The Economics of Tariffs and Trade (with Doug Irwin)

Is the United States victimized by trade? What causes trade deficits? Are higher tariffs a good idea? Can manufacturing jobs return to the United States? Economist Doug Irwin of Dartmouth College answers these questions and more in this wide-ranging conversation with EconTalk's Russ Roberts.

• 0:02Speaker 00

  Welcome to Econ Talk, Conversations for the Curious, part of the Library of Economics and Liberty. I'm your host, Russ Roberts of Shalem College in Jerusalem and Stanford University's Hoover Institution. Go to EconTalk.org where you can subscribe, comment on this episode, and find links to other information related to today's conversation. You'll also find our archives with every episode we've done going back to 2006. Our email address is [email protected]. We'd love to hear from you. Today is April 22, 2025, and my guest is economist and author Doug Erwin of Dartmouth

• 0:43Speaker 00

  College, where he is the John French Professor of Economics. Our topic for today is tariffs, trade, trade deficits, and this rather dramatic moment we're in the middle of, although by the time this airs, things, of course, could be radically different. So we're going to stick to the basics. I'm hoping to create a primer for listeners, clearing up some fundamental misunderstandings some people are having, although I suspect at the end we'll touch on some of the details of this moment in particular. Doug last appeared on Econ Talk in October of 2010, discussing the Great Depression and the gold standard, an episode I highly recommend. Doug, welcome back to Econ Talk.

• 1:21Speaker 01

  Thanks for having me. Good to be here.

• 1:23Speaker 00

  Let's start with trade deficits. What's it mean when a country runs a trade deficit? What's the definition of a trade deficit?

• 1:30Speaker 01

  Well, trade deficit is simply when a country imports more than it exports to the rest of the world. So that raises all sorts of questions, but that's the functional definition. Sometimes it's called a current account deficit because it's a little bit broader than just merchandise. You have to include services and then other things of that sort.

• 1:48Speaker 00

  And so if the United States, I want to talk about two examples that people are discussing a lot these days.

• 1:59Speaker 00

  The United States runs a trade deficit with respect to the rest of the world, the entire world. That is, the United States imports more goods and services from the world than the world imports from the United States. And it also runs a trade deficit with many individual countries of different magnitudes that, when aggregated, add up to the whole, entire, trade deficit. What does it mean? Let's start with why a country might run a trade deficit vis-à-vis the rest of the entire world.

• 2:34Speaker 01

  Yeah, there's various ways one can break it down. So, one way to think about it, it sounds rather boring, but in terms of the balance of payments. So, if we are importing more than we're exporting, we are sending more dollars abroad to at least pay for that, because we're importing those goods. Those dollars don't stay abroad, in general. They come back to the US, and instead of buying US goods, they're buying US assets. So, that's one way to think about it, that actually we're exporting assets as well as goods, and that's sort of balancing what we're importing from the rest of the world.

• 3:07Speaker 00

  Well, some of it is used to buy American goods and services, but not the whole, not all, the dollars. So, the dollars buy some American goods and services, and in addition, buy American assets. And when you add in the asset position, you tend to get balance. There's one little tricky thing there about currency. You can, you want to say anything about that?

• 3:29Speaker 01

  Not really, because I think that's a rather minor point of it. But you're absolutely right. So, I think, I have this book, Free Trade Under Fire, and I try to update this calculation every now and then. For every dollar that we send abroad importing some foreign products, 75 cents comes back and buys US good or service, and then 25 cents is buying US assets. So, a dollar goes out, but a dollar comes back. It's just a question of how is it divided between buying goods and services from the US versus buying US assets?

• 3:58Speaker 00

  And the currency part that we're going to leave alone, because it's a little bit of a red herring, is a little complicated, because the US is, tends to be a reserve currency for the rest, for many nations in the world, meaning it's an easy way for countries around the world to hold a liquid form of purchasing power. If I am correct, the US runs a surplus

• 4:22Speaker 00

  In services with respect to the rest of the world, is that correct?

• 4:25Speaker 01

  That is absolutely correct, and it's been growing over time. It's pretty substantial. Obviously, it doesn't make up for the deficit on merchandise goods. But the US is largely a service economy. We are a premier producer of many services: architectural services, construction services, financial services, and so the rest of the world purchases those from the US. So we're a net exporter of services, yes.

• 4:48Speaker 00

  And we're a net importer, excuse me, we're a net exporter of investment opportunities. So the United States runs a capital account surplus, but the capital account being a way of saying the United States is a more attractive place for the world to invest than American investors find the rest of the world. So on net, the rest of the world's investing in the United States relative to what the United States is investing elsewhere. That's called a capital account surplus. That finances, in some sense, because, but not literally the way, it's a bad phrase because it's not the way you and I finance our purchases. But it is the counterpart, is a better way to say it, of the deficit that the United

• 5:32Speaker 00

  States has in trades and trade services, in goods and services, correct?

• 5:36Speaker 01

  Absolutely. You know, you've said it very well, and I also agree with you on the financing aspect of it. The US is very different because it's, the dollar's sort of the world currency. People want to invest in the US. We have these safe assets, treasury notes. We have, obviously, a stock market that's doing very well. And so compared to other countries, we're just a rich, deep, liquid capital market that is sort of a safe haven and a great opportunity to earn good returns for foreign investors.

• 6:04Speaker 00

  Well, you said the stock market's doing very well, historically, on average. This has been a bad month, we're recording this in April, and maybe we'll get into that later. But the United States is a very attractive place for investing. And so, on one hand, the United States runs a capital account surplus, capital meaning investment. So, again, just to make it clear.

• 6:29Speaker 00

  Foreigners invest much more in the United States than the United States invests in foreign assets. And on the flip side, the United States imports more goods and services from the rest of the world than the rest of the world imports from the United States. Is there anything good or bad about either of those? Do they tell us anything about? Let's just start with the health of the economy.

• 6:51Speaker 01

  Yeah, not really. I mean, let me invoke an author I know you're a fan of, and I am as well, Adam Smith, who said, "There's nothing more absurd than this doctrine of the balance of trade," either as a measure of whether you're winning or losing from trade, or as something a source of concern. I also invoke the Wall Street Journal editorial page, which once had this memorable phrase, "The best way to think about the trade deficit is not to think about it." And so the way I've put it is, sometimes when I'm telling my students, you know, let's say the government didn't produce statistics, economic statistics. If we had inflation, would you know it? Absolutely, you'd know it. Every time you go to the grocery store someplace, you'd see it. If you, if we're in a recession, would you know it? Absolutely.

• 7:36Speaker 01

  You'd see people around you losing their jobs, maybe you yourself. If we're running a trade surplus or a deficit, would you know it? No, it's sort of an abstraction. It's not something that is personally affects you directly. So there are circumstances in which countries should perhaps worry about it, but I think for the US case, with the dollar being the reserve currency, it's generally not something that people have to fret about.

• 7:58Speaker 00

  I want to come back to that question about worrying about it, but I just want to make an historical point, because you and I have both, we've been in these trenches so long fighting this battle, that, you know, for a while, I just didn't write anything on Twitter, and people were saying, "Don't you have anything to say about it?" Yeah, I've about, I don't know, 100,000 words, 500,000, I don't know how much I've written about it. Look it up if you want. I'm happy to share it. And I kind of thought it was settled. I want to make a reference to, in 2006, when the counter talks started, I had the privilege of interviewing Milton Friedman. I talked about how great it is that economics taught people that price controls are bad. And he said, "Oh, no, no, no, no.

• 8:42Speaker 00

  It wasn't economics that got people to oppose price controls." And what he said, and he went on to say, the reason, you can go back and listen to it, we'll link to it, the reason people stopped favoring price controls is because they lived through it. And they got so horrified by it that they didn't want it anymore. They didn't like the long lines for gasoline, for example. That was price controls on gasoline. And then he said, and when those people die, die off, people start thinking, maybe we should have price controls on things that get more expensive. So economics didn't solve this. So I kind of naively thought when I was younger, you know, economists have kindly educated the world about how tariffs work and trade deficits. Turns out, it's more complicated than that. But I want to go back, because having been in the trenches as long as I have and you

• 9:23Speaker 00

  have, when you invoke Adam Smith, a lot of people say, well, Adam Smith, or David Ricardo, they lived hundreds of years ago. Their theories have been, they've been shown to be incorrect. And what they don't realize, and they're old. That's an ancient doctrine. What those people don't realize, is that Adam Smith wrote a significant piece of The Wealth of Nations to answer the people who were called mercantilists. And the mercantilists were worried about dollars leaving the country, in his case, England. And that doctrine, which was, I think, wrong, the mercantilist doctrine, I think the first reference I've seen was

• 10:06Speaker 00

  in like, the 1200s. So if we're gonna use an ad hominem, the equivalent of an ad hominem attack on a doctrine that's outdated, mercantilism is even older and more ancient than Smith's views on trade.

• 10:20Speaker 01

  Yeah, I don't think Smith is out of date in really any significant way. I mean, maybe you find this the same way. Every time I pull the book down from my shelf, The Wealth of Nations, I learn something again. You know, I've read it, but I find there's some sentence I missed, or insight. And it's just a true book of wisdom. I mean, here's a guy, he didn't have the internet, he, you know, limited to Britain and a little bit of time in France. But he knew so much, and he interpreted things so well. And it's so relevant for today in so many dimensions.

