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.
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Additional ideas and people mentioned in this podcast episode:
Milton Friedman on Capitalism and Freedom. EconTalk. Russ Roberts and Michael Munger on How Adam Smith Can Change Your Life. EconTalk. Douglas Irwin on the Great Depression and the Gold Standard. EconTalk.A few more readings and background resources:
A few more EconTalk podcast episodes:
Russ Roberts on Smith, Ricardo, and Trade. EconTalk. David Autor on Trade, China, and U.S. Labor Markets. EconTalk. Don Boudreaux on Globalization and Trade Deficits. EconTalk. Don Boudreaux on the Economics of "Buy Local". EconTalk. Don Boudreaux on China, Currency Manipulation, and Trade Deficits. EconTalk. Arnold Kling on Specialization and Trade. EconTalk. Arnold Kling on Patterns of Sustainable Specialization and Trade. EconTalk.More related EconTalk podcast episodes, by Category:
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| 0:37 | Intro. [Recording date: April 22, 2025.] Russ Roberts: Today is April 22nd, 2025, and my guest is economist and author Doug Irwin of Dartmouth 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 EconTalk in October of 2010, discussing the Great Depression and the gold standard in an episode I highly recommend. Doug, welcome back to EconTalk. Doug Irwin: Thanks for having me. Good to be here. |
| 1:23 | Russ Roberts: Let's start with trade deficits. What does it mean when a country runs a trade deficit? What's the definition of a trade deficit? Doug Irwin: Well, a trade deficit is simply when a country imports more than it exports to the rest of the world. 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. Russ Roberts: If the United States--I want to talk about two examples that people are discussing a lot these days. 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-a-vis the rest of the entire world. Doug Irwin: Yeah, there's various ways one can break it down. 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 United States. And, instead of buying U.S. goods, they're buying U.S. 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. Russ Roberts: Well, some of it is used to buy American goods and services, but not all of 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 balanced. There's one little tricky thing there about currency. Do you want to say anything about that? Doug Irwin: Not really, because I think that's a rather minor point of it, but you're absolutely right. 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 product, 75 cents comes back and buys a U.S. good or service. And then, 25 cents is buying U.S. 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 United States versus buying U.S. assets? Russ Roberts: 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 United States tends to be a reserve currency 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. |
| 4:15 | Russ Roberts: If I am correct, the United States runs a surplus in services with respect to the rest of the world. Is that correct? Doug Irwin: 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 United States 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 United States. So, we're a net exporter of services, yes. Russ Roberts: And, 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 is 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, 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 States has in goods and services, correct? Doug Irwin: Absolutely. You said it very well. And, I also agree with you on the financing aspect of it: the United States is very different because the dollar is the world currency. People want to invest in the United States: 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 a safe haven and a great opportunity to earn good returns for foreign investors. Russ Roberts: Well, you said the stock market is doing very well. Historically. On average. Doug Irwin: That's correct. [inaudible 00:06:09]-- Russ Roberts: 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, 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. |
| 6:44 | Russ Roberts: 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. Doug Irwin: Yeah. Not really. 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 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 or someplace you'd see it. If we're in a recession, would you know it? Absolutely. 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 is to an abstraction. It's not something that personally affects you directly. So, there are circumstances in which countries should perhaps worry about it. But, I think for the U.S. case, with the dollar being the reserve currency, it's generally not something that people have to fret about. Russ Roberts: 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 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, 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 EconTalk 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. It wasn't economics that got people to oppose price controls.' And, what he said, he went on to say, 'The reason price'--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 off, people start thinking, maybe we should have price controls on things that get more expensive.' So, economics didn't solve this. I naively thought when I was younger, 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 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--they've been shown to be incorrect. 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 in like the 1200s. If we're going to use 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. Doug Irwin: Yeah. I don't think Smith is out of date in really any significant way. 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. I've read it, but I find there's some sentence I missed or insight. And, it's just a true book of wisdom. Here's a guy--he didn't have the Internet; 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. |
| 10:53 | Russ Roberts: I want to come back to a phrase you used a few minutes ago. You said, 'The dollars come back.' So, Americans buy 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 if 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. Suppose foreigners 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 wall as wallpaper, and never bought American goods and services or invested in American assets. Would that be bad for America? I mean, we're stimulating their economy, but they're not stimulating ours. That's so unfair. Doug Irwin: 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. In fact, actually there are a lot of dollars circulating in the world, so that's true to some extent. In Latin American countries--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 U.S. assets or goods or services. Russ Roberts: But, isn't it unfair? I mean, we're stimulating their economy and they're not stimulating ours. Doug Irwin: 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. Russ Roberts: Are we going to have fewer jobs? Doug Irwin: 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, in terms of jobs, the current unemployment rate in the United States is about 4%. It'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 [Gross Domestic Product], they're negatively correlated. When the unemployment rate goes down, our imports to GDP go up because we're buying more. We're robust; the economy is 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. So, imports aren't taking away from jobs in that sense: the correlation goes the wrong way for the 'imports are costing U.S. jobs' at the broad macroeconomic level. Russ Roberts: 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 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. That 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 many workers in a particular industry. We may come back and talk about that. But, that's what's going on. It's an economic change that's, on average, good for the country. It 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. Andso, 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, 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. Others have responded and innovated to make their products more cheaply and 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 is a total misunderstanding of 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. 