The Trade-Offs on Tariffs and International Trade, with Professor Douglas Irwin

interview with Douglas A. Irwin
Tuesday, April 21, 2020

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TRANSCRIPT ONLY

Peter Robinson: During an administration that has imposed huge tariffs on goods from China and elsewhere and during a health crisis that has businesses across the country re-examining their investments abroad, what's the right way to think about international trade? Is free trade still the best policy? Douglas Irwin is the John French Professor of Economics at Dartmouth College. He's the author of a number of books including the definitive history of American trade policy, "Clashing over Commerce." Doug, thanks for joining us. And welcome, everyone, to this special plague time edition of Uncommon Knowledge. Doug is in his office in Hanover, New Hampshire. Have I got that right, that's where you are?

Douglas Irwin: That is correct, yes

Peter Robinson: Right, and you have all those books memorized I suppose.

Douglas Irwin: I've looked at most of them.

Peter Robinson: And I'm here at home in Palo Alto. Doug, the case, briefly the case in principle for free trade. It goes all the way back to Adam Smith and "Wealth of Nations," and because I knew I was going to be on with you and you're a hard grader, I took the trouble to look up the central quotation here. This is Adam Smith in "Wealth of Nations," 1776, "If a foreign country can supply us "with a commodity cheaper than we ourselves can make it, "better buy it off them," close quote. Explain that, elaborate on that one for us just a little.

Douglas Irwin: Sure, well, the way to think about international trade is it's a two-way street. It's not just you're buying from others, you're also selling to others. And so countries have to export more to afford the imports that they buy, but basically, and you're right to start with Smith because he's a great expositor of this doctrine and book four of "The Wealth of Nations" is still worth reading today, he talks about specialization, the gains from specialization and then trade. So each of us as individuals, I didn't make this shirt, I didn't do all those books, I didn't make this desk, I didn't make this computer, I don't make my food, I prepare it maybe at night, but I do one thing, I specialize in one activity, and everyone else is specializing in doing those other things. So we have farmers specializing in food, and we have computer manufacturers producing all the different components with specialized inputs, putting those together. So as Adam Smith said over 200 years ago, the division of labor leads to productivity increases which leads to greater output per unit of work, and we can share in that munificence by engaging in trade. Whereas if we tried to go it alone and be self-sufficient and be autarkic, we'd be very poor indeed. So if I could drop out of society, I'd get a couple of acres out in the Midwest or something, try to make my own clothes and make my own food, I'm free to do that, but I'd be much poorer for it.

Peter Robinson: All right.

Douglas Irwin: Part of a commercial society has these economic advantages.

Peter Robinson: So the president of the United States would in this or that regard beg to differ, I think, but we'll come to that in a moment. You've just very nicely and succinctly put the case for free trade in principle. What about free trade in practice? We have a long history with it now.

Douglas Irwin: Absolutely, so there a couple of ways you can think about it. One is with there might be certain exceptions to the idea of free trade where it would not be a good idea to rely on imports. We can get into some of those. Adam Smith mentioned a few. He did say defense is more important than opulence, by which he meant that the nation state, first duty of the sovereign is to defend people against foreign threats, and that objective of national defense supersedes any short-term economic advantage from trade.

Peter Robinson: We'll certainly come to that, but this chart that you've got up here, can you talk me through that?

Douglas Irwin: Absolutely, so this is sort of the history of the world economy over the past 130 years or so or 150 years. And so what it's showing is world trade, sum of world exports and imports, divided by world GDP or world output. Basically showing how integrated is the world. How important is trade in the world economy? And it starts out in the late 19th century, this is the era of the steam ship when there was growing world trade. And you can see under sort of phase one that there's growing world trade, integration between Latin America, Western Europe, North America, East Asia and what have you. Then of course we hit World War I, so that's a bump down, but after World War I we did not resume the trade policies that we had prior to that. Countries imposed tariffs, countries imposed import quotas. They started moving in a more autarkic direction. So you see in phase two--

Peter Robinson: You'd better define, you've used it twice now and I'm going to, if you're going to keep talking about autarky you're going to force me to say what the heck does that word mean? I have this dim memory, monopoly, oligarchy, it's an, but I can't remember which one autarky is.

Douglas Irwin: Basically it means self-sufficiency. You're trying to be less engaged with trade. Autarky just means complete self-sufficiency, no trade. Obviously very few countries are in that state. You know, even North Korea trades with China a bit and a few others. Even Cuba trades a bit, but even though they don't like that trade and they've tried to isolate themselves.

Peter Robinson: But in 1620, say, the pilgrims were autarkic.

Douglas Irwin: Exactly.

Peter Robinson: Right, although the trade started pretty quickly with Britain, didn't it?

Douglas Irwin: Yes, they still ride on ships coming in every, so even they were not completely autarkic.

Peter Robinson: Okay, so number two, there's an arrow going down.