• 10:52Speaker 00

  I want to come back to a phrase you used a few minutes ago. You said, the dollars come back. So Americans buy

• 11:01Speaker 00

  Goods from abroad, foreigners then have dollars. And they then spend them, as you said, on both goods and services and then on investment opportunities, assets, acquiring assets. And of course, those assets, that sale of those assets puts money in the hands of Americans. It's a complicated thing to talk about. But a lot of people say, if we're running a trade deficit, obviously, we're giving foreigners more money than they're giving us. Now, we just made it clear that's not true. That's an arbitrary way of defining giving dollars, because it excludes investment opportunities. But I just want to pose the question. Suppose they didn't come back.

• 11:45Speaker 00

  Suppose foreigners gave us, sold us cars and all kinds of things, and we sent them dollars, Americans sent them dollars, and the foreigners really liked the way the dollars looked. So they put them up on their walls, wallpaper, and never bought American goods and services or invested in American assets. Would that be bad for America? I mean, isn't that, we're stimulating their economy, but they're not stimulating ours. That's so unfair.

• 12:13Speaker 01

  Well, in some sense, what we're doing is printing up worthless pieces of paper. They're giving us goods in exchange for them, and then there's no liability associated with that. They don't have to make a claim on our assets or our goods as a result of that. They'll just keep it down there. And in fact, actually, there are a lot of dollars circulating in the world. So that's true to some extent. In Latin American countries, if you go to Argentina, dollars sort of circulate because they don't trust the domestic currency and elsewhere around the world. So there's a big stock of dollars out there in the world, but compared to the yearly flows, I think it's not huge. But once again, it's not necessarily a problem if they never redeem those dollars as a claim on US assets or goods or services.

• 12:54Speaker 00

  But isn't it unfair? I mean, we're stimulating their economy, and they're not stimulating ours.

• 12:58Speaker 01

  Not unfair. They're helping us by selling their goods at reasonable prices to consumers that want to purchase them. So I'd still say it's a win-win.

• 13:08Speaker 00

  Are we going to have fewer jobs?

• 13:11Speaker 01

  Ah, there's a book they should read, The Choice, by you. This gets into a huge issue about manufacturing and things of that sort. So, you know, in terms of jobs, the current unemployment rate in the United States is about 4%. That's pretty low historically. That's also close to what we think is full employment, but we have a large trade deficit. In fact, if you look at the correlation between the unemployment rate and, say, imports as a share of GDP, they're negatively correlated. When the unemployment rate goes down, our imports to GDP go up because we're buying more. We're robust, you know, the economy's doing well. And it's precisely when the unemployment rate goes up that we enter a recession that imports as a share of GDP go down.

• 13:55Speaker 01

  So imports aren't taking away from jobs in that sense. The correlation goes the wrong way for the imports are costing us jobs at the broad macroeconomic level.

• 14:04Speaker 00

  And I think economics teaches that trade doesn't affect the number of jobs. In the short run, it can, of course. Trade disruptions or changes quickly, quick changes in economic interactions with foreign countries can affect, obviously, employment in certain industries. But in general, trade, the way economists think about it, changes the kind of jobs we have, not the number of jobs. It doesn't mean the transitions are easy. There can be people in an industry who suddenly face competition from foreigners, just like there can be tough transitions when there's innovation and we don't need as much, as many workers in a particular industry. We may come back and talk about that, but that's what's going on.

• 14:46Speaker 00

  It's an economic change that's, on average, good for the country, makes it richer, but not every person. We don't want to pretend that's true. It's not true. And many people can face hardship from dislocations due to changes in the mix of trade, changes in technology and innovation. And so a country has to decide how they cushion or not those kind of transitions. But as you point out, over the last 50, 75 years, the United States, except for recessions, are in, generally, have a very, very dynamic and healthy labor market and a rising standard of living. And at the same time, certain industries have been hurt very badly by trade from competition from foreigners.

• 15:29Speaker 00

  Others have responded and innovated to make their products more cheaply and more in higher quality. So it's a complicated picture, but this idea that somehow if foreigners don't spend money here, we'll have fewer jobs because those jobs won't be stimulating the economy is to me a total misunderstanding of how what dollars are doing. That's not what they do. This idea that we need to keep the money in America or in your own country is a terrible, terrible fallacy. Well, we don't care about how many pieces of paper we have. We care about what it can buy. And if we cut ourselves off, a nation cuts itself off from trade, it'll find itself paying more in effective terms and real terms for the things it wants to enjoy and have fewer things to enjoy.

• 16:14Speaker 00

  Still, it could have full employment, just have a lower standard of living.

• 16:16Speaker 01

  Yeah. If I could just make one qualification or footnote, which is actually a minor defense of Mercantilist in some sense, because we talked about our previous episode was on the gold standard and the Great Depression. I mean, one of the things that Mercantilists in the pre-Adam Smith period were reacting to is that the money supply was tied to how much gold you had. And so if there's an outflow of gold, you're going to have deflation, and that might not be good for the economy in the short run. And that's where Milton Friedman came along and said, hey, if you have flexible exchange rates, you know, you don't have to worry about that, because then you can have an independent monetary policy. So I think the case for free trade is actually stronger in the sort of the post-World War II period because of Friedman and making the case for flexible exchange rates than when you're on a gold standard, which is much more rigid. You can't respond to various shocks.

• 17:01Speaker 01

  It's a monetary rule, but sometimes it can be a straitjacket as well.

• 17:05Speaker 00

  So I want to go back to the point you made earlier, that trade deficits in and of themselves with respect to the rest of the world are not worrisome. And then we'll move on to looking at trade deficits with particular countries. So overall trade deficit that the United States runs with respect to the rest of the world, the capital account surplus that it runs with the rest of the world. How would you think about how to understand that? Can you think of cases where it's not healthy? Or what might be causing that mix to be what it is? Of course, it could exactly balance out. America could invest the same amount outside the United States as the rest of the world invests in the United States.

• 17:48Speaker 00

  The United States could import the exact same amount of goods in dollar terms that the rest of the world. It's kind of a funny thing. It's not in dollar terms because they use foreign currency. But the dollar, some measure of monetary value of the goods and services the US imports could be the same as what the rest of the world imports. But that isn't the way it is. The US runs a trade deficit and a capital account surplus. Do I learn anything about the world from that, that reality?

• 18:15Speaker 01

  Well, the US, I think, really is sort of a special case in some sense. We have an independent central bank, flexible exchange rates, the dollar's a reserve currency. But other countries, you know, they might have to worry about their trade surplus or deficit a little bit more than the US does. And actually, there's a great case from Israel in the 1950s and 60s where Israel had a massive trade deficit. It was called, actually, an import surplus. And Don Patinkin and some of the early Israeli economists were thinking about this. And there's that word financing that used earlier, said it doesn't really apply to the US, but actually did apply to Israel. The only way Israel could finance and afford massive imports from the rest of the world, when it was just starting out as a country, was through US foreign aid, aid coming from Germany, reparations and things of that sort.

• 19:00Speaker 01

  And so the Israeli economists at the time were worried about, well, what happens when that aid shrinks? Then we'll have to export to import. We'll have to export ourselves. We just can't rely on other people giving us Deutschmarks or dollars to finance imports. And that happened gradually, and it wasn't really a problem. But there's where the idea of financing your trade deficit is important. And for developing countries, that can sometimes be an issue. Where if you're importing way more than you're exporting at some point, if that's being driven by foreign aid, that could dry up and you're going to have to jumpstart exports in some way to pay for your imports.

• 19:37Speaker 00

  And this is a little bit tricky because they both have the word deficit in it. But the US runs a budget deficit as well as the trade issues we're talking about. A budget deficit means that the federal government spends more than it collects in taxes and it has to finance, in this case really does have to finance, it has to find a source to make up for that shortfall and historically the US has borrowed. To the point where we're now, the United States now runs a large annual budget deficit, has a large outstanding national debt of about $35 trillion because it's accumulated obligations to the rest of the world.

• 20:22Speaker 00

  Does that interact with the trade and capital account surpluses or deficits in any way?

• 20:29Speaker 01

  It actually does. You're absolutely right. There's something called the twin deficits hypothesis, which says the fiscal deficit and the trade deficit sort of go, not hand in hand, not one for one, but there's definitely a relationship. And it's exactly as you were sort of explaining. The US currently has a fiscal deficit of about 6.5% of GDP, which is really large when the economy is doing pretty well. And what that means is the federal government has to borrow a lot on capital markets. And of course, capital markets are integrated, so part of that deficit is being financed by capital inflows, us trying to sell our treasury debt, not just to domestic residents, but to foreign residents. If we were to close our fiscal gap, we wouldn't need to be borrowing from the rest of the world or relying on those capital inflows from the rest of the world quite as much.

• 21:14Speaker 01

  Obviously, we'd still probably have a current account or trade deficit because the US market is attractive for assets and it's still a safe asset, but we're just creating so much need to import capital in some sense. It is a driver of those deficits.

• 21:28Speaker 00

  And that deficit...

• 21:29Speaker 01

  Or the capital surplus.

• 21:30Speaker 00

  Yeah. That trade deficit would be smaller, I would think, if the US borrowed less from the rest of the world, putting dollars into the hands of...

• 21:41Speaker 00

  Foreigners.

• 21:42Speaker 01

  That's an important point, too, because it's often said, you know, the trade deficit is something that other countries are doing to us. You know, they have mercantilist practices, they're manipulating their currency, they're engaged in unfair trade practices, they don't want to buy our goods because of protectionism. Well, you know, we sometimes have to look at our home policies, too, what we're doing, and maybe that's a driver, and that's something we can affect change if we want to change our situation.

