[Music] conversations with Tyler is produced by the mercada center at George Mason University Bridging the Gap between academic ideas and real world problems learn more at [Music] arcades.in conversations withth tyler.com [Music] I'm here today with Douglas a irn of
Dartmouth University Doug has just published a book clashing over commerce a history of US trade policy that is in fact the greatest book on trade policy ever written and Doug is one of my favorite economists so today Doug we're going to start in on trade
and what I'm going to do is toss out a bunch of arguments used against free trade and you either give me what you think is the best rebuttal or if you want to accept the argument that's fine ready for that sure here goes okay the
claim that 19th century American growth was driven by high tariffs what's your take uh well not really true um if you look at why the US economy performed very well particularly relative to Britain or Germany or other countries Steve broadberry shown that a lot of the
overtaking of Britain in terms of per capita income was in terms of the service sector so the service sector was expanding rapidly it had very high productivity growth rates and we usually don't think is that being affected by the Tariff per say so that's one reason
um we had also very high uh productivity growth rates in agriculture so I've done some counterfactual simulations if you remove the Tariff how much resources would we take out of manufacturing and put into services or agriculture is
actually pretty small and uh it just wouldn't have uh you know it doesn't account for the success we had during this period and is there any country where you would say their late 19th century economic growth was driven by tariffs Argentina Canada Germany
anything anywhere no if you look at all those once again late 19 century they're major exporters largely of Commodities but they did very well that way obviously you know that Argentina was one of the richest countries in the world in the late 19th century and it
really wasn't until they adopted more import substitution policies after World War I that they began to fall behind yes you can build up your manufacturing sector but if it's a low productivity sector or it's not going to be uh very Dynamic it's not going to enhance
national income okay take tariffs on agriculture today arguably the single biggest exception to free trade principles in the world what if I were to argue that the National Security argument actually makes sense we live in this funny bubble of a world where there
has not been a major war anytime lately and if you were say Japan you're a vulnerable Island you actually can't grow a lot of your own food you're easily blockaded and if the Japanese have some tariffs on say rice beef and other items uh it may in most years look
like it makes no sense whatsoever but the long-term payoff of keeping some autonomy in their own production of food stuffs will make it worthwhile sooner or later and give them more leverage in foreign policy true or false okay well I
go back to Adam Smith the master who said that defense is more important than opulence so certainly economists have always recognized that there might be an exception to the doctrine of free trade in the case of helping out uh domestic
industries that are essential for National Defense so then the question becomes if that's really security worry what's the best way of promoting agriculture first of all is rice protection really going to help them out if there's some sort of maor major
conflation uh probably not so but why not you can always eat rice correct there's fish from the sea fish plus rice equals some version of Japanese food it's delicious it's good for you it won't ever go away maybe they have a war major war once in a century isn't it
worth it as a form of insurance yes no well you could do the calculation and actually see whether it might possibly pay off but uh you know they've used very high import very tight import quotas raise the price to Consumers they're holding back uh the overall
economy because they're devoting a lot of Labor and land to uh this relatively unproductive sector of the economy so if they're willing to it's sort of a societal choice in some sense if they want to sacrifice x% of national income
for 50 or 100 years for this what I would think would be a relatively low probability event who's to say that they've made a wrong choice the cultural exception to free trade a common argument at UNESCO so if you go back some number of years South Korea has
significant quote as keeping out a lot of Hollywood movies South Korean movie making then According to some accounts appears to Blossom you have wonderful South Korean movies like mother South Korea becomes a movie making power you're later South Korea is still a
leading movie and otherwise entertainment and cultural exporter to the rest of Asia therefore for cultural reasons it's often a good thing to allow more tariffs and quotas on movies television programs linguistically designated products possibly National
Heritage items than a lot of our free trade agreements allow what's your view and that's not not just an argument there uh Canada too has cultural exceptions built into the US Canada Free Trade Agreement naft and things of that sort actually I'm surprised you're
asking me that because you've written about the cultural diversity that you get with openness and free trade and that if you limit ability of domestic consumers to watch foreign movies and taste foreign food and and import foreign art um you you're losing
something as a result of that so I'm not sure many countries could become this sort of net exporter of uh you know cultural products The Way South Korea has a fairly new argument against one kind of free trade and that is the claim
that in some parts of the world there's too much tourism so if you live in Venice on one hand tourists probably account for the living you're able to make but arguably Venice as we know it is not sustainable there are too many tourists Works get damaged uh everything
becomes chained in Venice Venetian culture now for the most part seems to be gone there's barely a Venice left it's like being in a large airport surrounded by a lot of monuments people in Iceland are now wondering well the population of Iceland I think it's about
400,000 and so many tourists are coming Iceland is wondering if its own culture isn't being overwhelmed by tourists they fear the Icelandic language will go away and that somehow the natural heritage of Iceland or even some of the cultural
aspects are being ruined so in your view can there be too much tourism and is there an appropriate policy response the appropriate policy response would be taxation so you want tax the foreign visitors you wouldn't want to exclude them you wouldn't want to set quotas but
if you set an appropriate tax it applies both to domestic and foreign citizens so it's not protectionist per se it's just accounting for the externality of degradation of overuse or something like that and if you're the Icelandic median
voter do you favor such attacks good question I it's on my list of places to go so I haven't measured that myself but I would think that they're uh getting quite wealthy as a result of this whether they've gone too far I don't know and whether it's taxing of their
infrastructure let's take a somewhat different approach to trade it's found I think especially in China some people would argue it's even practiced by Germany as well and that is to have a focus simply on everyone being able to keep a job not efficiency as economists
would describe it not output not productivity but the notion that exports possibly can take away some of your jobs as they've done in parts of the American Rust Belt that that's very bad for your political economy you might believe it
or not start electing rather strange candidates or perhaps start opposing the Chinese government in nonproductive ways and therefore trade policy really should be governed by making sure everyone has a good enough job China sort of has done this through a rather extreme