Douglas Irwin: Yes, so this is a time of international economic disintegration. Countries relied less on trade. They raised trade barriers to stop the commerce that would've taken place otherwise. And of course, a big part of this is the 1930s, and you might have heard of the Smoot-Hawley Tariff and the protectionism of the Great Depression. That period made a big impact on a future president, Ronald Reagan, who would often in speeches refer to Smoot-Hawley and the dangers of protectionism during the Great Depression. And then we get to about 1950 or so, we can see a little bit of a bounce back after the war, but phase three is where we see a gradual rise in international integration because of lower transport costs, but more importantly because countries began to cooperate with one another to reduce trade barriers. So there was an international institution formed called the GATT, the General Agreement on Tariffs and Trade, US-led this to negotiate tariff reductions around the world. And then we see in the 1980s this begins to pick up even more. President Reagan was a big champion of opening up world markets, with some exceptions, and we had the Uruguay Round, we had NAFTA shortly thereafter. But the big momentum in the '80s and '90s was China joining the world economy, India joining the world economy. In phase three, when things are rising, it's mainly trade from the US, Western Europe and maybe Japan, but the rest of the world, developing countries which historically had imposed very high barriers themselves, they thought the way to get rich is to industrialize, and we can never catch up to Japan and the United States so we need to protect our own manufacturers. Well, that isolationism, that autarky if you will, led to very small, very inefficient industries. You know, India did industrialize behind tariff barriers, but it was horribly inefficient, horribly small scale, and they didn't export unlike Japan and some other Southeast Asian countries. So more countries in the '80s and '90s got with the game and opened up to trade, and that's where that phase four where you see this really big increase in worldwide integration, and also I should say a massive reduction in world poverty. Okay, that accompanies trade. Opening up, you getter better technology, become more efficient, and you can afford to pay higher wages because you have more economically active population--

Peter Robinson: Doug, over this period that begins, Deng Xiaoping opens, he makes his big announcement in 1979 so it begins, say, in the '80s, slowly but then picks up speed. But let's say since 1979 when Deng Xiaoping announced that China was going to open itself to markets and to trade, how many people roughly has China, how many people have emerged from poverty in that one country?

Douglas Irwin: Well, I think depending on where you draw the line, we're talking about hundreds of millions. The population of China is some 1.3 billion or something like that. Basically most people were in agriculture in the 1950s and '60s. Very small industry. And you start moving people from the rural countryside into manufacturing centers, foreign investment comes in, you unleash private enterprise to some extent. And so we're talking 500, 600, 700 million people moving from destitution and poverty into a lower middle class to middle class existence.

Peter Robinson: All right, so that's a very dramatic event in all of human economic history.

Douglas Irwin: Absolutely, absolutely.

Peter Robinson: So number four, and then what happens at number five?

Douglas Irwin: Well, this is where it gets interesting and also gets to the current administration. Economists have talked about peak globalization, and you can see the peak there is actually 2008 or so right before the financial crisis. There's a sharp drop in 2009, we come right back, but since then we've been sort of on this downward movement in terms of global economic integration.

Peter Robinson: And I want to repeat, this is not measuring global wealth, it's not measuring global GDP, it is measuring interconnectedness.

Douglas Irwin: Absolutely, that's right, sort of trade flows across countries. And so, yes, you got a question, but I was just gonna say that we're at maybe an inflection point in history where the US and China are beginning to disengage. This occurred before the Trump administration but obviously they've accelerated it. I think the current coronavirus that we're going through is leading to greater suspicion between the US and China and other countries. That will further limit how many Chinese tourists come here, how many students we allow in. You know, Hank Paulson, Dartmouth class of '66 has talked about an economic Iron Curtain coming down between the US and China. It's not quite there yet, in a sense you still have a lot of flows, but we may have reached this period where the world is moving towards less economic integration, more inward orientation. And this is partly policy but it's probably a reaction to what's been going on in the world as well.

Peter Robinson: All right, the case for free trade, you've made it in principle, Adam Smith. In practice in China it's lifted half a billion people out of poverty. What good has is done for us?

Douglas Irwin: Oh, we can communicate by these computers and by these cameras that are incredibly high-quality that our parents certainly could never conceive of existing. I mean, my father used to sort of work on the telecommunications industry. In the late 1960s there used to be something called Picturephone. American Telephone and Telegraph thought about possibly having a picture that we'd associate with the telephone and it never really came to fruition. And now with the technology that we have that is, on global supply chains, specialization. When you look at how many components go into the iPhone, they're sourced from all over the world. Incredibly specialized technology that's really brought together, it's assembled in China, it's not made in China, but it's really taken over the world and connected everyone. So that's just one aspect of it.

Peter Robinson: All right, case for free trade, Professor Douglas Irwin, thank you very much. Here's the case against free trade. This is from a paper by economists Justin Pierce and Peter Schott, who as far as I can tell are very serious people.

Douglas Irwin: They are indeed.

Peter Robinson: They are, you know them, in which they examined counties in this country, counties, they went county by county and examined counties most exposed to trade with China. Quote, "We find that in counties "most exposed to the change in policy," that is to the granting of permanent, normal trade relations to China in the year 2000. Quote, "Counties most exposed to this change in policy "exhibit relative increases," in wealth, in happiness? "Relative increases in deaths of despair "including suicide and drug overdoses," close quote. Okay, and Doug Irwin replies, there are winners and losers but the losers get hit really hard, don't they?