• 22:07Speaker 00

  And now, let's move to the individual country case. Of course, many countries practice all kinds of protectionism of various kinds for across the products, for particular products. I remember when I was teaching at Washington University in St. Louis, my Japanese students in the business school were shocked to discover that American rice was actually pretty tasty compared to Japanese rice. They'd been told all their lives that American rice was inferior, rice plays a crucial role in Japanese culture, and that justified keeping out foreign rice to preserve the quality of rice in the Japanese diet and culture.

• 22:49Speaker 00

  And, of course, that's a story that served the interests of a very small number of Japanese rice producers. It was useful for them to perpetuate a myth that American or foreign rice was inferior, which allowed the price of Japanese rice to be much higher than the price of rice in the United States, say, because of, I think quotas in that case, it might be tariffs, I'm not sure. But the point is, is that many, many nations, including the United States, have barriers, both explicit in the form of tariffs or quotas, or practices, non-tariff, non-quota barriers that make it challenging to sell in their markets.

• 23:30Speaker 00

  They're natural barriers, things are far away, they're hard to sometimes adapt to a local market. So there are many, many reasons why it might be hard to sell abroad. But let's talk about the nasty ones.

• 23:48Speaker 00

  How does that affect the trade deficit between, say, Japan and the United States? That Japan doesn't let American rice come in and America lets Japanese rice come in?

• 23:59Speaker 01

  Well, it actually doesn't affect the trade deficit directly, surprisingly, because currencies can adjust in value to... It goes back to the capital account. The trade in assets is so large, the capital flows are so large, they're really the driver. And even if one country protects one sector or even a few sectors, it's really which way capital is moving that's going to be driving things. So protectionism doesn't necessarily change the trade imbalance. I mean, this gets to the idea of could we, the US, use tariffs to reduce our trade imbalance? And it seems to make sense that if we use tariffs, imports will go down, exports will continue on their merry way, and we just close the gap between them.

• 24:41Speaker 01

  But in fact, when you impose those tariffs, you do affect exports indirectly, either because your currency will appreciate, because other countries will retaliate against your tariffs. But you can't take exports as just being independent of imports in that way. So in general, countries that have high protection or protectionist policies, some have trade surpluses, some have trade deficits. And the same with free trade countries. Some have trade surplus, some have trade deficits, because there are other factors that are really driving things.

• 25:11Speaker 00

  So why does the United States run a deficit with some countries? And of very different magnitudes, by the way, it's important to mention that. So the United States runs a trade deficit with respect to the entire world, foreign nations generally, but it's not even across every country. It's not divided by 200, the 200 countries in the world. It's not divided... It's not proportional to the size of the economy. They might be related, but it's not mathematically associated. A lot of people, unfortunately, I think, have decided in this moment that it must be, if the United States runs a large trade deficit with one country and a smaller one with another, that the large one must be because they're not letting in American products, and we

• 25:56Speaker 00

  need to punish them or incentivize them to change that. Is that true?

• 26:04Speaker 01

  No, I mean, you might remember from a school, childhood school days, about the triangular trade, where you get different regions trading in different ways with one another. So, we have a trade surplus with Australia, for example. Why? Because we export a lot of mining equipment to Australia. And then they use that mine equipment to dig up minerals that they export to China. And then China exports steel and other things back to the US. So, that's where you get the sort of circular flow of trade between different countries. And you don't need the bilateral balances. I mean, this applies to us as individuals. Robert Solow famously said, "I run a massive trade deficit with my barber. You know, he never buys anything

• 26:46Speaker 01

  from me." And we all run big trade deficits with our grocery store. But, you know, once again, we earn money from other sources, where we export, where we're selling our services to. So, you don't need bilateral balance with every transaction that you're undertaking. And the same is true with countries. We used to have a big trade deficit with Saudi Arabia when we were a big oil importer. Not so much anymore, but that was sort of a natural thing. And then we'd have surpluses with other countries where we were exporting, and they weren't selling us as much.

• 27:18Speaker 00

  And just to sort of emphasize the economic way of thinking and the challenge of what you might think of as budget constraints and math. You might think that you could fix each deficit with each country with the right tweaks and leverage. But, it's gonna, if indeed, the United States is an attractive place to invest, you're still gonna run a net deficit with the rest of the world combined. The mix of any one country's bilateral relationship with the United States is complicated by the example you gave. It's complicated by the fact of that triangular trade. It's not, you can't fix them all at once. If that were

• 28:00Speaker 00

  your goal, it's not a good goal, we both agree. But if you tried to fix it, you'd find it didn't work.

• 28:06Speaker 01

  And another good example of this is the iPhone. And just sort of the mis-measurement of trade flows. So one of the reasons we have a measured large trade deficit with China, not the only reason, but one part of it, is that China assembles a lot of products, the iPhone being a big one. So when that comes into the US, all that value of the iPhone is attributed to China, because that's where the goods coming from. But actually, we export more components to China that are in the iPhone than the Chinese labor that's embedded in putting the iPhone together. In fact, the iPhone is just components from South Korea, from Germany, from Japan, from the US, that are being put together there in China. It's not really a Chinese product, but it's attributed to it as a Chinese product when

• 28:50Speaker 01

  it enters the US and it's recorded as a big import from the US. And Apple sort of knows this, on the back of the iPhone, it says, "Designed in California, assembled in China." It's not "Made in China." It's mainly foreign components that China imports and then exports the final goods to the US.

• 29:07Speaker 00

  I feel bad for listeners, Doug, because I do like to challenge my guests, but on this case, it's kind of hard for me. I don't want to be just a choir. I do want to offer you some tough questions, but you and I both share a lot of views on this topic, so I'm trying to, I'm doing my best, listeners. So I'm going to give you a really hard one now. You ready, Doug?

• 29:29Speaker 01

  Sure. Fire away.

• 29:31Speaker 00

  So, okay. It's assembled in China, and that means they've got all the assembly jobs. If we, through whatever policy, whether it's tariffs or quotas or legal restrictions, if we could stop that importing of the iPhone from China, we could bring those assembly jobs back to the United States. And those manufacturing jobs are the jobs that we've lost, and a lot of people are arguing that we need tariffs now to bring back the manufacturing jobs that used to be here. What's wrong with that argument?

• 30:05Speaker 01

  I think the comedian Dave Chappelle put it best. He said, "I want to wear Nikes. I don't want to make them."

• 30:10Speaker 00

  Yeah.

• 30:11Speaker 01

  It's pretty tedious work assembling things. Actually, the New York Times had, I believe it was the New York Times, had a great article just the other day on textile and apparel manufacturing in the South, which all those jobs have been lost by and large. They interviewed some former workers and they said, "I would never want my children to work the way I did." You come home with lint in your hair, lint all over. It's bad for the lungs, so you have health issues. It's tedious. It's monotonous. And very few of those workers said, "Yeah, these are the kind of jobs that I want my children to have in terms of their future." So a lot of the basic manufacturing jobs are very rote and not so interesting. And once again, dislocation, as you pointed out earlier,

• 30:56Speaker 01

  when that happens, it's very costly. You're depriving someone of their livelihood and it's very difficult to retrain for other types of jobs. But in terms of the 21st century economy, to aspire to be assembling iPhones or stitching together shoes, you know, there are many more other opportunities that I think we could be offering workers in the US.

• 31:20Speaker 00

  I think it's important to point out that there's a lot of romance about those jobs that was the romance that was true 75 years ago, 1950, but isn't true today. In 1950, a manufacturing job was a good-paying job. Not so much today because it doesn't require much skill. There's a lot of competition. But we could bring those jobs back and they would pay more in the United States for a whole bunch of reasons, mainly to attract people to them away from other things. And that, of course, would mean that the iPhone, if it were assembled here... There would be more jobs in the assembly and manufacturing business. Those jobs wouldn't pay like they did in 1950 relative to other opportunities,

• 32:04Speaker 00

  but they would be jobs here in that activity. But it would be less efficient to produce them here, which means that the price of the iPhone would be dramatically higher, which would mean that either people would lose the pleasure of that because they decided they couldn't afford it, but if they still decided to afford it, they'd have fewer resources to spend somewhere else in the economy. And that would mean their employment in those areas would shrink. And that's the unseen part of this complex story that I think is so hard for people. They see the first effects. It's hard to see the second and third unless you've studied economics and thought about it. And that's what we're talking about today.

• 32:45Speaker 01

  You're absolutely right. It's that sort of that opportunity cost that sometimes gets missed. And I think there's some estimates to say the price of an iPhone would be up to $2,000, possibly $3,000 if it was manufactured in the U.S. But there's another important distinction to make here between bringing back industry and bringing back jobs. So we might, through tariffs, bring back some industries. Of course, there's an opportunity cost, and that may not be a good idea. But we don't necessarily bring back the jobs, precisely because wages are so high in the U.S. and it would be automated, or there'd be pressures to automate in the U.S. So we could bring back some steel production jobs. But once again, the way we made steel in the 1950s and 60s is not the way it's made today. Back even as late as the 70s, you'd see a lot of blue collar workers physically in

• 33:30Speaker 01

  the plant, moving molten steel and filling molds and things of that sort. Now you look at a steel production facility in the U.S., it's completely automated. You don't see anyone. So you can bring back production, albeit inefficiently at a higher price, but the jobs aren't going to follow. So once again, we're really in the 21st century in terms of what we have in terms of labor market, and it's not the way it was back in earlier periods.

• 33:56Speaker 00

  And your insight really highlights the connection, which seems strange but is quite real, between technological innovation and trade.