mercantilism some people would say Germany has done it by its role in the Euros system which gives it a currency which has arguably a permanently low value relative to German productivity do you think there's much to this argument
well there might uh no in the sense of that I don't think you want a trade intervention per se as as a job creation mechanism so if you want to guarantee jobs for or people that would be one uh approach but you don't have to link it to the trade sector per se in fact
there's sort of a theme through all of your little exceptions that you're throwing at me which I enjoy very much the case for free trade has never been the case for Lay fair so there there may be cases for intervention either overuse
of uh you know certain tourist sites or uh you need a certain industry or a sector for uh National Security these don't necessitate uh an intervention in trade you don't need tariffs quotas uh export subsidies things of that sort there are other domestic policies that
can more efficiently and more directly address the uh situation you're trying to deal with let's take some of the recent free trade agreements which as you know large parts of them are not about free trade in the Elder classical sense of cutting tariffs but they're
about regulatory standardization and this always tends to make me a little bit nervous even though on average I favor these agreements so regulatory standardization often lowers the cost of trade but it also tends to bring in many cases more regulation so we live in this
funny world where more free trade or semi-free trade and more regulation albeit better regulation come together and if you're skeptical about there being more regulation as I often am but you're favorable toward more free trade you're not sure always how to feel about
these new trade agreements do you think the future inevitably is one where what we're calling free trade agreements actually on average will be bringing onnet more regulation to the economies they're covering uh unfortunately yes so
so tariff levels have been beaten down obviously they're not zero there's still scope to reduce those there are many parts of the world that still have relatively High tariffs but if you look at sort of the big trade agreements the
US and well transpacific partnership was this if the US and the EU ever reach a trade agreement um there's going to be a lot of regulatory provisions and and once again I share also your view that this could go either way one of the things that at least us trade
negotiators say is that there's a lot of regulatory protectionism out there and this is a way of not necessarily even setting standards but ensuring that there's a mechanism to ensure that other governments are not tweaking their standards um to favor domestic firms or
to serve some special interest so yes it could lead to more regulations it could lead to standards that maybe developing countries can't adhere to so it has that sort of downside but it also could sort of uh not clear the the decks with uh of
Regulation but prevent regulatory protectionism which that's a possibility as well many recent and even some older trade agreements have embodied in them investor arbitration panels sometimes called isds or investor State dispute settlement and these panels as you know
they sometimes have the ability to override National laws or the Court decisions of national governments the possible conflicts between these panels and what some would say is democracy or some would say is constitu ISM a to what extent does that worry you and B in
general do you want to see isds in the trade agreements we're writing or do you feel at somehow gone too far well personally I wouldn't want them in uh they they sort of distract from I think what is the main purpose of these trade agreements which is to reduce trade
barriers and Regulatory barriers so I'm not particularly happy that they're in there but I do think on the other side sort of the progressive left if you will there's a lot of isds horror stories about how it undermines democracy it's a
a terrible thing and the US is fening this on the International System and other countries don't want it but in fact it turns out a lot of developing countries insist that this is in Mexico just recently uh asked for this in I believe in a new agreement with the EU
or Canada I can't recall where I read it the reason why developing countries want it is because it's a way of ensuring that they can sort of commit themselves to treating in foreign investors fairly and they want to attract foreign
investment and they maybe don't necessarily want isds but they're willing to go in for it they ask for it because it's a commitment device let's see I was reading also Canada and the EU I think their recent Ceda their agement that also has isds and once again so
it's not sort of something us was pushing many in Europe are very much opposed to these things but it got in there for various reasons take a trade agreement such as TPP with or without the United States what percentage of the gains from TPP do you think are coming
from more foreign direct investment and what percentage of the gains do you think are coming from more trade in the narrower sense of the term oh that's that's a great question so it depends a lot on the particular country Australia
is already a pretty open market you know Vietnam could be a big winner in the sense of getting a little bit more Market access but also liberalizing their own tariffs and quotas that they'd be forced to do so their own uh unilateral not unilateral but their
liberalization within the context of a TPP is good for them and to the extent that they sort of institutionalize this as a trade regime that may attract even more foreign investment and certainly when we've seen when Mexico and other
countries reach a lot of foreign trade agreements they can become export platforms and attract investment to the extent we think the gains are from more direct foreign investment does that not mean we should favor more isds rather than shy away from it enter the debate
argue against the Europeans try and get isds in as many agreements as possible for the purposes of more foreign direct investment or no you're still gun shy well once again I sort of take the world as as sort of evolving and want to analyze why what's driving this and even
if uh you sort of say okay any future Trade Agreement we're not have no isds they're already sort of embedded in the system in these bilateral known as bits bilateral investment treaties so they're going to crop up one way or another and
once again as I mentioned this is not something that the nefarious United States is foisting upon unsuspecting other countries other countries sometimes want this as a way of saying look you maybe you don't trust our judicial regime uh but we'll do this and
uh as a way of promoting investment and once again with Canada in the EU no one doesn't trust their R judicial regimes but still somehow those two countries very Progressive wanted isds in their agreement here's a question that's a complete softball so he's I can't
believe I'm asking you how strong is the connection between free trade and world peace okay um this is something I've actually wanted to investigate in more detail so uh certainly my gut reaction and I think there's a lot of evidence
for it is that they they are related certainly when you listen read the Memoirs of Statesmen in the mid 20th century they definitely saw that Cordell Hall being the leading example who's the US Secretary of State for uh um from 1933 until 19 uh 4 44 or 45 um and he
wasn't alone a lot of economists Jacob Viner and others also saw that connection because uh when you had either trade protectionism or imperialism uh closing off of markets it led to sort of the Scramble for Africa or something like that instead of
trading these resources freely you had territorial acquisition is being uh sort of the the counterbalancing of that now what's interesting is uh just as economists have done a lot of empirical work on benefits and costs of trade political scientists have done a lot of