Douglas Irwin: They do, absolutely they do, in this particular circumstance. So a market economy is one that Joseph Schumpeter said has a lot of creative destruction, okay? So there's a lot of creation, new wealth being created, new industries growing up, new jobs being created, but there's also destruction and trade is part of the process. As I mentioned, it's a two-way street of exports and imports. Some of those imports are things that we don't even produce here, that don't really touch, you know, I don't think imports of bananas are very controversial, we don't have a banana industry that's clamoring for protection. But some imports do compete head to head with domestic producers, and there was this particular period which they were studying when China really ramped up its trade, and you can see that's part of part four of that chart. Particularly between, I would say, 2000 and 2008 when imports from China really go off the charts. And economists have called this the China shock and have studied it quite extensively, and have shown that those imports during this period did cause a lot of dislocation for certain communities where you had a one-factory town where the workers there did not have the opportunity to move to another sector of the economy. So if you're part of a big urban area that's diversified economically, you lose your job in one sector, you can transition to somewhere else. If you're in a small town in rural Virginia that's producing furniture, if you're not willing to move you're sort of sunk. And what they found is there weren't other jobs, people dropped out of the labor force and had all the negative consequences that you were talking about.

Peter Robinson: Let me try this line one more time, Trump advisor Peter Navarro. This is Navarro speaking in 2018, "The US has lost tens of thousands of factories "and millions of manufacturing jobs "precisely because China and other countries "were maintaining tariffs higher "than those of the United States," close quote. So first, this isn't exactly what Navarro says, but could you just address the argument which is in the air, people feel it. You can see people, you watch enough cable news and you can see that in all kinds of ways it's taken for granted, it's a premise underlying a lot of conversations, and the premise is China got richer by making us poorer. In particular that manufacturing in this country got hollowed out because the people in charge of investment decisions outsourced manufacturing to cheap labor and new manufacturing plants in China. So Shanghai, well, Shanghai's a trade city, but there are manufacturing cities in the interior of China that are glistening and Detroit has fallen apart. And it happened, one rose, ours fell because theirs rose. Address that.

Douglas Irwin: Right, well, so many points to be made on this particular issue. So first of all, consumers have benefited tremendously from cheap imports of various consumer goods. So whether we're talking about clothing, which is now a much smaller share of people's budgets because price has gone down so much, and that's not just China, it's Vietnam and many other countries as well. We're all very aware of the imports and the dislocation they cause and that study that you mentioned talks about that. What we're much less aware of is the exports and they're not necessarily going to China, but they may be going to other countries. So we may be exporting heavy earth moving equipment to Australia, you know, John Deere, Caterpillar and others, exporting that to Australia which is mining stuff that will then be shipped to China and then becomes goods. So you have to look at the totality. If you just look at the bilateral sometimes it's very misleading. Here's one example where the bilateral is misleading, the iPhone, which I presume you and many of your listeners have. You know, when that comes in, there it is, and I always ask my students, what does it say on the back? 'Cause it doesn't say made in China, it says designed in California, assembled in China. So when that comes in as an import that counts as about a $200 per unit import from China, but guess what, only about $5 of that is truly Chinese content. The labor to put it together and a few small components. Most of the value is obviously Apple in terms of intellectual property, but even the physical stuff. It's the semiconductors coming from Korea, it's the camera lens coming from Germany, it's other chips that are coming from Japan. Really, that's a world product assembled in China, brought into the US. So sometimes the statistics can be misleading, but here's more direct to your point, that once again there is no doubt that there have been many towns and many places in the Midwest, say, that have suffered greatly. We've lost a lot of manufacturing jobs although that has sort of flattened out, at least as a share of the labor force. But some of those jobs have been relocated within the United States, so auto manufacturing has moved to the South. So that's where unions and labor laws have a lot of play. So if you look at Alabama, lot of manufacturers there both domestic and in foreign investment. So the Midwest is sort of not competing with other states of the union for those jobs. Also, those jobs, they're so much more technology-intensive than they used to be. So in terms of the steel industry, in the 1980s when we were cutting our teeth in Washington, it took 10 worker hours to produce a ton of steel. Now it takes one worker hour to produce a ton of steel. We're still producing a lot of steel, but it's just not a lot of jobs behind that. It's a few engineers who are monitoring the dials and that's not foreign competition. Well, it is to the extent that we're being forced to compete, but it's also an increase in productivity. We're getting a lot more steel than we used to for many fewer workers than we had. But obviously what that creates is a problem for those workers who aren't fortunate to go to Stanford or Dartmouth, who are not part of the knowledge economy, who are going to be doing something in terms of manual labor, and if you're not creating a lot of jobs for that class of people, it's gonna cause a lot of difficulties. You cannot just graduate from high school or even not do that and get a job at the local factory. That's technological change. China's a part of that but a very small part of that.

Peter Robinson: So what about Navarro's other point here, that China did this to us because they had tariffs that were higher than ours.

Douglas Irwin: Actually, you know, once again I'll grant the partial truth or the part of it that there has been--

Peter Robinson: It feels intuitively plausible, right, but.