• 34:04Speaker 00

  Both of those things are ways that we get more from fewer resources, right? It's called productivity. So in 1950, the number of workers that would work in a certain kind of plant would be a much higher ratio of labor to capital, many more workers per machine. In today's world, it's very, very small. Part of the reason that manufacturing as a source of employment in the United States is shrunk to very small levels, under 10% as a proportion of the entire workforce, partly is because factories have moved to Indonesia making Nikes and to China doing steel, but part of it's because you don't need as many workers to make steel in either place as you did 50 years ago.

• 34:49Speaker 00

  And that's a fabulous thing on average. Not a fabulous thing for everybody, don't want to look at it through rose-colored glasses, but that's how the world's standard of living grows. That's how we get more access to things we care about and more free time if we want it in terms of leisure. So I think it's really important. We could bring back, you said we wouldn't bring back those paying jobs? We could. We could bring back the assembly industry. We could make it illegal to use robots. And then there'd be, not just the industry would come back, the jobs would come back. But they couldn't be very high-paying jobs. Oh, well legislate that too. Well, if you do, that means that there'll be less, fewer resources to do in other areas.

• 35:32Speaker 00

  You can't have all the things we have, all the extraordinary things in the 21st century if you insist on using 19th century or mid-20th century technology. It doesn't matter where you put them. You're going to have a lower standard of living.

• 35:49Speaker 01

  Yeah, I mean, with respect to the steel industry, in the 1980s, it took 10 worker hours to produce a ton of steel. Today, it takes one worker hour to produce a ton of steel. We're producing basically the same amount of steel as we did back then, but we just need fewer workers to do it. And that's productivity, as you said. And so, once again, we're not going to advance as a society, and this goes back to Adam Smith's Wealth of Nations too. Productivity was at the heart of it, the division of labor, specialization, and the wealth of the nation depends on improving productivity.

• 36:22Speaker 00

  So now I'm going to give you a really hard time, Doug. That's a terrible attitude, what you just said. Oh, the only thing that matters is money? So you let a bunch of industries disappear because of your policies that you favor, these free trade policies. You let those factories go to China, let the robots come in, and as a result, the small towns of America, which used to have decent standard of living and decent wages, they're all gone. That's what the Rust Belt is almost by definition. It's rusty because it's old and beat up and decrepit, and that's because of the economic policies that economists advocated for. And what those did is they helped rich people, but they didn't help the people who used

• 37:03Speaker 00

  to work in those factories, who had a decent life and could afford to have a car and a mortgage and educated children. And so what this policy of free trade has done is made their lives horrible and enriched a few fat cats in finance.

• 37:20Speaker 01

  Well, there's no doubt that there are many communities in the Rust Belt that are really suffering and have not done well. But what's interesting is a lot of those industries did not migrate overseas, they migrated to the South. So one of the videos I showed in my class is a small town in Pennsylvania, Tamakiwa, Pennsylvania, where a textile mill closed down. And they interviewed one of the workers, he said, you know, all the jobs, you know, the plants have shut down and they moved down south. So Mack Truck used to have a plant nearby, that moved down to South Carolina. If you look at foreign auto producers in the US, they're all in Alabama, South Carolina. And, you know, the North Carolina industry estate is really an interesting one because

• 38:02Speaker 01

  they've made the transition from textiles and furniture to medical services, healthcare, advanced research, and the research triangle. So it is possible for regions to, you know, bloom and do better. The Rust Belt, I think, you know, here you have to get into, well...

• 38:23Speaker 01

  Our union's too strong, our regulations to honor us in Pennsylvania and Ohio. So you're not getting those regenerative industries. But also, there's a difference between the small rural towns where if one plant closes, there's not many opportunities, and a place like Pittsburgh, which is a flourishing city, used to be steel thirty, forty years ago, but once again, they've made the transition to different industries. Once again, because it's a city that was much more diversified, so other things could grow up as things were sinking. But there's no doubt for rural communities where there's only one plant within thirty miles, if that plant goes down, that community's going to suffer. And there's a big debate among economists about, do we help the people there? Do we help the place? Place-based policies?

• 39:06Speaker 01

  It gets very complicated, it's a very difficult issue to deal with.

• 39:09Speaker 00

  Yeah, I think that we've talked about it in the past on the program a great deal. I care about the people, not the town. So the children and grandchildren of those textile workers, whether they were in Lawrence and Lowell, and those jobs then migrated to the Carolinas, or whether they're in the Carolinas and those jobs eventually migrated typically to Asia. The jobs are gone, the industries are gone, the towns are beat up, but the children moved to the cities, the grandchildren now, where they found tremendous opportunity, opportunity that wouldn't have existed if we had kept all the jobs and the industries statically the way they were for all time.

• 39:53Speaker 00

  All the most, a lot of the most pleasant jobs today, podcaster, for example, a very safe job as opposed to working in a mine or making steel, those jobs are only able to be afforded because we've allowed resources to move to their most valued use. We have a lot of competition to move some industries outside the United States. But, here's the but, but some people don't want to move to the city, and they stay in that town, and the economic opportunities have dried up there, and they're on fentanyl, and they're dying because they are both depressed, and they've got nothing to do, and the jobs aren't available, and it's not literal suicide, sometimes it is, but a lot of times it's

• 40:36Speaker 00

  just people in despair because the things that their parents and grandparents did aren't available anymore. You don't want to do anything for them.

• 40:45Speaker 01

  That's a hugely important issue, and it's not my area of expertise in particular. How do we help individuals or communities, if we care about the community as well, in terms of overcoming some of these hurdles and the difficulties of economic dislocation loss and then the societal consequences of that? But once again, it's not just trade, and throwing up trade barriers isn't going to be the solution. There's a very good book by a Washington Post journalist called Janesville. It's about Janesville, Ohio, Wisconsin, where a GM plant closes down, and she tracks what happens to the people. And the plant closed down during the great financial crisis of 2008, 2009.

• 41:26Speaker 01

  And what's interesting is that, so it wasn't trade, it was just a recession, huge social consequences for the town and for the workers. GM offered to hire all the workers who were laid off at different plants across the Midwest, just reallocating production away from that plant elsewhere. Only about half the workers took it. A lot of those workers commuted from Wisconsin to Ohio, leaving Sunday night or Monday morning and coming back Friday night, because they didn't want to leave their communities.

• 41:55Speaker 00

  Yeah. Their parents, or their uncle, or...

• 41:59Speaker 01

  Exactly, yep. They at least had the income, so they could sustain that. But the many people said, exactly as you were suggesting, you know what, I don't want to move, I want to stay here. You're not going to do as well, because once again, those jobs were paying pretty well, and then the social dysfunction, it just is a downward spiral. So it's not just a trade issue, it's an economic change issue. How do we deal with economic change in that case? And there are no easy solutions, I think.

• 42:26Speaker 00

  You said you're not an expert. There aren't any, how to deal with this. This is a very, in my view. I once, for better for worse, wasn't really a pleasant experience, but I once agreed to debate somebody on trade at some library in St. Louis when I lived there, and it turned out, most people in the room, about 100 people there, about 97 of them were related to the guy I was debating. They were very sympathetic to his views, they were not sympathetic to mine. It was a character building experience. There's a large Chrysler plant, I think it was Chrysler, in that area of St. Louis.

• 43:09Speaker 00

  Dick Gephardt was their congressman, a member of Congress. And people would tell me, "You need to send Dick Gephardt your book, The Choice." I'd say, "I don't think that's going to make a big difference. I think he probably has some understanding how terrorists work, but he's trying to help his constituents, and I get it. I disagree with him, but that's his choice." But at the end of that debate, a question from the audience, and it was the brother of the guy who was debating, he said, "You know, I worked in the auto industry for 30 years, 40 years, made a good living, and I just got laid off. And your stories are nice about how this helps the standard of living or future generations,

• 43:54Speaker 00

  but what about me?" And I said to him, "What do you want me to do for you? You want a welfare check? That's one of the ways you can cope with..." He said, "There's no easy answer." "So you want a check to soften the blow?" He said, "No." He said, "I want my job back." Of course, what he really meant was, "I want the dignity that I once had from taking care of my family and earning a living." And I get that, and it's very... It gives me goosebumps just to think about that moment. Now, I don't remember whether I told him this or not, but the only way I can get your job back is to prevent your fellow citizens in the United States the freedom to buy the kind of car they want.

• 44:39Speaker 00

  "Do you want me to do that? I can do that. We can pass a law. We can ban foreign imports of cars. That'll get your job back." Of course, you'll be taxing implicitly your fellow citizens for the... Forcing them effectively to buy from you and your company. So you're still getting a handout, actually. It just is hidden, but you'll have more dignity and it won't feel like a handout because you'll work for it in a way you wouldn't if I just put you on some what's called trade assistance, you know, a literal welfare check. And I think that's a legitimate issue. I think that's an argument for softening or stretching out or delaying economic transitions.

• 45:22Speaker 00

  There's a big question if we really could have driverless cars. There's a lot of people who drive cars and trucks for a living, and they're not going to quickly transition to some new opportunity if driverless cars and trucks come along. Those people are going to be unemployed. We can give them a welfare check, they're not gonna be happy, and I don't blame them. They're gonna be miserable, they're gonna have very little dignity. So I don't think these things are unimportant, and I think it takes a lot of creativity. But the truth is, if you want to live in a system of economic change and freedom to let people buy what they want, where they want, these are the kind of things that happen, and you want to soften those in different ways, if you can, besides just giving them money. Maybe it's delay, give them better education.