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, in real terms, for the things it wants to enjoy and have fewer things to enjoy. It still could have full employment, just have a lower standard of living. Doug Irwin: Yeah. If I could just make one qualification or footnote, which is actually a minor defense of mercantilism in some sense. Because we talked about our previous episode was on the gold standard and the Great Depression. One of the things that the mercantilists in the pre-Adam Smith period were reacting to is that the money supply was tied to how much gold you had. 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 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 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. It's a monetary rule, but sometimes it can be a straitjacket as well. |
| 17:05 | Russ Roberts: I want 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, the 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 do 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. 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 United States imports could be the same as what the rest of the world imports. But that isn't the way it is. The United States runs a trade deficit and a capital account surplus. Do I learn anything about the world from that reality? Doug Irwin: Well, the United States really is sort of a special case in some sense. We have independent central bank, flexible exchange rates, the dollar is a reserve currency. But other countries, they might have to worry about their trade surplus or deficit a little bit more than the United States does. And actually, there's a great case from Israel in the 1950s and 1960s 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 you used earlier that doesn't really apply to the United States, but it 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 U.S. foreign aid, aid coming from Germany, reparations, and things of that sort. 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 Deutsche marks 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 jumpstart exports in some way to pay for your imports. Russ Roberts: And this is a little bit tricky, because they both have the word 'deficit' in it. But, the United States 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, it really does have to finance--it has to find a source to make up for that shortfall. And, historically the United States 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 has accumulated obligations to the rest of the world. Does that interact with the trade and capital account surpluses or deficits in any way? Doug Irwin: 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 explaining. The United States 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. Obviously, we'd still probably have a current account or trade deficit because the U.S. 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. Russ Roberts: And, that deficit [inaudible 00:21:30]-- Doug Irwin: That would [?] a surplus. Russ Roberts: Yeah, that trade deficit would be smaller, I would think, if the United States borrowed less from the rest of the world-- Doug Irwin: Absolutely-- Russ Roberts: putting dollars into the hands of foreigners. Doug Irwin: That's an important point, too, because it's often said the trade deficit is something that other countries are doing to us: '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, we sometimes have to look at our home policies too--what we're doing. And, maybe that's a driver, and that's something where we can effect change if we want to change our situation. |
| 22:07 | Russ Roberts: And now let's move to the individual country case. Of course, many countries practice all kinds of protectionism of various kinds for across their 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. 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 that many, many nations, including the United States, have barriers, both explicit in the form of tariffs or quotas, or practices and non-tariff, non-quota barriers that make it challenging to sell in their markets. There are natural barriers--things are far away. There's--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. 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? Doug Irwin: Well, it actually doesn't affect the trade deficit directly. Surprisingly. Because, currencies can adjust in value. It goes back to the capital account. Trade in assets are 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. This gets to the idea of could we--the United States--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. 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. The same with free-trade countries: some have trade surpluses, some have trade deficits because there are other factors that are really driving things. |
| 25:10 | Russ Roberts: So, why does the United States run a deficit with some countries? And, at 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 proportional to the size of the economy. It 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 need to punish them--or incentivize them--to change that. Is that true? Doug Irwin: No. You might remember from the 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 mining equipment to dig up minerals that they export to China. And then China exports steel and other things back to the United States. That's where you get the circular flow of trade between different countries and you don't need the bilateral balances. This applies to us as individuals. Robert Solow famously said, 'I run a massive trade deficit with my barber. He never buys anything from me.' We all run big trade deficits with our grocery store. But, once again: we earn money from other sources where we export, where we're selling our services to. 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. Then we'd have surpluses with other countries where we're exporting and they weren't selling us as much. Russ Roberts: 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 going to--if indeed the United States is an attractive place to invest, you're still going to 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. You can't fix them all at once--if that were 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. Doug Irwin: And another good example of this is the iPhone and just the mis-measurement of trade flows. 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 United States, all that value of the iPhone is attributed to China--because that's where the good is 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 United States that are being put together there in China. It's not really a Chinese product. But, it's attributed as a Chinese product when it enters the United States, and it's recorded as a big import from [?for?--Econlib Ed.] the United States. And Apple 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 United States. |
