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A public policy blog from AEI
“If stability despite conflict is a lesson from past experience,” wrote economist and trade historian Douglas Irwin last year, “one can easily be led to conclude that the future will look much like the past and that the reciprocity period will continue for some time to come.”
But with President Trump’s trade war still ongoing, is this vision of a free-trading future too sanguine? Irwin himself joined me to discuss this question, as well as some American economic history, the most pervasive myths people believe about trade policy, and much more on a recent episode of my podcast.
Douglas Irwin is a professor of economics at Dartmouth College, a research associate at the National Bureau of Economic Research, and the author of “Clashing over Commerce: A History of US Trade Policy.” What follows is an abbreviated transcript of our conversation. You can read the whole transcript here, or can download the episode by clicking the link above. And remember to subscribe to this podcast on iTunes or Stitcher. Tell your friends, leave a review.
If you look at trade policy since World War II, has US trade policy overall helped or hurt the American middle class? And has that changed throughout the decades?
It has changed a little bit, but it’s very hard to give an unequivocal answer one way or the other in terms of talking about everyone because economists do focus on the distributional consequences, and just because some groups are harmed doesn’t mean one would say the entire middle class has been hurt or that all elements of the middle class benefited from more open trade.
But here’s the way I would put it. We entered the post-World War II period with pretty low tariffs because we established something known as the General Agreement on Tariffs and Trade after the war. We didn’t face a lot of foreign competition in the 1950s and 60s, because Japan and Western Europe were still recovering from the war. And so a lot of our major manufacturing industries didn’t face a lot of foreign competition. A lot of American workers were not really adversely affected as a result of imports.
The world really began to change in the 1970s as Western Europe and Germany in particular and Japan and East Asia began exporting products that were substitutes for domestic producers, like steel or autos or what have you. And I think people try to take those few examples where a lot of US industries have been affected by foreign competition and talk about some of the workers who have been laid off and then say, well, the entire middle class is worse off as a result of trade.
But of course even in the immediate post-war period only less than half to about a third of the US workforce was in manufacturing. We export a lot of manufactured goods. So a lot of workers depend on exports for their jobs. So there’s no denying that certain workers in certain industries have been adversely affected as a result of imports, but when you talk about the productivity improvements that come about as a result of trade, the jobs that are created by exports, and the benefits to consumers, I would say on balance America is better off. But one can’t deny that certain groups have been made potentially worse off as a result.
Trump has said one possible deal is what they call the zero scenario, where there will be zero tariffs, zero subsidies, zero of any kind of restrictions. It’d be kind of like this perfect, libertarian free-trade zone. What do you think about that scenario, and under that scenario would the US still run a trade deficit?
NAFTA does have zero tariffs between the US, Canada, and Mexico, but he says it’s been a disaster and he doesn’t like it. So that’s an indication that it’s not the tariff levels there, which are zero on all sides. That isn’t the issue for him. He’s really concerned about the trade deficit. And that’s something that first of all you can’t write into a trade agreement.
Trade agreements do not specify what the level of trade will be or the balance of trade. It just specifies what the government rules of the game for trade are, so it doesn’t guarantee a particular outcome. So just having free trade doesn’t mean the US will be running a trade surplus or trade deficit; that’s determined by other macroeconomic factors such as capital flows.
In the post-Civil War era trade policy focused on protecting US industry, keeping the domestic market for domestic producers, and reducing imports. And a lot of people today will say that was a great time for America: the US economy boomed, and that’s when we became a major economic power. If you’re looking for an historic example of US trade policy done right, it’s the post-Civil War era, right?
A lot of people will say, you know, we grew very rapidly in the late 19th century. We industrialized as a country and we had high tariffs and ergo the tariffs are responsible for those good times and therefore we should go back to that. You hear that from Pat Buchanan and probably Steve Bannon and maybe even the president himself. But when you look at that era, actually in the late 19th century the US was very open. We were open for immigration and we indeed had massive immigration. We were open to capital from the rest of the world and were able to borrow and purchase a lot of technology. So it’s not as though we were an isolationist country with big barriers. Yes, we did have fairly stiff tariffs on imported manufactured goods, but otherwise we were very open to what was going on in the world economy.
In fact immigration, as I point out in the book, was a key instigator in terms of the development of many manufacturing industries in the United States. So we’ve never really had a period in US history when we’ve been closed to both trade and immigration. In addition, it’s become very hard to attribute US economic growth in the late 19th century to those higher tariffs. A lot of the key improvements in technology and a lot of the growth was in the service sector: telecommunications, railroads, and things of that sort. Manufacturing really didn’t grow much as a share of GDP in the late 19th century. A lot of that grew in the pre-Civil War period when tariffs were actually much lower — only in the range of 20 percent or so.
So there is the simplistic argument that one encounters a lot — that tariffs allowed us to grow rapidly in the late 19th century — but the more you look into it you see it’s a really tough case to make. A lot of other factors were involved and the tariffs were probably third or fourth order. And it’s not even clear they had a positive impact as opposed to a negative impact.
Was Alexander Hamilton a protectionist?
He has that reputation because of his Report on Manufacturers in 1791 — which is a great report, but it’s much more nuanced than is commonly portrayed. The standard view is that he advocated higher tariffs in government, industrial policy if you will, so yes. And it is certainly true the US did not have a very diversified economy back then and he wanted government promotion of manufacturers, which weren’t being stimulated at that time. But he really wanted it on a much more limited scale. He wanted subsidies and encouragements to invest rather than high tariffs. He didn’t think tariffs really worked well in terms of getting manufacturing going.
So I think the best way to describe it is he wanted to promote manufacturing, but he didn’t want to necessarily protect it from foreign competition because he did recognize that it would lead to inefficiency and lower the overall volume of trade. So I think you have to take him in the context of the time when the US had just exited a major war with a major power, the UK. We were basically an agricultural country with very different conditions than later in the 19th century and certainly the 20th century.
Was it a mistake to let China into the World Trade Organization?
No, I don’t think so at all. It has generated a lot of debate recently, but I think given what we knew at the time — getting China to reduce its tariffs, bind itself in terms of certain actions regarding investment and things of that sort, and establish a framework of rules and procedures for bringing China into the world economy — that was all good.
I think what has changed however is that there are a lot of things the Chinese government is doing that are not covered by WTO rules. We have not been exactly persistent in terms of enforcing the rules that do apply to China most effectively.
So I do think there’s this tension in this question. We have to interpret how we deal with them, but in terms of bringing them into the system — that wasn’t a mistake at all at the time.
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