• 46:07Speaker 01

  Yeah, I mean, there's this very powerful moment, and you expressed it very well, and I'm, once again, reminded of Adam Smith, who said that when you're reducing trade barriers, you have to do it slowly and gradually, out of humanity. I think that's the word he uses, humanity. And that's the way the US has basically done it. Now, we still have these shocks every now and then, and obviously technological change is always there in the background. But how do you compensate workers? We always say, well, just, you know, give them the money. That's sort of the efficient way of doing it, but you're right, that doesn't really get at the gut issue. So, it's, economic changes, you know, can be a painful thing.

• 46:47Speaker 00

  Yeah.

• 46:48Speaker 01

  But once again, if you arrest the progress, you're foreclosing opportunities for the future, and then, you know, you get coal miners forever, and we're stuck in very, you know, very difficult laborious jobs. So, it's a short run versus long run, transitional issue.

• 47:06Speaker 00

  Yeah. So, going back to the question of bilateral trade deficits in particular countries, the Trump administration announced a whole complex set of tariffs. I didn't follow all the balls and strikes of whether these were, the way these were calculated, but they're different for every country, they seem to be somewhat based on the size of the trade deficit.

• 47:34Speaker 00

  And in the aftermath of that and the conversations about it, people did talk about these non-tariff barriers that are still there. Right? So one argument is that this is a negotiating technique. But let's for a moment say it doesn't work or it's not a negotiating technique. It's designed to keep out foreign goods. Are there serious non-tariff barriers that we know about that might be making it hard for certain industries to sell in certain countries?

• 48:03Speaker 01

  They can be because tariff levels are pretty low. I mean, the word reciprocity is used a lot, that there's a lack of reciprocity. But if you look at our major trading partners, the European Union, Canada, Mexico, a lot of Asian countries like Japan and Korea, their tariff levels are sort of approximately like ours at very low levels because we've negotiated over time or we have free trade agreements with them. So then you have to sort of look behind those tariffs and say, are there regulatory barriers? And once again, it's harder to point to, but it could also be an excuse for other things that are going on. So people say, well, and Trump administration said, we don't sell cars in Japan. Well, that would require us to make smaller cars where the steering wheel is on the right-hand

• 48:47Speaker 01

  side, not the left-hand side. That's a lot of retrofitting, and I don't see GM and Ford really doing that because they want to sell a lot of cars in Japan. It may not be worth the cost for them. So just because they have a zero tariff on cars in Japan doesn't mean that there's some rate barrier for us selling their cars, our cars there. It's just that they're costed tailoring your product for that particular market, and I don't think the US producers have tried to do that. So just because there's that huge imbalance in the way cars are going, you know, isn't ipso facto evidence of unfair trade or some sort of trade barrier.

• 49:26Speaker 00

  Well, let's say it is. Let's say there's corruption or, actually, a better phrase would be, say, opacity, non-transparency at, say, at the ports or at the docks or there's all kinds of subtle ways that it could be just cultural even. It could be people are discouraged emotionally from buying, culturally from buying foreign products.

• 49:54Speaker 00

  I just recently read about a person whose father worked at Bethlehem Steel. At Bethlehem Steel, you could drive a foreign car. It wasn't a rule, I mean, it wasn't a law, it wasn't in your employment contract, but everyone felt, I think incorrectly, but let's give them the benefit of the doubt for the moment, that buying a foreign car was a form of treason, disloyalty. Again, just to make it clear, if you buy a foreign car, you're an American who buys a non-American car. I would just remind everyone that American-made cars have all kinds of foreign components in them, often have a higher proportion of foreign components than so-called foreign

• 50:37Speaker 00

  cars assembled in the United States even. I would also point out that when you buy a foreign car that is cheaper, because you have access to a foreign car, and people are free culturally to buy non-American cars, that puts competitive pressure on American cars. They get better. Cars are much better today than they were 75 years ago, and one of the reasons is there's competition that pushes manufacturers to make their cars better and cheaper and more efficiently using robots and all those things we talked about. And that frees up resources to create other kinds of American jobs. So when people say, "Oh, you bought a foreign car, you took a job away from Americans," it's not true. So I just want to say that, and you can comment on that. You want to comment on that?

• 51:20Speaker 01

  No, I think you put it very well. And once again, one of the things about globalization today as opposed to 40 years ago is that we have so much trade in intermediate goods and components, in parts. So if you look at a Boeing aircraft, or an automobile manufactured in the US or Canada, or the iPhone, it's really internationally sourced. You get very specialized producers who just do wingtips, just do the landing gear, just do the interior seats, just do the chassis of various cars or aircraft or what have you, and then firms are putting all these things together. And that's incredibly complicated order, and it's also one that...

• 52:03Speaker 01

  Firms have found to be efficient rather than doing it all themselves. You know, there used to be a plant outside Detroit called the River Rouge Plant. It produced, I think it was Ford. And, you know, they produced glass there. They imported sand to make the glass. Then they'd import iron ore from Minnesota and made the steel there. They did everything on site. And that's just not the way you make things anymore. It's much more efficient to rely on suppliers who specialize in producing very individual components and then you put it all together.

• 52:32Speaker 00

  But I derailed myself. So suppose it's true that, let's not use culture, let's suppose there's an unwritten law, it's enforced through regulation, through the way monitoring of bureaucrats, that makes it really hard for American car companies to sell in Japan. Let's pretend it's not the side where the steering wheel is on, it's not the narrowness of the roads, and that Japanese people like smaller cars. They just make it really hard to sell American cars there. Should America try to do something about that?

• 53:04Speaker 01

  There's a great British economist, Joan Robinson, who said, "We shouldn't throw rocks in our harbors just because other countries have rocky coasts." That is, just because other countries throw up trade barriers doesn't mean that we either have to impose trade barriers ourselves or respond to them by imposing trade barriers. They're hurting their standard of living, they're hurting competition in their market by closing their market, and it imposes a little bit of a constraint on us. We don't have access to those commercial opportunities, but it's fundamentally not first order for us. That'd be one response. You know, if India wants to have a closed market, China under Mao had a very closed market. Should we respond by closing our market? That doesn't seem to make too much sense.

• 53:45Speaker 01

  If we want the competition, if we want the variety, if we want the gains from trade. But another, if we have a close trade ties with some countries and they have these sort of barriers, then there's always the opportunity to negotiate. So we do have trade agreements. And I know sometimes those who like free trade don't like these trade agreements because they're often long and complex and regulatory and what have you. But, you know, those are agreements to sort of establish the rules of the road. And certainly if they're in violation... of an agreement, you want to enforce it. If there's non tariff barriers that are outside the agreement, you sort of talk about it and you sort of work it out. Retaliation sometimes works and sometimes doesn't. Actually, Adam Smith has a great passage in The Wealth of Nations on that.

• 54:29Speaker 01

  And so I think you have to sort of consider these things, but not not automatically respond by closing your market just because other countries have high trade barriers.

• 54:39Speaker 00

  Yeah, one thing, sorry, go ahead.

• 54:42Speaker 01

  Adam Smith. One of the things Adam Smith said is that if you retaliate against other countries for their unfair trade barriers, you're reducing trade even more and you're not helping those who are hurt in our country from those trade barriers in the first place. So it's not compensating them. And he says you're doing a dual double injury by responding in that way.

• 55:02Speaker 00

  We'll come back and talk about 3D chess in a minute, but 4D chess, four dimensional chess. But I just want to mention something we haven't talked about, which is, once you open the possibility that the federal government or the president will intervene on behalf of a particular industry claiming that there is something unfair about it, the way it's being treated abroad, you open up the mischief of, you know, what's called rent seeking, meaning favors to particular industries for political gain that actually aren't helping the country as a whole, but merely helping those players. So these tariffs are not going to be put on by all seeing visionary, good hearted economists.

• 55:45Speaker 00

  They're going to be put on by, eventually, we worry, would be put on by people who are pursuing merely their own naked self interest. The other thing I want to say something about what you said about trade agreements. When in the 1990s, when NAFTA was on the table, North American Free Trade Agreement, which created a free trade zone between the United States, Canada, and Mexico. I tended to be pro NAFTA. I remember talking to Milton Friedman, and he says he's against it. I said, why are you against it? He said, well, it's not a free trade agreement. I said, what do you mean? He goes, well, it's full of, it's fat. It's a thick document that has all kinds of special carve-outs and special treatment

• 56:30Speaker 00

  of this industry and that industry, and delay of the things we're talking about phasing things in very slowly or never at all for certain industries. So we should just say, our borders are open to your goods and services. If you can compete effectively, you will make us richer. You'll make our lives better. Again, putting aside transition issues, that that might suddenly, doing that suddenly for a protected industry would be, could be harsh for some of the people involved. But as a general rule, Friedman argued that we don't, shouldn't have these free trade agreements. So there's a strategic question of that. And the 3D or 4D chess argument is, what the current threat of tariffs is, we're in

• 57:15Speaker 00

  this interregnum period where, or this interim period where there's a 90-day hold on what some of the tariffs are going to be put on at the levels that were originally published a few weeks ago. This is just a negotiating technique. It's just, it's just a way to get them to treat our products more fairly. What's your reaction to that?