| 29:08 | Russ Roberts: 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 doing my best, listeners. So I'm going to give you a really hard one now. You ready, Doug? Doug Irwin: Okay. Sure. Fire away. Russ Roberts: So, okay. It's assembled in China, and that means they've got all the assembly jobs. If we, through whatever policy--whether it was 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? Doug Irwin: I think the comedian Dave Chappelle put it best. He said, 'I want to wear Nikes. I don't want to make them.' Russ Roberts: Yeah. Doug Irwin: It's pretty tedious work, assembling things. Actually, the New York Times--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. Once again, dislocation, as you pointed out earlier, 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--there are many more other opportunities that I think we could be offering workers in the United States. Russ Roberts: I think it's important to point out that there's a lot of romance about those jobs, romance that was true 75 years ago in 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, 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'd decide 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 the employment in those areas would shrink. 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. Doug Irwin: You're absolutely right. It's that opportunity cost that sometimes gets missed. I think there's some estimates that say the price of an iPhone would be up to $2000, possibly $3000 if it was manufactured in the United States. 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 United States and it would be automated, or there would be pressures to automate in the United States. We could bring back some steel production jobs; but once again, the way we made steel in the 1950s and 1960s is not the way it's made today. Back even as late as the 1970s, you'd see a lot of blue collar workers physically in the plant, moving molten steel and filling molds, and things of that sort. Now you look at a steel production facility in the United States, 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. Once again, we're really in the 21st century, in terms of what we have in terms of the labor market, and it's not the way it was back in earlier periods. |
| 33:57 | Russ Roberts: And your insight really highlights the connection--which seems strange but is quite real--between technological innovation and trade. Both of those things are ways that we get more from fewer resources. Right? It's called productivity. 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 has 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 is because you don't need as many workers to make steel in either place as you did 50 years ago. 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. It'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. You said we wouldn't bring back as many jobs. We could! We could bring back the assembly industry; and 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, we'll legislate that, too!' Well, if you do, that means that there will be fewer resources to do in other areas. We 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. Doug Irwin: Yeah. 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 in then, but we just need fewer workers to do it. That's productivity, as you said. 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. |
| 36:21 | Russ Roberts: So, now I'm going to give you a really hard time, Doug. It'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; you 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. What those did is they helped rich people; but they didn't help the people who used to work in those factories who had a decent life and could afford to have a car, and a mortgage, and educated children. So, what this policy of free trade has done is made their lives horrible and enriched a few fat cats in finance. Doug Irwin: 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 classes, a small town in Pennsylvania--Tamaqua, Pennsylvania--where a textile mill closed down. When they were interviewing workers, he said, 'All the jobs, 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 United States, they're all in Alabama, South Carolina. North Carolina industry--a state--is really an interesting one because they've made the transition from textiles and furniture to medical services, healthcare, advanced research in the Research Triangle. So, it is possible for regions to bloom and do better. The Rust Belt--I think here you have to get into: Well, are unions too strong? Are regulations too onerous 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. It used to be steel, 30, 40 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 30 miles, if that plant goes down, that community is 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. It gets very complicated: it's a very difficult issue to deal with. Russ Roberts: Yeah, I think 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 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 move 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. 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--and 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 just people in despair because the things that their parents and grandparents did aren't available anymore. You want to do anything for them? Doug Irwin: 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, Wisconsin, where a GM [General Motors] plant closes down. And she tracks what happens to the people. And, the plant closed down during the Great Financial Crisis of 2008, 2009. And, what's interesting is that 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-- Russ Roberts: Yeah. Or their parents, or their uncle-- Doug Irwin: Exactly, yeah. They at least had the income, so they could sustain that. But then, many people said--exactly as you are 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. |
| 42:26 | Russ Roberts: Well, 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 or for worse, it 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--there were 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 was a large Chrysler plant--I think it was Chrysler--in that area of St. Louis. Dick Gephardt was their Congress Representative--Member of Congress. 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 tariffs 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 I think it was the brother of the guy I was debating. He said, '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. But what about me?' And I said to him, 'What do you want me to do for you? Do you want a welfare check?' That's one of the ways you can cope with--you said there's no easy answer. I said, 'Do 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. 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. Do you want me to do that? I could do that. We could do that. We could pass the law: We could ban foreign imports of cars. That'll get your job back. Of course, you'll be taxing, implicitly, your fellow citizens for--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 what's called--something that's called trade assistance, 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. 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 going to be happy; and I don't blame them. They're going to be miserable and they're going to have very little dignity. 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. Doug Irwin: Yeah. That's a very powerful moment and you expressed it very well. 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 United States has basically done it. 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 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. Economic change can be a painful thing. Russ Roberts: Yeah. Doug Irwin: But once again, if you arrest the progress, you're foreclosing opportunities for the future. Then you get coal miners forever and we're stuck in very difficult, laborious jobs. So, it's a short-run versus long-run transitional issue. |