Douglas Irwin: Yeah, but here's where he's sort of wrong, because that China shock, that dramatic escalation in China's exports, that came about because they were reducing their tariffs on imported inputs and on final goods that made their producers so much more cost-effective. You cannot export steel, you cannot export clothing unless you have access to the cheap inputs that are necessary to produce those final goods at world prices. And before, one reason why China was not competitive is because they'd sealed their economy off. If you wanted to produce something, you had to source it domestically. Those producers were terribly inefficient. When they opened up and reduced those tariffs, all of a sudden their producers could get access to those cheap inputs, made them much more cost-effective, much more efficient, and they've overtaken the world markets.

Peter Robinson: All right. The case against free trade part two, the new Cold War. You will have already anticipated this argument. Here's Milton Friedman who as you know argued that one of the few arguments in favor of tariffs that might in principle have some validity is, and I'm quoting him now, "The national security argument." The argument that "a thriving domestic steel industry, for example, "is needed for defense. "It cannot be denied "that on occasion this argument might justify "the maintenance of otherwise "uneconomical productive facilities," close quote. And you just quoted Adam Smith, "Defense is more important than opulence." Okay, so you grant that argument, obviously you do, you just quoted Adam Smith.

Douglas Irwin: Yeah, Milton Friedman actually got it from Adam Smith I think, so.

Peter Robinson: Oh Milton, yeah, okay, okay. So let's take one specific example and what I'm interested in is how far you can push this national security argument. The coronavirus crisis. We now discover, since you're so up on trade you may have known this all along but it was shocking to me, 90% of our antibiotics come from China. Senator Tom Cotton, quote, "For two decades the Communist Party of China "has targeted America's domestic drug manufacturers "for destruction using cartelization, "state subsidies and lax safety standards "to flood our hospitals and pharmacies "with cheap and dangerous Chinese medicine. "That's why I," Senator Tom Cotton, "have introduced a bill "to end our dependence on Chinese drugs "and take back our ability to make medicine "here at home," close quote. Is he on to a point, is he on to something? Does the national security argument extend to certain medical supplies?

Douglas Irwin: Well, I don't know so much about pharmaceuticals which is the one he's talking about, and I imagine that if we were going to limit our imports from China, we'd be importing those from Germany, perhaps Mexico if there's some labor cost component that's important there. So it's not necessarily we bring it home, but we'd certainly have a more diversified source of supply. And if it was that dramatic in terms of the 90% figure, that would be something to worry about and something to look at. But when we look at other things like masks, like respirators, we're not nearly as dependent on certainly China than those figures would suggest. So if I looked up hand sanitizers, for example, turns out we get most of our hand sanitizers from the European Union and Canada. Now, that's just in terms of the imports--

Peter Robinson: Wait, so you mean this stuff?

Douglas Irwin: That stuff, Canada and European Union.

Peter Robinson: Oh really, okay.

Douglas Irwin: Now, that's just in terms of the imports, of course we do produce that domestically as well. So imports are just a fraction of those of our total consumption. It's not like we're completely dependent on a foreign source of supply for those things. So I think sometimes when you look at the numbers, well, you do have to look at the numbers for particular cases. We are very dependent on imports of masks from China, but not so much other things. Respirators, most of that's coming also from the European Union. Gloves, Malaysia and Thailand. So you know, we have to consider are these national security threats or not. And one point that I want to come back to in terms of that dip in terms of total globalization is there is a worry about China, an overdependence on China, and that's factoring into the fact that this has not become a partisan issue, that both parties, leaders of both parties are much more suspicious of China than we were 10 years ago or so during the China shock. And I think the number one reason for that is President Xi because President Xi has taken China in a very different direction than his predecessors in terms of domestic repression, in terms of economic nationalism, and in terms of foreign policy activism and aggression. And so the way the administration and others are turning, I think that's why we are at this inflection point where it's gonna be very hard to have a rapprochement between these countries. We are moving in very different directions.

Peter Robinson: And you grant that?

Douglas Irwin: Absolutely, and I think that President Xi is largely the driver behind that. That we hoped for in the past a more constructive and engaged China, and if they're choosing a different path, you know, this is not Deng Xiaoping's China anymore, and our policy, we're gonna have to make some adjustments on our end.

Peter Robinson: Okay, so this leads to my next question, again, this national security argument. What's the right way to think about trade as regards China? It's very clear that, I would say it's even more, it's last five years or so, that the whole attitude toward China has changed right up until five, certainly when you and I, I forget to mention in the introduction you served in the Reagan White House yourself, you and I were both there. From the time of the Reagan administration right through the Obama administration, most of the Obama administration in any event, the hope was that China would follow the pattern of South Korea and Taiwan and that economic growth would lead to political freedom and ultimately to democracy. And of course it's one thing engaging in more and more trade with a country that you expect to embrace, ultimately, your own values, and surely it's something entirely different with a country that has become in all kinds of ways hostile. Okay, so that's my little speech, now back to a question for you. And you'd grant all that that I just said, right?

Douglas Irwin: Yes, I do want to make a broader point about this national security argument however though because for one issue is the bilateral relationship with China. Okay, the other issue is are there other industries that we need to protect on grounds of national security and how that can be abused.