• 57:35Speaker 01

  Well, I'm a bit skeptical because the administration's also talked about using tariffs to bring back jobs, and they sort of want them as a permanent feature of the US economy, rather than just this temporary bargaining chip. And so, you know, you can't sort of achieve both at the same time. Either you're raising the tariffs because you want to bring back the jobs and, you know, reshore manufacturing, or you raise them, but then they're not going to be bringing back jobs because everyone's waiting for the deal to be made to bring down the foreign trade barriers. There's someone on Twitter's had something nice, saying the logic is sort of like this, that free trade has destroyed the middle class, therefore we have to end free trade by raising these trade barriers. But if other countries come to reach agreements with us, then we'll go for more free trade

• 58:20Speaker 01

  by reducing our tariffs and they'll reduce theirs. So it's sort of like, is the goal free trade, or is the goal to seal off the US market so that we get manufacturing investment back here? You can't sort of use it as a bargaining chip and use it as a way of leveraging foreign firms to locate back in the US.

• 58:36Speaker 00

  I would just add that... Again, while there are certain people, particularly with little education, people who particularly didn't finish high school, or who finish high school but don't get a college degree, some of them have had economic challenges over the last 50 and 75 years. On average, American middle class, to the extent it's disappearing, it's disappearing because people are becoming upper class. The measurements that people use, the artificial boundaries of what's called middle class have changed because people have gotten wealthier on average. Now, I don't want to be naive. I don't want to be an idiot and say, "All we care about is on average." We don't. But it's important to remember that on average matters. It does capture something about what's going on in the United States economy.

• 59:21Speaker 00

  This idea that only a few small, narrow group has been improved by the economic policies of the last 75 years. I would add, economic policies are quite complicated. And in general, they've moved away from economic freedom. That's another whole question that's, you know, this somehow, this argument that somehow we've been living in this free trade, free market paradise for the last 75 years is literally not true. But with the full complexity of that, the average American is doing much better. Now, it's true, there aren't anyone who is the average American, but millions and millions of Americans have higher standards of living than they used to. And that's not a small thing. It's not unimportant.

• 1:00:04Speaker 00

  Transitions matter. An opportunity to stay near your family is a lovely thing that we might want to take into account in how we allow for economic freedom. I'm open to that. But we should not argue that we need to reverse free trade because the middle class has been destroyed. The middle class is thriving in the United States. Not every single person, but it's thriving. And poor people are richer than they were 100 years, 60, 75 years ago, 50 years ago. We'll put out some links to things that make that case. But if you listen to the news, you think, "Oh, my gosh. Free trade's horrible. Look how horrible the United States is doing."

• 1:00:43Speaker 01

  Yeah, I mean, so many, I could agree with you on so many aspects of that. You know, I think of Mark Perry's chart exactly on that, showing that the share of households in the middle class has shrunk, but they haven't moved down, they've moved up. The share of households that are higher income have increased. Um, you know, there is this, you know, you hear this in the media that inequality is increasing, that the middle class is stagnating. Um, and once again, uh, you know, there was a bump up in inequality, but it's not like it's been secularly rising. It's sort of, it fits and starts and sometimes it declines. And it's actually plateaued for, since the great financial crisis in, in, in terms of many measures. So, but the, the arguments keep coming back that we're sort of on this inexorable path

• 1:01:25Speaker 01

  um, of increasing divergence and that, that once again, it's not that bad.

• 1:01:29Speaker 00

  The word secular in that explanation means over time, not non-religious, just for, for the non-economists in the room. Um, I want to give one more 4D chess argument, which I've heard, which I find fascinating. Um, and it could be real. And again, I'm, in this whole conversation, I'm agnostic about what President Trump's real strategy, I have no idea. I have no idea. He's got something very thoughtful in mind, very unthoughtful, or whether his people who are promoting this, uh, understand this or don't understand. I, we're just, it's off the table. But I did hear this argument, which is really interesting.

• 1:02:09Speaker 00

  So I mentioned earlier, the United States has a $35 trillion obligation to the rest of the world, the national debt. Some of that goes to, is Americans holding US treasuries, but many, many dollars of that are, are held by foreigners. And, um, the interest payments on the national debt are, in the last year that I noticed, I think it was 2024, but it doesn't matter, it's just a general point, were about $300 billion. That's roughly within a billion, the US military budget. So what that means is, is that the United States is paying roughly the same amount

• 1:02:49Speaker 00

  to honor the promises it made in the past to people it borrowed money from, as it pays to maintain the armed forces of the United States and it's, and the equipment that they, that they produce, the munitions. That's a little scary. It raises, not because it's the same size as the military, I'm just using it as a measure. It's a little scary because it's a lot of money. And it raises the possibility, you mentioned earlier, that you gave the example of the absolute size of it as a proportion to GDP, raises the possibility that at some point the nations of the world might now want to lend money to the United States. And that would be a rather extraordinary dislocation. We're talking about dislocation, adjustment, and transition.

• 1:03:34Speaker 00

  The United States suddenly found itself unable to borrow money from the rest of the world because people were worried about the possibility of it being repaid or the promises on interest being honored. That would cause, I think, an enormous disruption in the US economy and in the world economy. And so some people suggest that what these tariffs are doing are threatening foreign countries as a bargaining chip to renegotiate the terms, the lengths of the treasuries and notes that the United States has used to borrow money.

• 1:04:15Speaker 00

  That is, to get a lower interest rate, to effectively say, "We lent this money in the past, it was a lot of money, we're paying you back, and we'd like to change," not the amount we're going to pay you back, we're going to pay it all back, we're going to honor the promise, but we're going to pay it back over a different term, a different timeframe, at a different interest rate, and we'd like to swap out and renegotiate that promise. That's an interesting argument. I don't think it's true that that's what this is about, but it could be. And that would be for DCS. That would be an interesting way to lower the fiscal burden on the United States of

• 1:04:56Speaker 00

  spending more than it did for the length of time that it did relative to the taxes it collected.

• 1:05:03Speaker 01

  I had not heard that argument. That's fascinating.

• 1:05:05Speaker 00

  Isn't it?

• 1:05:06Speaker 01

  It strikes me, first of all, that it's a partial default.

• 1:05:10Speaker 00

  Correct.

• 1:05:10Speaker 01

  If you want to renegotiate.

• 1:05:11Speaker 00

  Yes.

• 1:05:12Speaker 01

  That's something we haven't done in more than, you know, 200 years of U.S. fiscal history. So that would be, you know, stunning. And if it is the case that that's sort of a motive, it's not working. Because what we've seen, once again, this is very specific to April of 2025, is that U.S. Treasury yields have been rising quite a bit after the announcement of these tariffs. And the dollar's fallen. These yields are rising, which seem, and gold prices are rising, which sounds like people are pulling their money out of, you know, the stock market and U.S. and selling U.S. Treasury debt and going into other assets. We talked earlier about the trade deficit. And this is one way to get rid of the trade deficit.

• 1:05:58Speaker 01

  If foreign countries are not willing to, or it's really not countries, foreign investors are not willing to put their money in the U.S. anymore. And we're going to see a great shrinkage of that deficit. And of course, it might also be accompanied by a recession with higher interest rates. You know, if we don't borrow from abroad, it does mean higher interest rates at home. And it makes it harder for us to finance our fiscal deficits. So if you want to, once again, if you complain about the trade deficit, this is one way to reverse it. But it's also a very hard lesson, I think, we're going to learn about how do you have to balance your fiscal books and other things if you're not going to rely on foreign capital markets.

• 1:06:33Speaker 00

  The other thing I would add is that some of the bumpiness of April 2025 isn't necessarily entirely due to the wisdom or lack of wisdom of the policies that are on the table. I think a lot of it's due to the uncertainty about what's next. So there was this sort of rosy idea that this threat of tariffs or imposition of tariffs that'll bring investment back to the United States because people will have to produce some of these goods here and that'll be great for manufacturing and we'll get these expanded opportunities for Americans. And

• 1:07:16Speaker 00

  Instead, I think what it did is that people said, oh, my gosh. This is a huge change of policy. What's next? How long is it going to last for? So many people reacted to this policy as if it was going to be permanent. There's no such thing. Dramatic changes in the economic environment and the rules of the game. Those don't encourage investment. They scare it away.

• 1:07:39Speaker 01

  Absolutely. And here's where there's this contradiction between using the tariffs to bring back jobs and bring back manufacturing and planning they're going to be in place for some time to come versus using them as a bargaining chip to get rid of foreign unfair trade practices or what have you. Because if you're a firm and you're thinking about a major plant, this is a multimillion-dollar, if not billion-dollar commitment. It's something that takes years to plan and break ground and work out. And the uncertainty, are the tariffs going to go up? How much? How long are they going to be in place? If you don't know that, you're not going to commit to some huge investment that you might not otherwise make. And so I think we're seeing that freezing of investment, partly because, exactly you

• 1:08:23Speaker 01

  pointed out, uncertainty about what policy is going to be six months, a year, five years from now.

• 1:08:29Speaker 00

  And I don't, I don't, you can't quantify this, but a lot of people decry the government structure of the United States, all the checks and balances. And the Trump administration is showing that, hey, you know, we can spring into action here. There's a big question of whether these changes are going to be sustained, there's going to be court challenges. But what we've observed in the first few months of the administration is that, you know, if you put your mind to it, you're willing to burn some political capital, you can do, you can do a lot of stuff.

• 1:09:06Speaker 00

  One of the virtues of a sticky system that has lots of bottlenecks politically is that things don't change very quickly. And that leads to a stable, generally a stable, economic environment for taking risk. And right now, we're getting a lesson in what the costs of a more flexible policy world is going to be, maybe. We'll see.