| 47:06 | Russ Roberts: So, going back to the question of bilateral trade deficits with particular countries, the Trump Administration announced a whole complex set of tariffs. I didn't follow all the balls and strikes of 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. 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? Doug Irwin: There 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 can also be an excuse for other things that are going on. So, people say, and the 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 side, not the left-hand side. That's a lot of retrofitting, and I don't see GM [General Motors] 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 barrier for us selling our cars there. It's just that they're cost to tailoring your product for that particular market, and I don't think the U.S. producers have tried to do that. So, just because there's in that huge imbalance in the way cars are going, isn't ipso facto evidence of unfair trade or some sort of trade barrier. Russ Roberts: But, let's say it is. Let's say there's corruption, or--actually a better phrase would be, say, opacity, non-transparency, say, at the ports or at the docks; or there's all kinds of subtle ways that it could be just culturally, even. It could be people are discouraged emotionally from buying--culturally from buying--foreign products. I just recently read about a person whose father worked at Bethlehem Steel. At Bethlehem Steel, you couldn't 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 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 an American,' it's not true. So, I just want to say that and get that. You can comment on that. You want to comment on that? Doug Irwin: 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 United States or Canada, or the iPhone, it's really internationally sourced. You get very specialized producers who just do wing tips, 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 an incredibly complicated order; and it's also one that firms have found to be efficient rather than doing it all themselves. There used to be a plant outside Detroit called the River Rouge Plant. It produced--I think it was Ford--and they produced glass there. They imported sand to make the glass, and 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. Russ Roberts: 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 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? Doug Irwin: 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 at 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 would 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 if we want the competition, if we want the variety, if we want the gains from trade. But another: If we have 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, 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. And so I think you have to sort of consider these things, but not automatically respond by closing your market just because other countries have high trade barriers. Russ Roberts: Yep. One thing--sorry, go ahead. Say that again. Doug Irwin: 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 double injury by responding in that way. Russ Roberts: We'll come back and talk about 3D-chess [3-dimensional chess] in a minute--or 4D-chess, four-dimensional chess. |
| 55:09 | Russ Roberts: 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 the way it's being treated abroad, you open up the mischief of 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. 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. In the 1990s when NAFTA [North American Free Trade Agreement] 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 said 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 of this industry and that industry and delay of the things we're talking about, phasing in very slowly or never at all for certain industries.' He said, 'We should just say our borders are open to your goods and services.' If you can compete effectively, you will make us richer. You will make our lives better. Again, putting aside transition issues--that doing that suddenly doing that suddenly for a protected industry could be harsh for some of the people involved. But, as a general rule, Friedman argued that we 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 this interregnum period where, or this interim period--where there's a 90-day hold on whether 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 a way to get them to treat our products more fairly. What's your reaction to that? Doug Irwin: Well, I'm a bit skeptical because the Administration has also talked about using tariffs to bring back jobs, and they sort of want them as a permanent feature of the U.S. economy rather than just this temporary bargaining chip. And so, 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 re-shore manufacturing; or you raise them, but they're not going to bring back jobs because everyone's waiting for the deal to be made to bring down the foreign trade barriers. There's someone on Twitter 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 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 U.S. 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 United States. Russ Roberts: 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 finished 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 U.S. economy. 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 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 to call--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. Transitions matter. The opportunity to stay near your family is a lovely thing that we might want to take into account and 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 a hundred years, 60, 75 years ago, 50 years ago. We'll put up some links to things that make that case. But, if you listen to the news, you think, 'Oh my gosh. Free trade is horrible. Look how horrible the United States is doing.' Not true. Doug Irwin: Yeah, I could agree with you on so many aspects of that. 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. You know, there is this--you hear this in the media that inequality is increasing, that the middle class is stagnating. And, once again, there was a bump-up in inequality, but it's not like it's been secularly rising. It sort of in fits and starts, and sometimes it declines. And it has actually plateaued since the Great Financial Crisis in terms of many measures. But, the arguments keep coming back that we're sort of on this inexorable path of increasing divergence; and that, once again, it's not that bad. Russ Roberts: The word 'secular' in that explanation means over time--not non-religious--just for the non-economists in the room. |