Perer Robinson: Okay, stop, time out, because I'm about to make the argument that there are, and I want to see what you do with the argument. And the argument, and I'm trying to be quite rigorous about this, I've thought this through. You intimidate me, Doug, so I've tried to make this rigorous. Here's the case. Point one, China is now hostile toward us. Their system and ours are as incompatible in many ways as ours and the Soviet system. Point two, they're more populous. Their economy may soon be bigger. Our only long-term advantage, our ability to innovate. I'm talking about defending this country, the United States. Now, point three, as long as the Chinese steal our technology the moment we develop it, they can neutralize that advantage. Point four, we therefore have no choice but to impose strict controls on the companies in which the Chinese invest in this country, on the kinds of investments American companies make in China, and on trade between the two countries, particularly exports from this country to China of all kinds of high tech goods. And that could lead to a pretty draconian regime all on the national security argument. What do you make of it?

Douglas Irwin: Absolutely, and I think there's ramifications for the economic relationship obviously. So once again we go back to defense is more important than opulence, but this is why this is a new and really interesting challenge for US policymakers, because if you go back to the 1980s again, we had the Soviet Union which was a security threat but not an economic threat. Back in the '80s we thought Japan might be an economic threat, but they certainly weren't a security threat, they were part of an umbrella. And now we have China which is both, security threat and an economic rival. And the question is, they don't seem to be playing by the rules that we've tried to establish after World War II that allowed that growth and trade because it was sort of more of a level playing field where we had market economy competing with market economy. And yes, there would be individual sectors that would get subsidized or what have you, but when you have this blurring of business and party in China and massive subsidies through the state-owned banking system and state-owned enterprises, there's an imbalance there. So the most dovish, you know, in the case of the 1980s in Japan, you might remember in the Reagan administration there was a division between the black hats and the white hats about how tough do we get on Japan. There's much less of a debate with vis-a-vis China. You know, the most dovish people in Washington today, vis-a-vis China, they want to go after them aggressively at the World Trade Organization and have alliances that will encircle or try to establish rules and norms that exclude China, that if China wants to join, they have to change their policies such as the Trans-Pacific Partnership. So that's the most dovish case. It's not that there's no kid gloves here, it's that you use the rule of law and you try to encircle them with various trade agreements and alliances. That's about as dovish as one can get, and then you're talking about ramping up security, counter intelligence, cracking down on their activities here in the US, all the way up to a full-fledged trade war. So that's the spectrum, it's really shifted in terms of just the where we're talking about vis-a-vis China.

Peter Robinson: I have to admit, it shows it's been a while since you and I had a talk about this because you're surprising me a little bit and you may surprise me a lot. I thought you were going to argue something along the lines of, it doesn't matter how crazy China is, within limits, like we don't want them launching missiles at us, but if they want to subsidize products to this country, let them. Why shouldn't we take goods that they have that make their own people pay for? I thought you were going to argue that we ought to stick with free trade with China in spite of Xi, but you don't make that argument, do you?

Douglas Irwin: I don't make that argument because I do think President Xi has--

Peter Robinson: Would Milton have made that argument?

Douglas Irwin: You know, I was just thinking exactly that same thing because I do recall that he and others who are strong free traders would say, look, if they want to subsidize their goods to us.

Peter Robinson: Take 'em.

Douglas Irwin: Take 'em, it's cheap for us to do so. But I think when it causes excessive disruption domestically and when they are a national security threat it's a completely different ball game. You know, we set up a set of international institutions after World War II to provide a legal framework for market economies to trade peacefully and prosperously with one another. And China is sort of entering this, we allow them to come in because they were moving in that direction, just like Eastern Europe. Formerly communist but moving in a more market-oriented direction, more democratic direction. China seemed to be doing that in the 1990s, at least in terms of the economy. Deregulating, less emphasis on the state-owned enterprises, but once again since 2010 or so they've moved in a very different direction. So obviously our policy has to adjust.

Peter Robinson: Okay, so Doug, let me quote you to yourself. Two quotations and they're both you. This is Doug Irwin, this is you writing with your co-author Chad Brown in Foreign Affairs last autumn, not that long ago. Quote, "A future administration will be able to start repairing "the United States' tattered reputation," all these things that the Trump administration has done, "the United States' tattered reputation "as a reliable trading partner. "In some respects, however, there will be no going back, "on China it has become clear that the Trump administration "is bent on severing, not fixing, "the relationship," close quote. That's you six months ago. Now, this is you--

Douglas Irwin: Can I comment right there or do you want to--

Peter Robinson: No, no! You have to get both, you have to sit tight, you have to sit there and take it! You have to listen to you last month. This is in an interview with Globes, a publication in Israel. This is you, "Under President Xi Jinping "the Chinese have made the private sector political "by insisting that Communist Party members "must be on the board of directors "and in management positions "and they have the made in China initiative "which is explicit economic nationalism. "The question is whether there can be "a comprehensive trade framework "containing state capitalism," China, "and market capitalism," the US, "under the same umbrella. "My tentative answer," Doug Irwin's tentative answer, "is no," close quote. So in the space of six months you have come to agree with Donald Trump?

Douglas Irwin: Absolutely--

Peter Robinson: Now I'll take it!

Douglas Irwin: In fact I think there is no inconsistency between those two quotes and so let me--

Peter Robinson: All right, go ahead.