• 1:09:30Speaker 01

  Yeah, this is actually a big problem and a big change, is that usually whenever there's a big change in public policy, in trade policy, there's a societal consensus or political consensus, we've got to move in this way. And there's a big political debate, and it involves the House, involves the Senate, involves civil society. You know, I've got this book over my shoulder, Clashing Over Commerce, which talks about big changes in US trade policy over time. It takes a lot of discussion, debate, and what have you. And we're not having that now. This is one person, the President, sort of unilaterally making big changes, and he's allowed to because Congress has delegated a lot of authority. But we spoke out in NAFTA earlier. There's a massive public debate about that. Hearings had to go through Congress.

• 1:10:14Speaker 01

  A lot of pressure groups arguing in favor of against. There was a national debate about it. Here, there's not really been much of a debate. It's the President saying, this is what we want to do. He's finding the reaction is very surprising in terms of financial markets, because it was sort of sprung on them, and now they've postponed them for 90 days. That adds to uncertainty, but also adds to the question of, well, what is the ultimate goal? And is Congress going to have a role in this or not? And so we're just in a very different political situation than we've been in recent years.

• 1:10:43Speaker 00

  Just a footnote to that, when you said Congress has delegated authority, they literally delegated authority. And I think 1962 or 1964, Congress, in the Constitution of the United States, has the authority to levy taxes, and which tariffs are won?

• 1:11:01Speaker 00

  In 1962, I think, or four, they said, "Well, but the president is allowed to put on tariffs for national security reasons." And now that's the world we're in. Everything is just about on that grounds. Congress could challenge that, the courts could challenge it, or somebody could challenge it through the courts. I assume that will happen. It is really weird for the President of the United States to arbitrarily, and this has been true, you know, this has always been true, it's a weird thing. It happens to be President Trump right now, but it's a weird thing that the President of the United States can arbitrarily decide a tax rate on United States citizens without Congress's approval.

• 1:11:44Speaker 01

  Yep, usually all tax bills begin in the House of Representatives. That's where we debate these things, and yet not in this case.

• 1:11:53Speaker 00

  Just a small technical point here. It's actually not small, it's not really technical, but it gets talked about this way. There's actually a debate in the press and in the social media about who's going to pay for the tariffs. Meaning, are the American consumers going to have to pay higher prices? Or are foreign suppliers going to have to bear the brunt of these higher taxes on imports? So one argument is only on imports, so only, and the importer will have to pay the tax, whether it's the foreign person who's bringing it in, or the literal importer, but not the consumer. What do you think of that?

• 1:12:35Speaker 01

  Well, literally, the importer pays, writes the check to the government to pay to give goods in, but then they have to pass that on to consumers in most instances because they don't have deep pockets where they can just absorb a 10% or 20% or 30% tariff. You know, a personal example of this is when tariffs were announced on Canada and Mexico. I'm living here in New Hampshire, very close to the Canadian border. I got an email that day from our propane provider, which provides heat for our house, saying, you know, even if you had a contract with us that fixed the price, we have to rip that up because this tax may be imposed and we're gonna have to pass that on to you. So we're gonna have a surcharge on the propane we deliver. So that's that, passing that tax forward.

• 1:13:19Speaker 01

  And, you know, for many years, we didn't have too much evidence on who bear the, bore the burden of the tariff because we didn't change tariffs very much and they weren't very high. But during President Trump's first term, we imposed tariffs on steel products, aluminum. We imposed it on many products from China, but some not. And there have been about a half a dozen papers that studied who paid the burden of those tariffs, who, who paid those tariffs. And on almost every case, it was passed through a hundred percent to, roughly a hundred percent to the consumer, passed forward to the next buyer of those goods. Once again, it's not like these merchants have deep pockets where they can absorb them and want to keep prices low for consumers. They have to pass that on. So yes, ultimately, the buyer will, will pay those tariffs.

• 1:14:01Speaker 00

  What about the American producers of those products now that they don't have, now that their competition is, is more expensive? Aren't they gonna get more business? Is that gonna be great? And as a result, the consumers will, they'll, they'll buy American now. That's what's wrong with that. So yeah, they won't, you say they'll, they'll pay a hundred percent of the tariffs. Yeah, but most people will just switch to American products.

• 1:14:22Speaker 01

  Yeah, but then here's a great case. A lot of these are imports. In fact, about 60% of our imports are intermediate goods, components and capital goods. So it's not us as households who are buying these products. It's other businesses. And when they have to pay these higher costs, it raises their, their costs. And so, you know, for example, the steel tariffs. That's gonna help out a few steel firms. Yep, they might have to ramp up production a bit. They can charge higher prices, put on an extra shift, maybe even hire a few.

• 1:14:50Speaker 00

  Yeah, to ban more workers.

• 1:14:52Speaker 01

  But guess who buys steel? I mean, I don't know about you. I don't go out and buy a buyer's steel every weekend when I go to Home Depot where Lowe's for home improvement. But guess what? John Deere. Caterpillar, Ford, GM, every state and local government's trying to repair a bridge and repair infrastructure, any construction firm that's trying to put up a new building, they're buying a lot of steel. And you're raising their costs and then it gets back to your point about the unseen. If you're going to spend a lot more on bridge repair, well, what aren't the state and local governments going to be able to spend on, or are they going to have to raise taxes? If you're reducing, if you're increasing John Deere or Caterpillar's costs to produce heavy earth moving equipment or farm equipment, first of all, they become less competitive

• 1:15:35Speaker 01

  against Komatsu and other foreign rivals that don't have to pay those inflated costs on their steel inputs, they can export to the US and also beat the US in terms of, in foreign markets. So if we're trying to sell farm equipment to Latin America, or Australia, or New Zealand, it's going to be tougher to compete against foreign rivals that don't have that 20 or 30% cost inflation in terms of their steel inputs. So, once again, you're helping some small firms or small segments of industry, but there are many downstream effects that are going to be very harmful to the competitive position of various producers. In fact, a number of studies have shown, net, we lost jobs from the steel tariffs rather than gained jobs because there are more people employed in the downstream user industries than in the steel industry itself.

• 1:16:20Speaker 00

  I would just add that when people try to buy American products, increase the demand, those producers are going to raise their prices even though the tariffs don't apply to them. So it's not just a component issue, it's competition's going to force the price of American and foreign goods to either be the same, or there'll be no foreign goods at all and everything will be, will be American, in which case, price will be much higher. So this idea that somehow the tax is only levied on foreigners is, I think, incorrect.

• 1:16:53Speaker 00

  So you mentioned your book a minute ago. You said there's a book over your shoulder. It's hard for people watching this on YouTube to see that it's written by Doug Irwin, but it is. It's called Clashing Over Commerce: A History of U.S. Trade Policy. What do you think of this moment? And I couldn't have imagined it, which is, I guess, not really interesting because there's so many things in the world today I couldn't have imagined, which breeds humility. But as a historian of trade and trade policy, how does this, how do you think about this? How does it compare to past episodes? A lot of people have said this is, we're going to relive the glory days of the McKinley tariffs

• 1:17:34Speaker 00

  of 1896. We're going to bring back the U.S. industrial power of the 19th century. Do you comment on that and then just more generally about this moment?

• 1:17:48Speaker 01

  Well, it's really unprecedented and it's off the charts on so many dimensions in terms of the decades and centuries that I covered in my book, where trade politics was actually sort of relatively normal. It had to go through Congress a little bit later on, after World War II. Some authority was delegated to the president to reach trade agreements, but they still had to go back through Congress. And there's a broad political consensus. And here, what's unusual is, first of all, one person or one administration is making huge changes in the direction of trade policy.

• 1:18:17Speaker 00

  One branch.

• 1:18:19Speaker 01

  Yeah, one branch, yep. And it's not just, and when we go back and consider tariff acts in the past, you know, the tariff had already been fairly high because of revenue purposes and it was sort of built into the system. And so a lot of, like, even the Smoot-Hawley tariff of 1930, which is sort of infamous, was an adjustment in the rates, a little bit up. A lot of the past tariff acts were just adjusting things, a little bit up or down, fine tuning things, not going from a period, from a place where the average tariff on imports last year, 2024, was 2.4%. Going from that to like 10, 15, 20, 25% on average, somewhere in that range, depending on the configuration of tariffs that's going to be implemented.

• 1:19:03Speaker 01

  And of course, over 100% on China. To do that overnight, that's a huge change in policy. Once again, without so much of a national debate. We're also much more open and exposed to trade than we were in the McKinley era in the 19th century, when imports were maybe 5% of GDP. Now imports are upward of 10 to 15% of GDP. So it's going to be a bigger shock to the US economy, and I think the stock market reaction has sort of indicated that. So I thought I had seen it all in writing over 200, you know, over 200 years of trade policy history, but this is really, really unique and unprecedented.

• 1:19:40Speaker 00

  So let's close with this. I have a phrase in my book, The Choice, where I say, "Self-sufficiency is the road to poverty." And the word "self-sufficiency" has multiple meanings. One meaning is stand on your own two feet, don't accept welfare or charity. It means to support yourself on your own as an individual. What I meant by it, though, is that if you decide to close your borders and make everything yourself, you're going to be very poor. You know, I also like to say, we tried buy local once. It's called the Middle Ages. The Middle Ages, you couldn't trade a lot with people of our white people. It was very expensive.

• 1:20:25Speaker 00

  There was some trade in small things like spices that you could transport in bulk and make a lot of money off of because they were extremely scarce. But in general, people weren't making stuff and selling them to foreigners or to even people across, across the country because it was incredibly costly. And so you lived at inevitably a low standard of living because you only had a limited number of people to trade with. One thing we haven't talked about is the relative unimportance of borders in terms of standard of living.