| 1:01:37 | Russ Roberts: I want to give one more 4D-chess argument which I've heard, which I find fascinating. And it could be real. And, again in this whole conversation, I'm agnostic about what President Trump's real strategy--I have no idea. I have no idea whether he's got something very thoughtful in mind, very unthoughtful, or whether his people who are promoting this understand this or don't understand. We're just: it's off the table. But, I did hear this argument, which is really interesting. 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 Americans holding U.S. Treasuries, but many, many dollars of that are held by foreigners. And, the interest payments on the national debt--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 dollars. That's roughly, within a billion, the U.S. military budget. So, what that means is, is that the United States is paying roughly the same amount 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 the equipment 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 that 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, the absolute size of it as a proportion of GDP--raises the possibility that at some point the nations of the world might not want to lend money to the United States. And that would be a rather extraordinary dislocation. We're talking about dislocation and adjustment and transition. If 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 U.S. 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. 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 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 time-frame, 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 it is about, but it could be, and that would be 4D-chess. That would be an interesting way to lower the fiscal burden on the United States of spending more than it did for the length of time that it did relative to the taxes it collected. Doug Irwin: I had not heard that argument. That's fascinating-- Russ Roberts: Isn't it?-- Doug Irwin: It strikes me, first of all, that it's a partial default. Russ Roberts: Correct. Doug Irwin: If you want to renegotiate, that's something we haven't done in more than 200 years of U.S. fiscal history. So, that would be 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 has fallen. These yields are rising and gold prices are rising, which sounds like people are pulling their money out of the stock market, 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. If foreign countries are not willing to--or it's really not countries, foreign investors--are not willing to put their money in the United States anymore, then 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, 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 you have to balance your fiscal books and other things if you're not going to rely on foreign capital markets. |
| 1:06:33 | Russ Roberts: 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 is 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, 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, and-- Doug Irwin: Absolutely. And here's where there's this contradiction between using the tariffs to bring back jobs and bring back manufacturing and implying 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 multi-million 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 as you pointed out--uncertainty about what policy is going to be six months, a year, five years from now. |
| 1:08:29 | Russ Roberts: And 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: If you put your mind to it, you're willing to burn some political capital, you can do a lot of stuff. 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 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. Doug Irwin: 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 a 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. I've got this book over my shoulder, Clashing Over Commerce, which talks about big changes in U.S. 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 talked about NAFTA earlier. There's a massive public debate about that. Hearings had to go through Congress, a lot of pressure groups arguing in favor or 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 questioning 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. Russ Roberts: Just a footnote to that: When you said Congress has delegated authority, they literally delegated authority, in, I think, 1962 or 1964. Congress, in the Constitution of the United States, has the authority to levy taxes--of wwhich tariffs are one. In 1962, I think, or 1964, 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 justified 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 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. Doug Irwin: Yep. Usually all tax bills begin in the House of Representatives. That's where we debate these things. And yet, not in this case. |
| 1:11:54 | Russ Roberts: 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 is going to pay for the tariffs. Meaning: Are 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: It's only on imports, so only--and the importer will have to pay the tax: whether it's the foreign person who is bringing it in or the literal importer. But not the consumer. What do you think of that? Doug Irwin: Well, literally the importer writes the check to the government to pay to get 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. 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, '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 going to have to pass that on to you. So, we're going to have a surcharge on the propane we deliver.' So, that's that passing that tax forward. And, for many years we didn't have too much evidence on who 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 paid those tariffs. And, on almost every case it was passed through 100% to--roughly 100%--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 pay those tariffs. |
| 1:14:01 | Russ Roberts: What about the American producers of those products? Now that their competition is more expensive, aren't they going to get more business? Isn't that going to be great? And, as a result, the consumers, they'll buy American now. What's wrong with that? So, yeah, you say they'll pay 100% of the tariffs; but most people will just switch to American products. Doug Irwin: 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 costs. And so, for example, the steel tariffs: they actually [?] help out a few steel firms. Yup, they might have to ramp up production a bit. They can charge higher prices, put on an extra shift, maybe even hire a few workers-- Russ Roberts: Demand more workers-- Doug Irwin: But, guess who buys steel? I don't know about you. I don't go out and buy steel every weekend when I go to Home Depot or Lowe's for a home improvement. But, guess what? John Deere, Caterpillar, Ford, GM, every state and local government that is 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? [More to come, 1:15:27] |
READER COMMENTS
William Hope
May 5 2025 at 12:47pm
It would be nice if you could continue the conversation and pick one of the more famous protectionist policies to discuss what you would do instead of what happened historically. The Sugar Act of 1764 would be a good one. Say you are in British parliament and you need to figure out how to pay for what the US calls the French and Indian War, you are competing militarily with Spain, France and Netherlands in the Caribbean where inbound sailing access routes to the American colonies is made primarily through Barbados , and your sugar grown in Jamaica is more expensive than the French sugar. What do you do?
I think that conversation would do better in addressing the grey areas that were missed in this podcast like military strategy, dumping, tax avoidance (incl. smuggling), how to raise revenue if you are a government, etc.
It wasn’t that long ago when the McKinseys of the world were telling all the multi-national corporations to move to Ireland to dodge a few bucks in taxes.
Dion Wall
May 5 2025 at 3:49pm
I’d love to hear about the economic response to the national security arguments for interfering with free trade. How does a country maintain the ability to produce supposed strategic necessities? When does it make sense to decouple from a trading partner that is also a national security threat?