Douglas Irwin: The tattered reputation first of all because this brings us back to this national defense exception to the idea of free trade, because when the Trump administration imposed 25% tariffs on imported steel from all sources it was on grounds of national security. They invoked a statute that said the president has this authority to protect national security. So the question is what was going on with the steel industry? Well, first of all, we only import about 27% of the steel that we use. Okay, so we produce basically three quarters, 75% of the steel we use. It's hardly a shrinking, shriveling sector where we're completely dependent on imports. Second of all, where are those imports coming from? Canada, European Union, Japan, Korea, friends and allies. Not China, because our imports of steel from China, they'd already been beaten down by something called anti-dumping duties, where domestic firms can petition the government to have higher tariffs to keep out those imports. So they, in the 1990s and the 2000s, imports of steel from China, they were beaten back with these anti-dumping duties. So there's a case where most of our imports, which are only a fraction of what we're consuming, are coming from our friends and allies and neighbors, we're hitting them with the 25% tariffs. We've already hit China, it's not really hitting them, it's not hitting Russia. And so our friends and allies were wondering what is going on? And Jim Mattis, your colleague at Hoover, I believe. He was secretary of defense at the time. The defense department, as you know, there's an interagency process. They wrote a letter to the Department of Commerce which was overseeing this saying from a defense standpoint there's no national security dependence on imports, that is unwise, and in fact because we import from our friends, any duties that we impose might compromise our national security by leading our friends and allies to question our reliability as a trade partner. So you might think if the defense department is saying there's no national security case for imported steel, for imposing tariffs on imported steel, most of the steel, which is once again a modest share of domestic consumption is coming from our friends and allies, that this would be something that they might take a second thought of. But the administration, because of Wilbur Ross in the commerce department, Peter Navarro and others, they went ahead. Peter Navarro predicted no country will retaliate, they will just take it. And what did other countries do, they retaliated. So that's where American farmers and others have paid the price of those imported steels ostensibly on the grounds of national security.

Peter Robinson: All right. Why did the Trump administration do what it did on steel? Was that just politics, that Donald Trump wanted to pay back voters who had supported him in the upper Midwest in steel producing states, or was it some crude and just flatly mistaken view that somehow or other protection will help the domestic industry modernize, grow stronger, start employing more people, or some combination of the two? What were the motives there?

Douglas Irwin: I'd say I'd make two points on this. One is that you had Robert Lighthizer who's the US Trade Representative, used to be a counsel to the steel industry. Wilbur Ross used to work with the steel industry. President Trump has ties with the steel industry in terms of executives and trying to win blue collar folks, so there are a lot of senior administration officials--

Peter Robinson: They were just trying to help their pals.

Douglas Irwin: Help their pals. And here's one way in which I do think it has been very damaging to not just our credibility but to our economy, 'cause Ford Motor Company had to pay a billion dollars more in extra costs. So we're saying Ford, we want you to compete against Toyota and compete against Kia and Hyundai, but we're gonna raise your costs by a billion dollars a year because if you're producing overseas you don't have to pay those higher steel costs. We're handicapping our own consuming industries, our steel-consuming industries where there's vastly more employment than in the raw steel-producing sector.

Peter Robinson: Okay, so--

Douglas Irwin: But let me just, one other point, there in some sense is not much new here. President Reagan protected the steel industry. President George W. Bush protected the steel industry very early on in his term. President Nixon protected the steel industry, as did President Johnson, walking it back to 1960. So historically the steel industry has been very politically powerful.

Peter Robinson: Sure, I guess that's sort of what I'm asking here, because when President Reagan engaged in those protectionist measures, he imposed import quotas on Japanese automobiles, everybody knew he didn't really mean it. He didn't believe it. Everybody knew he felt forced to play crude politics. And that's really what I was asking, is just what the Trump administration did just more crude politics, or is there some new school of thought that is blossoming here? Is Peter Navarro actually the leading edge of some new intellectual movement on trade? And the answer is no, I guess.

Douglas Irwin: Well, I'd say there's some nuances there because there are members of the sort of concerted movement who do believe that these tariffs are a good idea. But I guess I'd put it this way, is that you're absolutely right, when President Reagan did these things it was with reluctance. He had to be pressured into some political necessity, maybe some short-term economic gain for the industry, but long-term he wanted to get rid of it. Or it might have been a bargaining chip or something like that. This administration, I think they're true believers. I think they said, you know, we want more domestic steel production even if it costs downstream users, and therefore this is the way we're going to go. I do think they've been chastened a bit because they didn't quite realize that steel is an input for an awful lot of industries. And you can help out the steel industry itself, but you're gonna hurt those downstream users and so there's some trade-offs. In fact the number one lesson in all of economics is, Milton Friedman, "There's no such thing as a free lunch." You can't help out one industry without taxing others.

Peter Robinson: Right, or as Tom Sowell puts it, "There are no solutions, only trade-offs."

Douglas Irwin: Very nicely put.