work on this and uh the empirical work is not quite up I think to the standards of what have done in terms of the economic phenomena but partly it's because it's very difficult to quantify first of all what constitutes peace how do you sort of operationalize this what
constitutes a trade agreement trade is endogenous in many respects so if there's a lot of trade what exactly is the consequence of that sort of what's the exogenous variation where you know more trade leads to less peace we'd like
to see more more peace rather you'd like to see something like that so I'm not sure we have really hard social science evidence on it but I think it's sort of a a factor that we economists often Overlook I think a lot lot of trade policy debates are foreign policy driven
and um it's not something we should really neglect the idea that free trade might be connected to peace seems quite plausible to me in an era of Communism where you have expansionary foreign governments and for a long time there was as you know no McDonald's in Moscow
if you look today it seems something has changed so China is our largest trading partner but many observers of Foreign Affairs would argue that the relationship between us and China has some reasonable chance of leading to foreign conflict something has changed
in the structure of the equilibrium we're now Nations that trade a fair amount might fairly readily go to war relative to what we used to suspect and of course there is a McDonald's in Moscow there's probably quite a few people in Moscow eat sushi they consume
all kinds of American popular culture if only downloaded illegally on the internet so what do you think has changed in the structure of the problem to have made the free trade peace connection possibly now so weak uh well I don't know that it's weaker and um I
think China's a really difficult one to figure out in terms of U whether uh all the openness we've seen over the past two decades or so is going to lead to political transformation or a change in their foreign policy um it doesn't seem
to have yet so um I'd say that the jury is still out but um you know still the cost this goes back to Norman Angel's Point yes and and of course he's widely misinterpreted from saying you know we won't see wars in the future because of
increased trade he didn't say that he said it uh changes the cost benefit calculation and I think it may have for um uh for uh China just recently watching the Ken Burns Vietnam series on PBS um there are a lot of wars in Southeast Asia beyond the Vietnamese War
China invaded Vietnam Vietnam invaded Cambodia and I'm not sure that that that sort of local conflict is more I don't think it's more likely uh given uh the tremendous amount of Commerce that's going on and the uh the perceived need
of the governments to justify themselves by saying we're providing an adequate standard of living for our people some questions about trade in Asia should the united states allow China to buy us semiconductor companies ah so um here well one could invoke National
Security one could also I mean without answering that specific question and of course we do have this process for reviewing those things um there is a big question about uh how easily we can integrate China further into the world trading system that is I don't think
things have developed the way a lot of people hoped when China joined the WTO and uh we gave them uh a permanent normalized trade uh status it's become Much More mercantilist Much More interventionist much more protectionist I think in uh sort of non-tariff ways
than I think a lot of people thought and hoped that China would evolve there's a question of actually this is a question that uh economists raised after World War II as well a great uh trade Economist such as Jacob Viner saying can
we really integrate the Communist and the non-communist worlds in a trading system and turns out the answer was no and I think uh I guess my worry with China is the more they push it and they are pushing sort of the envelope in terms of uh the rules of of trade as we
in the west sort of uh see them in terms of limited government support for firms um and things of that sort um they're pushing things and I think that uh we could be moving in a a direction where there will be uh more trade conflict
even set aside Trump and all that sort of thing so China decides to keep out Uber and DD of course becomes the market leader for ride sharing in China uh a much larger company than Uber now China also keeps out Google and Facebook and there are Chinese equivalents or near
equivalent that rise to take their place just from the point of view of Chinese economic welfare not Global welfare but China alone are those economically rational decisions good for the Chinese economy well I think they're being taken not for economic reasons but for
political reasons and national security reasons but just on the economic side does it boost Chinese GDP for the Chinese and the media or average wage to keep out Uber Google and Facebook personally I don't think so because um you're limiting uh access to uh more
Choice uh Google is a very efficient search engine you're by limiting access to information by your domestic citizens um your scientists and others um unless they can breach that wall they're not going to have access to the best ideas
out there but if you get from that decision you get a buo which is Chinese equivalent of Google you get 10 cent WeChat being in some ways like Facebook DD of course is an all Chinese company they get a version of the services scientists who need the research they
use a VPN they still access Google but it seems there's much more output within the Chinese economic Nexus than if those decisions had not been taken possibly but um question is also uh you would I think had a lot of Chinese entrepreneurship in terms of web
development and new apps and things of that sort simply because they know the local market much better than a foreign firm coming in saying we're going to provide this particular service in addition if foreign if you were able to attract Google and uh other um apps uh
to produce in China you're adding to local capabilities so foreign ownership I'm I don't think is a particular problem when the United States and indeed the West more generally let China into the WTO uh many people are now saying it turns out looking back we gave
up too much leverage we had a lot of Leverage at the time we didn't use it China entered on terms where it's allowed to violate too many of the rules subsequently agree or disagree a little bit agree because uh actually the US
negotiators were very defensive um in terms of what they were asking China they wanted really exceptions that the US could impose trade barriers against China rather than saying we want much stricter rule is that you can't intervene in this sector or that sector
provide uh you know sort of free credit to domestic firms so we are more interested in exceptions for ourselves to block their textiles or have a special Safeguard exception rather than making uh firm our insistence that uh China not get its fingers all over their
own economy as you know there's a series of papers by MIT Economist David outour with co-authors and they argue to varying extents that Chinese import penetration has hurt us middle-class wages and indirectly would seem to imply it's damaged a fair number of us
communities and this may account for some of the sad state of our Rust Belt and former manufacturing areas a how much do you believe that result and B to the extent there's something there how well do you feel that result is being processed by the policy community and
the policy discussion well I think that that's they've done some really interesting work I call it a great piece of economic history because the Shina shako is a one-off shock it's not going to happen again there's a huge increase in the uh uh supply of labor to the
market sector in China um from the 1990s and into the 2000s and uh actually I think we're going to have some papers in the future about the negative China shock because the Chinese labor force is going to be shrinking so it was a very