Chase Van Etten
May 5 2025 at 5:21pm
In Federalist no. 10, Hamilton says, “The diversity in the faculties of men from which the right of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of Government.” [emphasis mine]. What is often missed in these discussions of industrial policy, under which I would include tariffs, is the role that access to knowledge has on the ability of a citizenship (their aggregate faculties) to compete over the long term. The Trump administration’s confused communication offers no help here.
Concretely, technology develops combinatorially: through the breaking up and recombining of many constituent technologies into something new. This idea has been articulated many times, but most thoroughly by Brian Arthur in “The Nature of Technology.” What Arthur notices and explains clearly is the large extent to which access and intimate knowledge of many different technologies, often from divergent areas, is critical for rapid innovation. The loss of our manufacturing ability in the US is not just the loss of jobs, or a diminishment of national markets, but a loss of national faculties.
By failing to maintain a sufficiently large industrial base, we forget how to do things. By forgetting, we close off avenues of innovation.
Ethan
May 5 2025 at 10:26pm
Something I’ve noticed about these discussions is that “US assets” as a category gets replaced with “US Treasuries” at some point. You both drew the distinction but it’s subtle the way an Oren Cass, or even the vice president, will make the argument that trade deficit equals fiscal deficit.
I may not understand well enough, but it seems like there is some slight of hand where demand for our debt turns into the actual debt.
Mark
May 6 2025 at 2:39am
Great episode. I feel like you covered all the classic arguments for free trade, while discussing why they’re classic arguments. While I agree with most of this, I’ve been encountering some new arguments against free trade that don’t seem to be covered by the classical arguments discussed here. I’m wondering if you could respond.
On the trade deficit, one argument I hear, and something that was briefly mentioned at the beginning of the episode, is that we’re not just exchanging pieces of paper for cheap goods. If that were the case, then the classical reductio ad absurdum would apply, “If we’re worse off because they sell us stuff on the cheap, then by that logic, we’d be devastated if they started giving us stuff for free.” But that’s not what’s happening. The exchange is cheap goods for a share in US capital markets (e.g. from buying US stocks).
It’s like if you had a hole-digging business and I had a hole-filling business. I pay you a dollar to dig a hole. Now I have a hole and you have a dollar and there’s a ‘trade deficit’. But you’re not going to stick that dollar under your mattress. You’re presumably going to pay me a dollar to fill the hole and now we’re even. But what if, instead of paying me to fill the hole, you buy 1% of my hole-digging business with that dollar. Now, every time you pay me to dig a hole you get a penny back. Keep doing that until you own half my business, and that exchange to dig/fill the hole leaves you with 50 cents, because you own both sides of the business. In reality, there are benefits to trade, so the arbitrage doesn’t leave to destitute, but it does allow one party to realize the benefit of those gains more than the other party.
In this scenario, the trade imbalance both presages and reveals a difference in capital ownership trends that benefit one side of the transaction. Because, as Piketty says, the returns on capital are greater than the returns on labor over time, (exactly as we’d expect) transfer of capital wealth is not a good national strategy.
Now take that and multiply it by 1,000. Now you have workers and owners and everything in between. When cheap goods flood the market, the worker loses their job to manufacturing that moves overseas. But the owners of the companies aren’t sad about the foreign investment flooding into the markets, driving up the price of their stocks. They make out quite well, watching their asset values increase.
From the average worker’s perspective, this looks like their jobs getting shipped overseas. Sure there’s more stuff in the economy, but they can’t afford any of it. Everyone who owns capital wins in this scenario, but the average worker doesn’t own capital, so they lose.
Personally, I’m doing well in this economy. I have friends who were looking to buy a house a few years ago, but who no longer think that’s possible because prices went up so high. For these people, rising prices in the stock and real estate markets don’t do them any good because they see their ability to own capital as low and getting lower. They don’t care if the trade deals hurt stocks. They just want to tip the scales back toward a place where they’ll be able to climb the ladder of home and capital ownership again. Capitalism works best for those who can own capital, so if we want the system to be robust, and honestly popular with the voting public, we need to ensure they can participate in the game of capital accumulation. To the extent they’re shut out of that game – in this case by competition from foreign competitors – those policies will hurt support for capitalism.
In other words, the arguments I’m hearing are that the pseudo free-trade practices encouraged for the past several decades are felt by those at the bottom of the economic ladder as a mechanism of wealth transfer. Their hope with tariffs is to reverse that transfer.
Austin
May 6 2025 at 9:44am
This is an interesting take and I am sympathetic to those that are left behind. Russ and Doug mentioned when they discussed the human side of trade policy that they think we should do something for those that lose their jobs because of changing trade policy.
For me, I think of Thomas Sowell’s quote:
> There are no solution. There are only trade-offs.