Peter Robinson: Last couple of questions here, although one of them is a big question. Back to China. By the way, our friend, I consider him a friend, I know he's at least an acquaintance of yours, Larry Kudlow in the Trump administration. Larry argues, has argued even recently in public that he's a free trader, he believes in free trade, and that tactical tariffs ought to be, and he believes substantially are in this administration, the interest of freer trade over the longer term. I'm just trying to stick up for Larry Kudlow because I know he's there and he has the president's ear as much as anyone. But here's the big question, back to China. This is what reminded me of why Larry came to mind because I heard him speak recently and his, I don't want to put words in his mouth, but what I took away from it was the argument as follows. China had to be dealt with. We had to demonstrate displeasure with Xi and begin to insist that we were going to stick up for ourselves and for some international regime of law and fairness. Two tools, one is military, and that is unthinkable, and the other is trade, so you use trade. Plausible?

Douglas Irwin: Plausible, but then I think you open up the room for the debate about how do you use trade.

Peter Robinson: That's the question for you! If you think in terms of, China's not going anywhere, we're going to have this one on our hands for a long time to come. What's the correct way to think about using trade, using trade if we could to reform them or at least to protect our own interests. What's the right way to think about trade now that China has risen and gone nasty?

Douglas Irwin: So many different points here, I'll just sort of thread some ideas. One is I think we have to first of all recognize, which I think the administration had not sort of pushed, is that we've just talked about how there's gains from economic integration, gains from trade, but when you pull them apart it's not without costs. So when we say that China's paying the tariffs or that this'll be beneficial to us. Well, it's a separation, a divorce if you will and it's gonna be messy and it's gonna be costly for us in the short run. So we have to accept some pain and some adjustment, not think this is just sort of a free lunch if you will. So that's the recognition, and it takes a while for supply chains to adjust and things of that sort. And for some things like apparel or sporting goods that we have massive dependence on China, those can easily move to other countries in Southeast Asia. So the long-run costs I think of dislocating some of that will not be very high, but it does take time.

Peter Robinson: When you say time, months, years?

Douglas Irwin: Well, it depends in some sense, that's why I think this interesting turn in terms of global integration. I think there's a recognition that even if tariffs haven't been imposed, that the relationship is going sour, that you could be held up in China for political reasons or what have you, and so I think firms are adjusting slowly moving to other countries and--

Peter Robinson: And then the coronavirus would speed that. You're talking about things that are totally independent of the Trump administration.

Douglas Irwin: Yes, yes.

Peter Robinson: And yet as you pointed out on your chart the disintegration, not total disintegration, but the beginnings of a disintegration dates back to 2008 or so, that predates Trump. And now the coronavirus, Donald Trump may have his faults, but he didn't cause the coronavirus. As best we can tell the Chinese should have done a much better job of reporting on it. It's another reason why the relationship with China is in doubt. So if you're an American business guy or gal you've got plenty of reasons, even before Donald Trump comes along, to start thinking about shifting your supply chain so that you're less dependent on China. Okay, grant all that.

Douglas Irwin: Let me put it this way, one reason we didn't act against China in the past, say 10 years ago, 15 years ago, is because if you asked the business community is it time to get tough on China, they would say no. No, we know there are problems in operating the Chinese market, but we're making money, it's working out okay. We can deal with it. They didn't want this sort of disintegration. Now the business community offers no pushback whatsoever, recognizes that there are costs of doing business in China. So once again even in the absence of any administration action they're rethinking because the environment in China's changed, they're rethinking their dependence and their--

Peter Robinson: See this is, let me.

Douglas Irwin: And then when you add on the virus and you add on the Trump tariff threat on top of that, it just, that's why there's this momentum to less integration than we've had in the past.

Peter Robinson: Okay, so that, just I still want to stress this shift in the way the business community, ordinary Americans, this bipartisan, Speaker Pelosi has nothing good to say about China, she also has nothing good to say about Donald Trump but that's the point. Suspicion of China is now bipartisan, and I recall if you looked at polls going back to an earlier conflict, after the years of detente, Richard Nixon, Gerald Ford, Jimmy Carter, and President Reagan came in, the public was not all that firmly behind him in wishing to stand up to the Soviet Union and then the Soviets shot down that Korean airliner, KAL007, and public opinion shifted like that. We haven't seen anything perhaps quite that dramatic, but this coronavirus, we're a democracy, and it feels as though the American people are saying whoa. Or just the other day I ordered these AirPods and I ordered them off because they're supposedly better on the camera and our producer, fine. And then I got the tracking number from Apple and I clicked on it and they were coming from China. And I'm a free trade guy, I've learned that much from you, but my first thought was whoa, do I really want to do business with China anymore? So even in this little mind there's a reservation, there's a second thought that didn't used to be there, even a few months ago. Okay, so that, when you talk about an inflection point I'm starting to get that now. That's a serious matter, that's a big deal.

Douglas Irwin: Absolutely, and you're right, and it predates the Trump administration because it's based on Chinese behavior not something that President Trump, obviously he's accelerated things and moved things in a certain direction, but there are other forces going on.

Peter Robinson: So what's the, go ahead, well, allow me to, so we've got things that are apart from an American administration, but what should the president, and I'm even willing to say the president instead of Trump, how should Americans, how should policymakers be thinking about trade in relation to China?

Douglas Irwin: Well, you know, that's a very difficult question because--

Peter Robinson: Hard, isn't it?