particular uh unique uh period in uh economic history um and I think if you're thinking about bringing in hundreds of millions of people in China into the market sector and then you're losing one million jobs in the United States over 10 years that's actually
pretty small impact on the United States now impact is particularly hard on those communities where there's it's a one factory town or something like that they're producing furniture or apparel so it's clear that that had a negative
impact there but there's also sort of a macroeconomic context to what I think you have to think about in terms of the China shock I don't worry about the 1990s so much because we had a robust growing economy then um and actually there's some evidence that workers who
were displaced from the textile industry in the 1990s were actually getting higher wages outside but the 2000 is very different situation even though the the aggregate unemployment rate was coming down the 2000s the Fed was tightening so the China shock was not a
a macroeconomic shock and not an aggregate demand shock in a sort of Scott suner uh point of view certain communities were hurt but this is also a period where we had uh a 10% of current account Chinese uh current account Surplus and a big uh us current account
deficit so I think the problem during the 2000s was the economy wasn't particularly robust we had these big macroeconomic imbalances which I think you have to sort of understand the context during that period if for example us export growth to China had
been matched or matched you our import growth from uh China we probably wouldn't be having this debate um there would have been a China shock but we said boy there a lot of alter Alternatives elsewhere so yes we were getting capital inflows and had lower uh
interest rates because of the inflows of capital from China but um people don't see that as much and and and think maybe it propped up the housing bubble and and shifted resources into housing it's history it happened um I think um
doesn't cause me to rethink the case for free trade in any way um we've always known their M cost we always know in certain communities are going to be hurt um but I do think we can exaggerate um how important that was in terms of um
where the US economy is today Ed conard has an argument for why he's skeptical about some of the trade with China and he worries about the capital inflow from China that it hasn't been sufficiently concentrated in Risk taking entrepreneurial Capital he says the
capital has come in in the form of buying often government securities government at times is actually one of our less productive sectors so we've gotten more quote unquote investment from that Capital but we get it in an area that's a bit of a lemon in
productivity terms and therefore Ed thinks uh trade with China hasn't been a good deal necessarily at some margins what's your take on that well a lot of government spending is just transfer payments so it made those transfer payments and the US fiscal deficits
easier to accommodate but of course there is going to be a reckoning we do have to pay for those at some point and just because you're getting cheap credit for a 5 or 10 year period doesn't mean that you don't want to think about
correcting that fiscal deficit and worrying about access to cheap credit which may not be there forever now we switch back to our home Shores American economic history and trade policy and other matters some of this of course comes from your book but your book has
much much more it's uh what about 900 Pages well I try to cut it down by saying a lot of it's the index a lot of it is the um uh endnotes and the references so it's actually about 690 Pages it's a highly readable 690 Pages uh but here's some questions about us
trade history we used to have bills have fun names like the Tariff of Abominations and now our trade bills have boring names why did that change why do we have complacent names for our trade bills well they used to be just tariff acts so they would just change us
tariffs um and that was the main purpose of it so they would be named for the uh chairman or chair woman of the house Ways and Means Committee and the Senate finance committee so they would be the official act for example uh Smoot Holly
which is actually should be called The Holly Smoot Tariff because it's always the house first then the Senate but the official name of that is the Tariff Act of 1930 so either the press or the members of Congress themselves sort of introduced the moniker to give it you
know a little bit more cache but uh since uh smoo Holly all the trade acts are not really about tariffs per se they're about trade negotiating Authority so that's sort of what may be a little less interesting and so we have the trade expansion Act of 1973 the
trade Act of 1974 it's not really like there's one or two key people on key committees who are um saying you know I'm setting tariff rates here um like a tax bill or something like that so I guess because they're less interesting in that sense they don't get named in
the Years leading up to the American Revolution of course there are restrictions on trade there's a common complaint still repeated taxation without representation now applied to the district of Colombia at times but in those years leading up to the American
Revolution how high actually were trade barriers in real net effective terms were we just a bunch of whiners or were these trade restrictions actually terrible I actually think we were uh very good at whining first of all we were getting an enormous implicit sub in
terms of British National Defense and our tax burdens compared to the average British citizen were very very low so we wanted to have it both ways we wanted Britain to sort of underwrite our defense but we didn't want to have to pay for it so there's a all the tax
debates in the 1760s we are a little bit of a whiners in addition to the trade barriers you know Britain was sort of our natural trading partner anyway and there's some Commodities such as tobacco which were enumerated and had to go
through Britain but uh when you look at the post-independence period we don't really shift away from Britain too much I think the uh navigation acts have been you know exaggerated in popular history in terms of how much they're really
constricting us Commerce and and harming the American economy the Tea Party not the modern tea party but the real good old-fashioned tea party were they the good guys or the bad guys once again they weren't sort of tax Cutters uh they were actually want to um stop smuggling
so people don't so they were protectionists they really were in a sense that they you know that that what Britain was doing was actually uh during this period was uh through the Tea Act was cutting the duty on tea and trying to help out and spur uh undercut
smuggling and help out the East India Company so it wasn't a big tax hike at all it was actually a tax cut um but the Smugglers were the ones who uh really were invading the uh British ships and throwing the tea over overboard now you
mentioned to me in an email before this chat a notion of understanding the American Revolution in part as America's early version of brexit could you explain that for us a little more sure so um you know the American re founding fathers really didn't want to lose Mar
Market access to the British Empire so we wanted our political Independence we didn't want taxation without representation um but we thought you know longterm we're very integrated with the British economy we should maintain that integration and there was this hope
and actually there's some reason for the Hope after uh we had won the war that Britain would be magnanimous and uh we could maintain our trading status within the context of the British Empire but of course the British didn't see it that
way they said okay if you want your uh uh political Independence you're going to get your economic independence as well so all the Privileges that you used to have they're out the window you're now outside the British Empire and I don't think the founding fathers really