• 1:20:53Speaker 00

  I put an essay up online that talks about that, the human side of trade. Borders are not unimportant for cultural reasons, but for economic reasons, I think they're misunderstood. But self-sufficiency is the road to poverty. I live in Israel. If Israel were to close itself off to the rest of the world, Israel would become desperately poor. Enormous amount of wealth here is generated, and standard of living is generated from the fact that the world wants to trade with us, that Israel produces many things that the world wants, that it's innovative. So if Israel pursued a closed border policy, or put 20% tariffs on, or doubled the tariff rate, tripled, whatever we're talking about, quadrupled, it's more than that, Israel would

• 1:21:37Speaker 00

  take an enormous shock to its economic well-being, and it would be damaged very seriously. I want to make the point that the United States can actually, because of its size, can be relatively effective if it were to pursue a less open policy with respect to the rest of the world. America would not be desperately impoverished if it raised tariffs to 25%. The transition would be brutal, I think there would be a serious recession, but when things settle down and markets recalibrated, and labor markets in particular, and capital markets, and if it was thought to be for a long time, America would become more self-sufficient.

• 1:22:20Speaker 00

  Many industries would come back to America that have been sent abroad. Many of them would not be here at all, would not be in America at all, because they won't be worth it, they'd be too expensive. So the standard of living in the United States would take a hit. There'd be less innovation, less competition, all that would come at a price. America would not be destroyed by an enormously less open trade policy, the way other successful countries would be, that became less open to trade. If, for example... In the aftermath of Brexit, England decided it would no longer not just follow the policies of the EU, the European Union, but would decide to create everything for itself and make itself richer. It would become much, much poorer because it's a small country

• 1:23:02Speaker 00

  relative to what it's open to now. It has many, many more people to trade with now, and that it costs for much more specialization, much more powerful division of labor, and a much higher standard of living than could be sustained if the people of the British Isles decided to make everything for themselves. They would be much poorer. There might be some advantages in terms of, I don't see it actually. You can make an argument that trade was pursued too aggressively. To try to go back, I don't think has the benefits that people have in mind. But I do want to concede, and I want to see if you agree with me, that if the United States, these tariffs stick, and the United States stops

• 1:23:42Speaker 00

  trading with China, because for whatever reason, it's decided that either for economic fairness, or geopolitical advantage, or whatever it is, that the United States should not interact economically with China, the United States would take a hit, but it would be still a prosperous country. China would take a huge hit, by the way, I think, and it would be very hard on them, which is, I think, the argument for some kind of leverage. But in my experience, when you knock people around, they don't always feel like compromised. So I'm not optimistic this is going to end well, but we'll see. I'm agnostic about it. We'll see. What are your thoughts on this, though, about the United States? Kind of a special case in a certain dimension?

• 1:24:22Speaker 01

  Absolutely. So we already talked about how it's a special case in terms of its currency, but you're absolutely right in terms of economic size. We are a continental-sized nation. We are diversified. We have a huge amount of agriculture, still a lot of manufacturing. We talk about how we've hollowed out, but we still produce a lot of manufactured goods. Obviously, we have a world premier service sector in many cases. So we're very diversified. We're the world's largest economy. And you're right, if we turn inward, we take a hit, but it's not going to be disastrous. We have the resource to still do reasonably well. But other smaller countries are as Israel, Canada, are much more dependent on external

• 1:25:03Speaker 01

  trade. They can't produce the variety of products. And so they're much more open, they're much more dependent on trade, and they are the ones who are really going to suffer, I think, if the US and other countries go down this route of closing down to trade. You know, I don't expect to see a complete reversal of globalization in all the things we've seen, but once again, it's an attenuation, and there's going to be some harm as a result. But the US is a special case because it is so large. You can't think of a small European country, a small Latin American country, a small Asian country, that hasn't really done well because of openness and the variety and the cost and the efficiency of engaging

• 1:25:48Speaker 01

  in trade. It really depend on it. And those are the ones where the case for trade in some sense is easier to make to the population, because you can sort of see it. Whereas the US, it's a harder case to make, because, once again, the costs are not going to be that apparent of closing markets.

• 1:26:03Speaker 00

  I'll give you one more, and close on this, trying to give the argument it's due, which listeners, I'm sure, have noticed, it's not my strong suit for this topic, but one of the stranger parts of this moment is that unemployment is 4%. If unemployment were 20%, if they're, you know, the so-called China shock, which I think has been grossly overstated, the China joining the World Trade Organization in, I think, 2000, led to, I'd say, a slight increase in the pace at which manufacturing jobs left the United States. If you look at the trend of the proportion of manufacturing jobs as a proportion of

• 1:26:46Speaker 00

  total employment, it's almost a straight line down over the last 75 years. There's nothing enormously obvious about NAFTA passing, or China joining the World Trade Organization. You can, it looks like there's a little effect in terms of the steepness of that decline. Again, I think it exacerbated the decline that was already there a little bit from technology and innovation and the use of robots and so on. It doesn't mean it didn't have an effect, didn't mean it didn't have a big effect in certain areas. It probably did, but at the national level, I think it's greatly, greatly exaggerated. So if because of trade with China, somehow the pace of it had been so intense that unemployment

• 1:27:30Speaker 00

  in the United States had risen to recession levels of 10% or more, 15%, 20%, or a depression, you can understand, wow, yeah, we've got to preserve America's jobs. I could see a demand for some protectionism in that world. Here we're living in a world where unemployment's basically zero, and yet the body politic and the public at large has come to believe, I think incorrectly, but has come to believe that somehow the United States, the wealthiest nation in the history of the world, has been exploited by its trading partners, which is incomprehensible to me. There are things that are unfair in the world and in the world of trade, but that the United

• 1:28:13Speaker 00

  States is the victim of this is very strange to me. And yet, it's clear politically that Trump has given a voice to a large, not small, a significant portion of the American electorate and the body politic that sees that something has gone wrong. Now, I think it's they're looking at the wrong culprit. They're seeing trade and Chinese trade, it used to be Mexican trade and NAFTA, or Japanese trade in the 80s as somebody to blame. I think that's a complete error, but it's pretty clear that a lot of people think that Trump's on to something here.

• 1:28:53Speaker 00

  So now I'm going to put your political science hat on, which you don't have, but you are an historian of trade policy over time. How does that make, what do you think about that, this justification and this mood in the country that somehow trade has been a source of pain and economic disruption?

• 1:29:23Speaker 01

  First of all, I agree with your premise that it's an unusual time for trade to be on the agenda when the unemployment rate is very low, the economy's been sort of humming along, and you wouldn't have expected that. You remember the early 1980s as I do, when we were in the deepest recession since the Great Depression, there's Volcker disinflation, imports were coming in from Japan and elsewhere, the dollar was very strong, a lot of protections pressure back in those days, and you can understand that. But what's going on today? Well, here's where I'll disagree with you a little bit in terms of the public mood. Now, certainly, there's one person in the executive branch who believes strongly that trade's a big problem for the US. But if you look at public opinion polling on trade

• 1:30:04Speaker 01

  in the US about whether it's an opportunity or a threat, it's swung much more towards opportunity. If you look at the popularity of the tariffs, they're not very popular, particularly against Canada and Mexico. Yes, there's some support for tariffs against China, because China's sort of a bad actor on many dimensions. But should we be hitting our allies with tariffs? That's not a popular policy. There's not a lot of widespread support for that. So I do think that, and once again, you mentioned earlier on about Milton Friedman and the role of experience as an education process. If we go through with these tariffs, we're going to learn very quickly, I think, the new generation will learn, it's not going to solve the problem. It might actually compound certain problems in terms of the standard

• 1:30:48Speaker 01

  of living, cost of living, and things of that sort. So it's not a good solution. And maybe that'll carry us forward in a different way. So I'm a little bit more optimistic about the political mood in the US in terms of pushing back against this. But here's sort of a depressing historical analogy. So you mentioned, the economy's doing all right, unemployment rate is 4%. Why the complaints about trade? Well, guess what? In the spring of 1929, when the House of Representatives opened up hearings on the Smoot-Hawley tariff, or what was going to become the Smoot-Hawley tariff, Stock market was doing well, economy was humming along, unemployment rate was very low, and they went forward with the tariff.

• 1:31:30Speaker 01

  And obviously, we hit the business cycle peak and the stock market crashed in the fall of 1929, and things didn't unravel from there. But that was an initiative by Congress at that time to raise tariffs at a time when it didn't seem like there was any need. No industry was clamoring, saying, "We're being beset by foreign competition, that we're being overrun, we're losing all these jobs." The economy was doing pretty well. And yet, Congress said, "Yeah, let's try this thing with this tariff and see if we can boost the economy up a little bit more." And it turned out to be a tragic error. And unfortunately, I think we've had a pretty good economy until recently. A lot of indicators are looking not so great now, and tariffs may have something to do with that.

• 1:32:13Speaker 00

  I guess today has been Doug Erwin. Doug, thanks for being part of Econ Talk.

• 1:32:18Speaker 01

  Thanks for having me. It's a pleasure.

• 1:32:26Speaker 00

  This is Econ Talk, part of the Library of Economics and Liberty. For more Econ Talk, go to EconTalk.org, where you can also comment on today's podcast and find links and readings related to today's conversation. The sound engineer for Econ Talk is Rich Goyette. I'm your host, Russ Roberts. Thanks for listening. Talk to you on Monday.