Douglas Irwin: Once again, we haven't confronted this in many, many decades if ever, because as we talked about in the 1980s was very different. We didn't fear the Soviets economically. We didn't have that high degree of an integration. And once again, pulling this apart is difficult because there are parts that are very constructive with the relationship with China. And also we do want to engage them because President Xi, that's not the end of the game. There are more liberals, more reformers in China, and there's a power struggle going on there. They're very much on the defensive and who knows how large or powerful they be, but we shouldn't give up hope that a new Deng Xiaoping could come around. And maybe they won't go for political liberalization, but they would scale back the economic nationalism they've had because it may be in their interest in the long run for certain segments of the Chinese community to have a more open and free trading China. So--

Peter Robinson: So Doug, here's what, go ahead.

Douglas Irwin: But I think we're limited in how much we can influence that debate, but here's why we can't just sever the relationship and have complete nonexistence between them, is because there are commercial benefits and there has to be this hope that the future could be better.

Peter Robinson: So here's what I'm hearing from my friend Doug. Again, in my mind I keep going back to what I experienced or the end of the final phase of the Cold War. But I think of, I believe it was February but the year was 1946, the Cold War is just beginning and George Kennan, an American diplomat then serving in Moscow, receives a couple of queries, what do the Soviets think they're doing about this, that and the other from the State Department in Washington, and he decides that a brief answer won't do so he composes the famous Long Telegram. He composes a 5,000 word cable that goes back to Washington, and you look at that thing all these years later, it said everything. He understood the military component, he understood Soviet psychology, and he outlined the strategy of containment which fundamentally remained American policy for 45 years until the end of the Cold War. The story is more complicated than that, but the point I'm trying to make is right from the get-go there was a, Kennan represented an infrastructure of scholarship and diplomacy. People had been struggling with the problem of Soviet communism since the Russian Revolution of 1917. We knew what to do. Doing it was hard, but we knew what to do. And what you're saying now is here we face China and here's what's different. We have no idea what to do. We just don't know. The Chinese have cash. They've already, here where I sit in Silicon Valley, they've already invested all around Silicon Valley. They have students at every American institution including yours and including the one where I sit, and of course overwhelming these are good people, but are they all? Are some who, the suspicion that we have to entertain. How do we think about this? And I sort of thought that my friend Doug would have figured it out. But what we're saying is this is a hard problem, and as an intellectual matter we're just at the beginning of thinking it through, is that correct?

Douglas Irwin: I think that's probably correct, and I think what you have is different communities, you have economists, you have political scientists, you have military strategists, you have intelligence experts who are all working on their little area, and you don't have someone with the grand vision of a Kennan who's putting it all together. Because you're right, do we kick all the Chinese students out or do we, you know--

Peter Robinson: You can't do that, can you, or?

Douglas Irwin: Manage them and, because they might have minders on campus, and there might be in labs and feeding information back home. So it's a very difficult, challenging problem, and it's one for just this administration, it's gonna be many administrations in the future.

Peter Robinson: You give Donald Trump credit for getting the effort underway, the effort of recognizing reality and standing up to them.

Douglas Irwin: Not without criticism though because I think we have frayed some alliances. You know, our views on China, they're shared by many people in many other countries in government levels and at sort of the popular opinion level. Other countries are not willing to stand up because they're much more vulnerable to retaliation from China, and that's where I think joining with these countries and building alliances. I mean, this is something that I'm sure Secretary Shultz would say, you can't go into this fight alone. We do have the world who is very much on our side on many of these issues, but once again they need leadership because they can't do it alone, and they'd feel much safer if we were taking the lead and bringing them along with us. And also we'd be much more effective vis-a-vis China if we had many other countries on our side doing things in concert with us against the problems that we have with them. You know, alliances are difficult because countries are gonna want a different, what they're gonna be willing to do, you have to negotiate those things. It's messy and it takes time. It's not as easy as viscerally striking back, but in the long run I think that's much more effective than just saying we can do it all by ourselves and we don't need alliances because I think then we're weaker for it and we'll have a less effective strategy in the long run.

Peter Robinson: Okay, last question, Doug. If you could commandeer the attention of our chief executive and get him to listen to whatever you said for a minute, and the questions were trade and China, what would you say to Donald Trump?

Douglas Irwin: Well, that's a very difficult question. How do you sum this up in one minute? And I guess it might be an elaboration of what I just said. You know, when he says sometimes our allies treat us worse than our enemies, that's not constructive, we actually do need them. And yes, they can be annoying, yes, they can be not quite on the same page as us, but if we are in a long-run struggle and either with conflict or in some cooperation as well with China we need more than just ourselves in this. And we do need to think of a strategy because we don't happen to have one at the moment and we're groping for how to deal with this thing. And once again, you know, the blame I put primarily on Xi for putting China in a different--

Peter Robinson: Yes, yes, yes, right.

Douglas Irwin: But we've changed, but we have to adjust to these changes that are happening there.

Peter Robinson: All right. Professor Douglas Irwin of Dartmouth College, thank you. For Uncommon Knowledge, the Hoover Institution and Fox Nation, I'm Peter Robinson.