anticipated that this would be the case and they spent a lot of the 1780s uh trying to claw their way back into the British Empire and got absolute uh no give from the British authorities a lot of this had to do with the Constitution
itself and the formation of the Constitution as a way of getting of allowing that uh 13 independent states to sort of band together and have negotiating Authority against other powers which we didn't have during this period so the Constitution is very much
outgrowth of us trade politics during this time and revenue of course was another key consideration there since the under the Articles of Confederation Congress uh couldn't raise couldn't raise funds and we had these big deficits that and the debts couldn't be
financed so I think it was a sort of a brexit gone uh badly and in fact economic historians Jeff Williamson and Peter lindert have a a book just a couple years ago on sort of American Wealth over time and uh once again the DAT are sort of sketchy but when you
look at us wealth and income in 1776 or the early 1770s and then you look at in the 1790s we're basically after 20 years or so just getting back to where we were before and a lot of people think this is POS possibly worse than the Great
Depression in terms of the impact on the economic act activity of the United States it wasn't just the revolution but the 1780s was not a good decade and partly because our trade had been so severely disrupted by being outside the the British Empire let's shift to
Broadway for a moment Hamilton Alexander Hamilton was he at the time in fact the founding American protectionist uh no first of all he gets that uh uh reputation because of the report on manufacturers which can certainly be read that way and he certainly makes uh
actually what's interesting about the report on manufacturers is an anti- Adam Smith argument um it's also uh and it's also an anti- physiocrat argument so it's anti- Adam Smith in the sense that he doesn't think that um the Invisible Hand will lead to the right allocation
of resources but it's also an anti- physiocrat argument because uh apparently he was confronting at the time uh the argument that a The Wealth of Nations is really based on agriculture and Manufacturing is not something we want to get into and he
said it's actually useful for various reasons uh not just defense but possibility for productivity increases is producing useful things it's an economic activity that we should want uh and not try to discourage but when you first well a couple there's so many
things to point out about that report the main thing I think is when you look at his activities when he was Secretary of the Treasury he did not want to keep out Imports he wanted a constant flow a large flow of imports coming in because
that was his tax base and he viewed the fiscal um sustainability of the federal government is being much more important than any sort of tinkering with uh trying to promote manufacturers here and there and so uh he actually rejected proposals from coming from uh the
opposite party uh Jefferson and Madison um to have embargos against Britain or um limits on on trade because uh he want to finance the the fiscal deficits and he thought any sort of disruption to Imports would upset those fiscal plans
in fact he was so much against those plans that uh import competing producers in Philadelphia and elsewhere began shifting their allegiance from the Federalists who are thought to be in favor of a strong Cal government and prot promotion of man manufacturing to
the Jeffersonian Republicans who they saw as being much more willing to impose pretty Draconian restrictions on Imports let's say it's the 1870s and you're Rutherford be haes and you're faced with a series of choices about tariffs and as you know tariffs in that era are a
significant means of funding the national government and you can either have higher tariffs or probably have higher excise taxes or maybe there's something else you'd like to put on the menu but how do you think about that tradeoff and what decision would you as
Rutherford B haes have made well remember we had huge fiscal surpluses in the 1880s late 1870s and 1880s so uh there was clearly scope for uh a big tax cut um and tariffs and you don't need protectionist tariffs to raise enough
Revenue to fund the federal government so the sugar tariff alone I think it's in the book I can't remember off the top of my head but the sugar tariff Al loone account for like 25% of all revenue coming from the tariffs maybe even more so you could tax a few select
Commodities have them as sort of excise taxes um that raises all the revenue that you need and you don't need uh heavy duties on steel rails and uh cotton textiles and things of that sort which truly were protectionist duties they didn't raise much revenue they did
block Imports and helped out uh domestic interests that way fast forwarding in time quite a bit the 1990s we passed NAFTA North American Free Trade Agreement at the the time many people were quite optimistic about NAFTA but today as you know there are numerous
research papers which look pretty hard to find any gains at all you may be able to find small gains from NAFTA but it's unclear what the payoff from NAFTA really has been if you look at the Mexican economy there doesn't appear to be convergence and they're growing at a
rate between two and 2 and a half% so looking backwards what is your view of NAFTA did we in some way do the treaty wrong and other than mere updating how might you revise NAFTA today um I spoke to one trade negotiator about this once
and they said um NAFTA is not a good trade agreement NAFTA is an effing great trade agreement and I agree it's a great trade agreement and once again us barriers towards Mexican products was already were already pretty low so it's
not like we're getting some big consumer surplus gains from you know taking down pretty big barriers but what it did was solidify the US Mexican relationship and so here you have you're appealing to foreign policy a little bit but also you're trying to do uh undertake uh
measures to strengthen the Mexican economy and uh and have a long-term partnership and I think it's uh on net been very good for Mexico once again it hasn't been perfect because recall that within a year after naft went into effect they had a financial crisis
they've had major Banking and Financial issues through the late 1990s and into the 2000s um obviously NAFTA is not a silver bullet well it just makes the Mexican economy transformed into something great so there's a lot of still reforms that have to be done in
Mexico some of it macroeconomic uh others not but um to say that we'd be off without NAFTA um you know I don't think either United States or Mexico would be and here's where you get sort of these nebulous things uh John Stewart
Mill talked about them in terms of the benefits of trade there's sort of an attitudinal shift in Mexico much greater openness towards the the world and that's been all to the better we've seen the the basically one party State dissolve into a competitive democracy um
and so I think NAFTA and the greater openness that it's brought about has been very good for Mexico is there a future for the World Trade Organization it has not achieved significant reductions in tariffs for some while some people not all compare it to the
political economy of riding a bicycle that if you don't keep on moving forward you may stop altogether the action we've seen in free trade has been multilateral agreements outside of the framework of the WTO it hasn't achieved real progress
on agricultural tariffs uh there's a Resurgence of nationalism populism whatever you want to call it in a number of nations including our own is is there indeed a future for the WTO I think that's a big question about whether there is so it used to be said that okay
so it's not so great for negotiating trade agreements anymore they can't seem to get a consensus the Doha round is the first real negotiating round that absolutely failed and that's been terminated now um it's been over 20 years since they have uh reached any