The reality is that I believe we are on average better off with free trade, but that doesn’t mean some people won’t feel some pain because of it. We should think about those people and how we can lessen the blow.
When the government tries to enact policy to change trade they are distorting the market and I believe this is on net less efficient.
Mark
May 6 2025 at 1:44pm
Absolutely. The problem is that in a representative system you run up against 2 confounders to a pure theory approach:
1. Public choice will never follow pure theory, so long as a policy creates losers with a special interest in protection from those policies, and
2. As mentioned in the episode, once government policy intervenes, there are strong incentives for rent seeking, which will distort both the market and the efficacy of any proposed remedy. Government will then tend to double down on compromised policies because the incentive structure forms a feedback loop.
I’ve often reflected that most/all advanced economies have some degree of social safety net. And I know many libertarian/classical liberal arguments in favor of abolishing those programs, based on theory. But from a Chesterton’s fence approach, maybe that safety net is there for an invisible political reason. You might think the alternative is a reduced government burden from payroll taxes, etc. But what if that’s opposite of the true alternative? Maybe instead you get socialism, because without government help, when people lose their jobs to robots, their last resort is to demand government action. Maybe public welfare programs are the price we pay to maintain a capitalist system that allows creative destruction.
The same counterpoint could be made about trade. Perhaps we’ve failed to compensate the large percent of the voting public who didn’t benefit from free trade. The result was they turned to government to enforce tariffs. Maybe there’s a better accommodation we could make that would allow free trade without creating natural lobbying interests opposed to trade. If so, we should consider that policy – even if it deviates from pure theory – because the losers get a vote. And the more losers, the more they lose, the louder their political demands will be.
Steve Spiller
May 6 2025 at 9:08am
Great discussion. Afterward I read Doug’s 2010 paper “Did France cause the Great Depression”. Wasn’t it also France in 1971 demanding gold for greenbacks that finally forced Nixon to abandon the last vestiges of the gold standard. If my history is fuzzy I hope an econtalk alum will correct me.
Ben Riechers
May 6 2025 at 11:11am
This discussion was on the edge of a straw man. While there are some Trump supporters (a minority I believe relative to the people who voted for him) who are all-in on tariffs, I believe most are looking for the broad improvement of trade agreements creating some chaos and uncertainty that an overwhelming majority hope will be short-lived resulting in the continuation of free trade, but on a fairer basis.
All that said, China is a different story. In my own view, I am not sure why, via trade, we want to make countries more profitable when they point nuclear weapons at us or use profits to build up their militaries counter to our interests. Plus, China consistently breaks WTO rules without any consequences. The CCP steals intellectual property, hacks into our systems, promotes, through social media and other means, the distrust of our government (not a big challenge), sends us fentanyl, uses slave labor, and raises the cost of our military.
I expect the chaos and uncertainty to reduce dramatically over the next 90 days except for China. If so, his support of the American people will trend upward, maybe 52%. Plus, Trump will gain more support than he loses continuing to focus on China.
Linking trade to national security is not a new idea. Thomas Sowell supported this line of thinking, but he noted the risk that doing so could be abused such that every decision had a national security dimension. For China, I strongly believe that linking trade to national security is completely reasonable.
As an aside, you both pointed to the unemployment rate as a measure of how our economy is performing. I am not suggesting anything more than that was the first metric you saw a need to mention. As you know, it is a flawed but useful metric. However, it should never be shared without context. None of the following metrics would be in the interest of those in charge, but they would be educational for most Americans by publishing them along with unemployment percentages. I am thinking of workforce participation rates for various age groups along with metrics of private and public sector GDP.
Chris Perry
May 6 2025 at 12:17pm
The absurdity and ignorance of US policy was well described. The explanation of how capital accounts complement trade accounts was very nicely illuminated.
What was not touched on was whether the progressive accumulation of assets (“real” assets in particular) is potentially disadvantageous. When Tata Steel is reducing its production capacity, the temptation/political pressure to close a Welsh mill rather than an Indian plant is surely substantial.
John L
May 6 2025 at 1:30pm
Thank you for a calm, abstract discussion on free, global trade. This episode reduced my anxiety about the current situation somewhat, if only momentarily. Here, we are worried about our investments, worried about our jobs, and my wife’s side business is likely already a casualty of the trade war. Many public thinkers are conveying panic regarding the current situation (and seem to be justified) but this talk took me back to earlier, joyful days of Econtalk when guests could talk free trade outside the shadow of a trade war. Love it. I also recalled Thomas Rustici on Smoot-Hawley from 2010, which was very provocative and memorable.
Unfortunately, Friedman was right that economics didn’t teach people that price controls are bad (our trade war president defeated a price control president in any case). Hopefully, people will learn quickly from bad trade policy and this generational lesson can be gained without a lasting recession.