sort of major multilateral agreement so uh the argument among economists has been well okay so it's not so great uh people are bypassing it in terms of trade negotiations but it's great because of the dispute settlement system but now we see the Trump trp
Administration saying we don't like this dispute settlement system and if the US undermines that then it's really not clear what the role of the WTO would have it wouldn't be an efficient uh uh forum for trade negotiations and it wouldn't have an effective dispute
settlement system if the US blows it up or walks away from it or something like that I think part of the problem with the WTO at least in terms of negotiations has been something that Canada identified way back in the 1940s which I think is in the book after World
War II we're going to set up a big multilateral organization called the I the International Trade Organization and at some point as we're moving in this direction Canada sort of snuck up to the US negotiations and whispered in their
ear you know what it may not be a good idea to every country talking about these things CU not everyone's on the same page and in particular they pointed out India and Brazil and a few others which they called the more protectionist
mind minded countries of the era and so that's why we went ahead with the gap which is a small nuclear Club of sort of like-minded countries to liberalize trade and we and the I actually uh never uh came to into being but when we shifted from The Gap to the WTO in 1995
we brought everyone into into the room and so now it has you know 160 members or something like that and uh it operates by consensus meaning it's sort of the lowest common denominator sort of negotiating Forum everyone has to agree um the former director general of the
WTO once said it's was like a car with one accelerator and 150 hand braks so any country uh uh not quite but almost any country can sort of step on the brakes and stop the process and the question is is this a way to go forward and I think what you've seen is
countries are just bypassing it they've gone to Regional uh by atal or even sectoral sorts of agreements um to avoid the whole mass of countries trying to agree on one common uh trade policy for everyone the United States federal government it often embodies a great
deal of messiness so if you think how many different agencies have we had that regulate Banks or financial institutions in some way it's quite a few you could say the same of trade there's USR there's the state department there's the
Department of Commerce there's OPEC there's a lot of different layers at which we address trade should we just consolidate those those into a big supposedly consistent Department of trade or do you prefer the sprawling mess oh I prefer the sprawling mess why
um so I spent a year at the Council of economic advisors a long time ago and I get to watch this inter agency process work its way out and I think what it does is provides it sort of checks and balances on USR or any lead agency in terms of any one particular area of
trade negotiation so it's an internal checks and balances uh it provides coherence because um USR is not going to do something that the Department of Agriculture is going to be very upset about they can sort of coordinate that and I think the problem is if you
centralize it and actually there have been many proposals over the years particularly in the 1980s when we needed a midi just like Japan had um you know one negotiating arm that would do everything in industrial policy you centralize power whenever you centralize
power I think it'll become do things that we don't necessarily want it to do Trump supposedly has said I think sitting his at his desk to some of his advisers tariffs I want tariffs bring me tariffs possibly he screamed this out now I know you don't work for Trump but
if you were put in the position of actually bringing to Trump a tariff what would it be call it least harmful if you wish but what would it be I haven't thought about which tariffs I'd like to impose recently um but I guess if I was
an adviser I'd say they're coming because there are certain cases uh under the provisions of us trade law where you will have a choice on your desk about whether impos tariffs or not so um that's the way the process works you cannot unilaterally decide to uh raise
these things by yourself you have to wait for them to come to you and they are coming just be patient but of course he's not very patient and um we'll see and what will Trump actually do on trade so if you look at the data the Mexican peso this year it's up last I looked
around 20% of course it was down about that much right after the election but that would seem to suggest Trump on trade is now thought of as a bit of a paper tiger other people like Bob zelik whose judgment I respect greatly a very smart guy uh he seems to think Trump
could do a lot of damage in the trade realm where do you stand on the spectrum of views so if we go back back to this uh decentralized view of us trade policy that's partly um been a check and IM balance I think within the government of
trump just doing something very quickly so will bar Ross the Department of Commerce they've sort of encouraged higher steel tariffs and and some guys under National Security what have you that report has been delayed delayed and delayed and delayed and I think the
reason is because there are other agencies that can weigh in other constituencies that can weigh in and say this isn't uh good for diplomatic reasons for national security reasons for Downstream user reasons or something like that and so uh you see the
administration sort of divided and actually The Reflex can't be activated because there are all these other parties that are uh being their voice heard whereas if you did centralize things it might be very easy for that centralized authority to say this is
what we're going to do doesn't matter if they're uh voices to the negative we just won't listen to them so um I I do you know I I think you're referring to Bob zelich's Wall Street Journal article if not too long ago I think the damage
is not so much in particular actions because we really haven't seen many actions except for pulling out of TPP which arguably Hillary Clinton or Bernie Sanders would have done as well well um but we haven't seen sort of the trade cases come to the president's desk and
and uh higher tariffs being imposed or quotas or what have you um but I think the damage is more the rhetoric in some sense you're alienating South Korea um uh an ally during a very tense time you're getting the Mexicans to actually
think about gee we could live without NAFTA and uh we could stick it to the Americans like we used to in the past instead of thinking about them as a partner because we've got all these other free trade agreement with the EU and and we' keep the one with Canada and
we could keep TPP and so you sort of get uh so there's no gain to the US from that and we lose sort of uh uh Market access in terms of exports if we're discriminated against so I think there's sort of this deterioration this rot can
that can set in and all of these chats we have a segment uh underrated or overrated and I'll toss some ideas out to you you're free to pass if you'd like underrated or overrated brexit it remains to be seen I guess I hate to punt and be a waffler but uh what does
it depend upon uh it depends on whether it actually happens assuming it happens assuming it happens okay um I well when you listen to the debate and this is sort of maybe uh Britain's NAFTA in some sense you know if you went back to the
NAFTA debate you got these uh some people saying you know it's going to create a lot of jobs create a lot of exports it's going to be huge gain for the United States or the other side being huge number of jobs losses disaster for the United States um giant
sucking sound and what have you and then you sort of lose uh the middle ground and I think uh the weight of the evidence in my view is that um Britain would lose some of its Market access to Western Europe they're going to lose some of their financial sector and it's
not clear that what they gain in terms of sovereignty or what have you or regulatory freedom is going to compensate for uh those that loss of trade and investment the movie Dunkirk um I enjoyed it um I know it got a lot of criticism because it didn't show the
context or didn't show Churchill but that's not the purpose of the movie the movie show what the the the men on the ground were feeling and reacting to and I thought it succeeded I liked it Churchill himself um he's very highly rated and I
think deservedly so so I don't think he's overrated or underrated Bismark I guess I'll punt on that one the Smoot Holly or perhaps Holly Smoot Tariff underrated or overrated correct I guess it depends on what dimension um so it's gotten a lot of attention and I'm very
happy with that because I have a book on it and so I think more people should be aware of it and uh some of its costs it does get get brought up a lot in trade policy debates and maybe these are mainly among wonks and it used to be the
sort of reflex that uh trade Economist would bring about um saying you know disaster will happen if we impose this tariff um guess to that extent uh the Dirty Little Secret might be is that it's overrated because it didn't cause the Great Depression and a lot of the
weight that was put on it um doesn't it doesn't support that but that said it was a very bad thing and so it's Evils are overrated it's actually in a funny way underrated that's right yes okay you've now lived in or near Hanover for a long time so the state of New
Hampshire in other words is it the uh what what did President Trump say is a a hot bed of uh a den of um opioid use yes um you know it's a very beautiful place um it's uh got the highest per capita income States how did you manage that
I'm not sure um you know you look at the sort of the southern part of the state where I don't live Manchester nsha seems very prosperous there's a lot of spillover investment uh from the Boston area um and it proximity to Boston has been a great help it's a little bit
isolated the winters are cold but um I think um I worry a little bit about um in fact a lot of economists in the state worry about the demographics and the business climate um where a lot of young people are not being attracted to the
state and uh the business climate is not as favorable as we in the state like to think we say we have no income tax we have no sales tax we we want businesses to come here but the business taxes are are more of a hurdle than one would but if it's the highest per capita income
and even if that's measurement error it must be near the top right why don't more people want to live live there probably isolation um you know people are but if more people lived there they wouldn't feel so isolated right it seems like an easy equilibrium to get to just
tough people trickle in as they did with California and all of a sudden you've got a lot of people yeah but I guess you need the investment to draw people in or something and um uh Boston area has been much more flourishing in terms of
attracting young people certainly uh professionals and things of that sort um so I'm not sure exactly what New Hampshire's uh um you know big claim to fame is it's it's sort of an older state so that's why it's a high income State because um in the Handover area you got
a lot of doctors and things of that sort of retirees what's the story of the first time you met Milton Friedman do you know the story actually no I don't I was told there is a story okay well this is in 1987 I believe and I was at the Council
of economic advisers I was uh in graduate school big fan of Freedman read his column in Newsweek in the 1970s in middle school and what have you and I was very excited so he was going to give a talk to uh people in the administration there's some room in the
old executive office building where uh he was going to be speaking so I made sure to get there very early and to get a good seat right up front so I could see him so I sat literally in the front row right in front of the podium
anxiously waiting his arrival and he comes in of course crowd fills in but I've got the best seat and of course he's standing behind the podium and I didn't see anything but the top of his head for the hour that he lectured because of course he's so short that he
didn't really poke over the podium so I should have sat like 10 rows back and I would have seen him um I did get to speak with him afterwards but uh during his talk I didn't see him at all what's the influence of Jag D bagati on you and your ideas very big impact he was my
thesis adviser I took a number of courses with him at Columbia University I think I learned two things from him uh one he made economics very fun so uh I don't know if you've ever talked to him him but he's always telling jokes he's a
great Rock onour he has great stories um he's laughing a lot um and that came across in his class economics is a fun activity it's a fun discipline um it's not just um sort of sterile Theory or what have you so I I try to bring bring that little bit of joy and levity um to
economics uh the way I teach it and and and hopefully the way I write about it as well the other thing I learned from him is marketing so this is back in the pre- internet area pre Twitter and what have you and we wrote a paper when I was
in graduate school and Not only was there a paper but there he got a New York Times column that we were allowed to write for the business section out of it uh The Economist did a box on that article I mean he was a master at disseminating his work not just to other
academics but to journalists to the uh public policy professionals and things of that sort and so I think that's one thing I've also internalized a bit as well you just can't write a paper submit it to working paper series and then sent
to journals you have to mark it a little bit that's much easier today in the age of Twitter um but back then that was considered something uh you know very unusual what's your connection with Randall Scott crosner who teaches at the University of Chicago business school
I'm responsible for all of the success he's had in his career because um I interviewed him for a job with the Council of economic advisers that was the first time we met and uh if I had said this guy doesn't uh Merit a position here you know he would have uh
gone back to Harvard and nothing would have been heard of him since uh so uh by launching his career and getting him into the ca it made uh available many opportunities for them later on our last and final segment I have a number of questions for you on International Trade
Theory these are super nerdy super wonky but feel free to give it full blast when it comes to International Trade how much of it is driven by comparative Advantage versus how much of it is driven by specialization well it's almost hard to
separate those things out because um they're sort of reinforcing so um comparative advantage is sort of a narrow concept but it it has sort of a broad applicability um the way we teach it just is a sort of a technology Factor um specialization reinforces
technological advantages in many senses so um I'm not sure I could sort of load you know what percent of trade is due to comparative advantage in some sense a lot of it but um can't give you a metric or a number from 1990 to 2007 at least
from the numbers we have it seems that global trade Rose at a rate about three times higher than Global GDP this now seems to have stopped this is sometimes called the global trade slowdown though it may just be the normal State of Affairs but why is there now a global
trade slowdown my story for that is that uh what we saw in the 1980s uh pardon me 199s is uh the great opening of the developing world so China India um African countries um other countries in Southeast Asia Vietnam would be a great
example too and so you got this oneoff big effect of countries that have been relatively closed to World Trade really reducing trade barriers significantly and big boosts to uh uh World Trade growth as a result of that that's sort of a one-off thing once you've cut