Greg McIsaac
May 6 2025 at 5:34pm
Russ Roberts: “And, the interest payments on the national debt–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 dollars. That’s roughly, within a billion, the U.S. military budget…. It’s a little scary because it’s a lot of money.”
It may be more than “a little scary” because the actual numbers are closer to $900 Billion
Congressional Budget Office Outlook:
FY 2024 Net Interest Payments $881 Billion; Defense Payments $855 Billion
FY 2025 (est) Net Interest Payments $952 Billion; Defense Payments $859 Billion
https://www.cbo.gov/system/files/2025-01/60870-Outlook-2025.pdf
Additional overviews of the US Federal Budget, debt and deficits here
https://media4.manhattan-institute.org/wp-content/uploads/Budget-Chart-Book-2024.pdf
https://manhattan.institute/person/jessica-riedl
Ajit Kirpekar
May 6 2025 at 5:52pm
Russ with probably the greatest single line ever uttered on this podcast.
“I don’t want money, I want my job back.” You can feel the intense humanity behind those words.
That aside, the guest touched on an interesting thought experiment. If we send dollars to China but they never make it back to the US(let’s assume it gets stored permanently in some underground vault or burned to ashes), are we still better off?
In this thought experiment, if the Fed were not aware that this was happening, I would imagine this would lead to unexpected deflation as it is effectively sterilizing large swaths of cash much like France with Gold Reserves in the Great Depression. That would imply then that we really aren’t just giving them worthless pieces of paper because that paper is real buying opportunity.
Steve Eastridge
May 6 2025 at 6:28pm
Russ, include me in the why-doesn’t-he-say-something crowd, and having been a listener since the beginning, knowing that it has already been said. Still, this was a great refresher. It also reminded me of the old ones, like the interviews with Milton Friedman. Love that these are still available.
Mike
May 7 2025 at 7:19am
A good lecture of the academic perspective on pros and cons on trade tariffs. As if your audience did not already knew about this perspective… Would be much more appreciated of you invited and talked to an expert on both trade in theory and ‘realpolitik’, Kissinger style. As I think some commenters already have alluded.
To state the obvious. There have always been impediments to free trade. It has got to serve some purpose in the real world, no? It is reasonable to state that ‘If you deescalate I will do so too. But not otherwise.’ To deescalate unilaterally seems stupid to most people. People that are not sitting isolated in an ivory tower.
Phong Le
May 7 2025 at 10:14am
I’m curious of what you guys think of Clayton Christensen’s theory on low end disruption as it is applied on a multi-national level? Ricardo’s comparative advantage theory assumes a static condition over time. In reality, poor countries can move up the value chain but rich countries cannot (or are unwilling) move down the value chain. Christensen describes this phenomenon in The Innovator’s Dilemma.
John
May 7 2025 at 12:37pm
Hi – I feel like the the podcast danced around but did not answer the following critical question. I think this is at the hear of a lot of what Trump wants – free and uninhibited access of US products to foreign buyers.
If you are the rice farmer or generic manufacturer of product X, and your products are not permitted by some protectionist rule to be sold into Country ABC, is that fair? Is that free trade? Clearly not.
Irwin’s response was essentially something about throwing rocks on a rocky shore which to my way of thinking is a non-answer. Notwithstanding the geometry of trade and other academic metaphors, to the rice farmer or the manufacturer, a market is closed. If the product doesn’t meet consumer tastes or is too expensive, fine. I can live with that. But a closed market for protectionist reasons is not free trade.
I wish there was a lot more on this.
Jeff Severts
May 7 2025 at 1:55pm
I’ve always been a dedicated free trader, but I now wonder if my view shouldn’t be a bit more nuanced. It seems to me that our economic models feel to capture three important issues:
1. National defense. In our comparative advantage models, national security is assumed. But what happens if you’re unable to produce the weapons and materials necessary to defend yourself? Today, for example, America is unable to build ships and drones of sufficient quantity and quality. Hell, we can’t even provide Ukraine with a reasonable supply of artillery shells. What dangers do we expose ourselves to when critical capabilities disappear?
2. Access to knowledge. Our models seem to also presume that nothing is lost when knowledge moves off-shore, or that such knowledge can easily be recovered. That doesn’t seem to be empirically true. We appear to no longer know how to produce the most sophisticated microprocessors. When I pull up behind a Tesla, I can see panel gaps in the trunk that no Korean/Japanese/Chinese manufacturer would ever tolerate, probably because we don’t have enough good manufacturing engineers in this country. What options do we close off for ourselves when knowledge is moved offshore?
3. The sources of human happiness and dignity. It’s indisputable that free trade makes us wealthier, but are we really confident we have figured out how to properly compensate the losers? Do they really want to move to a different city to find a job? Does a welfare check ever replace the dignity of work? What tears in the social fabric do we create when we hasten the demise of entire industries?