tariffs from 30% to 10% or 5% or something um if you further cut them you're just not going to get the uh uh growth effect the growth and trade effects that you had before so I think it's sort of a a one-off effect of of many developing countries entering into
World Trade sometimes for the first time in a big way and uh I'm not worried by The Slowdown um obviously the world economy has slowed down that's one reason why but we couldn't we shouldn't expect World Trade to grow at two or three times the growth of world GDP in
perpetuity will this happen again with Africa and South Asia after all those are billions of people and tariffs aside their infrastructure is often so bad that the real tax on trade all cost is considered is quite high now and you
could imagine it falling a great amount both by liberalization but also by better infrastructure so will we have this period again in the future once again the 1990s were special because we had the uh collapse of uh communism fall of the Berlin wall and so a lot of
regime change that led to some of these things and so we need a big reform moment in Africa I agree with you entirely that um Africa is sort of the big chunk of the world where there are a lot of people and they're still very closed to trade uh they both have trade
policies and and bad infrastructure that uh greatly increased trade cost so if we're going to see big growth in the future you'd think that's where it's going to be but uh I don't think we're going to have a big necessarily have a big reform moment uh in Africa where
there's a sort of a simultaneous opening up it could be more peac meal it could be more drawn out over time that's where the growth could occur but I don't think it's going to be a big bang like we saw in the 1990s globalization theorists
used to write about the death of distance it was called that doesn't actually seem to be true what we call the gravity equation how much trade depends on distance it doesn't seem to have changed much over time that is you still tend to trade with countries that
are close to you if you look at real estate values what's really gone up are a few major cities such as New York City London San Francisco SLS Silicon Valley it seems location matters more than ever before and yet there's more trade what's
the right way to think about that apparent Paradox well I think the death of distance maybe have more of an impact in terms of trade and services so um for merchandise there's shipping costs and things of that and they have come down down of course um but uh with with
Services um you know either there you need direct investment or it can be transmitted over the Internet uh and so their distance doesn't matter quite as much as you know containerization was a big breakthrough for trading a lot of
manufactured goods it made it easy to automate lowered a lot of costs but services are much harder to trade along many dimensions how optimistic are you about a future series of technological breakthroughs analogous to containerization but for services that
will make them much easier to trade and give us a fairly rapid trade boom in services not particularly optimistic because um unlike manufactured goods or agricultural Goods or merchandise in general each service sector sort of uh has its own specific um trade costs if
you will um you know money Financial Services every country has its own regime its own regulatory regime a lot of services are regulated locally uh harmonizing those is very difficult it's not like you have one single um transport cost or a tax at the border
it's more of the regulatory regime with regard to services and that's why I think the WTO has actually sort of I wouldn't say failed but the there is a a gat a general agreement on trade and services and it's a pretty in my view
empty agreement it doesn't have a lot of deep commitments it hasn't stimulated a lot of growth in trade and services in my view sort of this vague language about um non-discrimination and what have you but it's you know every service sector is different air uh you know
Airline Services um banking services insurance services and so these have to be sort of addressed not within one techn ology or one agreement but it's sort of more peace meal there's a phenomenon sometimes called premature de-industrialization at times It's
associated with the name of Danny rodri and that's the claim that some parts of the world possibly for instance Africa or some parts of South Asia they will never industrialize as say South Korea did because now manufacturing production is so automated and as you know it's
harder to trade services so they may be stuck in a kind of permanent rut that they industrialize to the extent They Do by buying things from factories elsewhere and they won't ever go the same path that parts of East Asia did agree or disagree I don't necessarily
agree because when you look at the steel industry in the United States it's really become fragmented you don't have the big integrated Mills anymore they've spread across uh the whole geography of the United States you have the local
Mini Mills and I think the same thing can happen in many developing countries so um uh you know you can have local uh small steel uh uh industry that's efficient uh same with other things so I think you can still have sort of this fragmentation of production
um and local production and not necessarily just have everything centralized in one or few countries one or two countries but say you look at countries such as Brazil India South Africa it seems their share of employment in manufacturing has
stagnated and is even going down and it never reached 15% whereas in the United States Great Britain uh Germany you have the share of employment in manufacturing going well over 25% sometimes as high as 40% and it ends up falling but you build
a stable middle class class first that supports a democracy is this a reason to be more pessimistic about the economic prospects of countries that have not yet industrialized I don't know about pessimistic but certainly they're going to have to choose a different path so if
they're if these people are going to go be going into Services rather than manufacturing um it could be the schooling system is much more important to the extent that human capitals are more important for services so uh they just can't follow the old recipe that uh
other countries followed did before them last question what might you Douglas a irn know about the of Chicago school economics that the rest of us do not and what are you planning on working on on this particular question well I've
always been interested in that that um in particular because uh I think there was something unique about Chicago in the 1930s that you had these people James Buchanan your former colleague who would go there as a socialist and come out as a a free market advocate in fact
he'd said within the first six weeks of Frank Knight's course he was converted but he wasn't the only one Milton Friedman went in as a new dealer and uh said Jacob viner's course on price Theory opened his eyes and there are many testimonies of other people who go
there with sort of leftist views but they come out thinking some something else now to have that sort of intellectual or ideological conversion in the 1930s during the Great Depression of all periods there must have been something going on in the classroom that
is convincing people that despite the problems we see um Socialism or communism is not uh the correct alternative and so I've always been interested in and what it was Frank Knight teaching Henry Simons um uh Jacob Viner that uh convinced people
that the market oriented system is despite its defects um is the right way to go Doug thank you very much and again I'd like to recommend your book clashing over commerce a history of US trade policy thank you Doug thanks for inviting [Music]
me thanks for listening to conversations with Tyler you can subscribe to the podcast in iTunes Stitcher or your favorite podcast app and if you like this podcast please consider rating it on iTunes and leaving a review this helps other people find the show