Trade War! (with Dan Ikenson)

Dan Ikenson joins us to answer one important question: is the United States in a trade war?

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Dan Ikenson joins us to answer one important question: is the United States in a trade war? We also discuss the future of trade policy and trade policy regulation.  

Further Readings/References:

Free Trade - Encyclopedia of Libertarianism.org

How Free Trade Creates Wealth - Free Thoughts Podcast

Specialization and Trade: A Re-introduction to Economics

 

[music]

00:06 Aaron Powell: Welcome to Free Thoughts. I’m Aaron Powell.

00:08 Trevor Burrus: And I’m Trevor Burrus.

00:09 Aaron Powell: And joining us today is Dan Ikenson. He is director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies. Welcome back to Free Thoughts, Dan.

00:16 Dan Ikenson: Thanks, guys.

00:18 Aaron Powell: Are we in a trade war?

00:21 Dan Ikenson: I would say not yet. There’s been a lot of rhetoric, a lot of posturing. The President has changed tack. I think there’s been a continuity in trade policy for about 80 years that has been breached. Most presidents, or all presidents going back to Franklin Roosevelt, saw trade as a win-win proposition. Trump sees it as a zero-sum game. And the rules of trade that have been established, I think, Trump is just making an assertion that they don’t apply to the United States the way they apply to everybody else. All animals are equal, but some are more equal than others. And the United States, because of its special role in the world version American exceptionalism that sort of demands tribute for everything we did to repair the world after the Second World War, instead of contributing to defense spending and being our best allies and our best friends, a lot of our trading partners instead decided to subsidize industries and compete with US companies.

01:24 Dan Ikenson: So the President is pursuing this view that the US is the indispensable nation. Everybody depends on us. We’re the world’s largest economy. We have trade deficits with everybody else, therefore we have more leverage with everybody else. And if you believe trade is a zero-sum game, you wanna win. So his view is that exports are our points and imports are the foreign teams’ points, we have a trade deficit, that is the scoreboard, that means that we’re losing at trade and let’s turn the tables now. He’s invoked some dusty old laws that haven’t been used in a long time, has announced tariffs on thousands of products, or his plans to impose tariffs. Nothing major has happened yet, but we will know more by the end of May. On May 15th there’s going to be a hearing with respect to the US-China trade flare-up and we’ll see whether or not that devolves into a trade war. If we impose duties, the Chinese are ready to retaliate. And of course, the pain will be spread throughout both economies.

02:26 Trevor Burrus: Is there a formal definition of a trade war in the literature, or is it more of a rhetorical concept?

02:31 Dan Ikenson: I think it’s used popularly as a rhetorical concept but to me, a trade war does have a definition. We have rules, we have the rule of law in trade. I would say we haven’t had any trade wars since the 1930s. We’ve had sort of tit for tat increases in protectionist exchanges, but under the World Trade Organization, under the General Agreement on Tariffs and Trade, governments are committed to reducing their trade barriers. If some governments renege, if they engage in protectionist behavior that violates their obligations, other governments can take them to the WTO and say, “Look, they’re violating, we want a ruling on this.” To me, you’re not engaging in a trade war unless and until you are overtly disregarding those rules. We haven’t really seen that yet. There’s a case to be made that Trump, by announcing these tariffs on Chinese tech products under what’s called the Section 301 case, Section 301 of the Trade Act of 1974, is acting in a rogue, unilateral fashion. Instead of going to the WTO to say, “Hey, China’s cheating. We need to do something about this,” he has already announced what the retaliation is going to be. So if the United States imposes those duties, then we will be in violation, and I would say that we would be launching the first volley in a trade war.

03:56 Aaron Powell: So if you listen to the rhetoric coming from Fox News or Trump or Trump fans, we’ve been in a trade war effectively for decades. That China has been kicking our asses all over the place in trade, we’re losing and the consequences are decimated industries and the declining middle class and a middle America that can’t find work. So now, it’s just time to fight back instead of just getting punched in the face over and over again. Is there anything to that take on things?

04:31 Dan Ikenson: Certainly, it has political resonance. There are lots of Americans who are cheering this on, this approach on. No, I don’t think that we have lost. There have been some transfers of job, some US industries that were exposed to direct competition from the Chinese, have atrophied, as they’re supposed to atrophy. But by and large, millions of Americans have benefited from our relationship with China. Certainly, hundreds of millions of Chinese have been lifted out of poverty as a result of their openness to the world and vice versa. I think what happened is, from Tiananmen Square in 1989 until the Great Recession in 2008/2009, that 20-year period, China was emerging. It made a great leap, not to borrow that phrase…

05:22 Trevor Burrus: I’ve heard of that before, yes.

[laughter]

05:25 Dan Ikenson: It made a real leap forward in the sense that, in the course of a generation, it went from a subsistence economy to a manufacturing powerhouse. There were frictions in the relationship, but we have the trade remedies laws that US industries could avail themselves of if they were struggling with Chinese competition. Then after 2001 when China joined the WTO there was that course of action. And so US policymakers saw the relationship with China through two different prisms. One was the economic prism and you had US multinationals saying, “Hey, this is the promised land, there’s a pot of gold on the other side of that rainbow. Don’t rock the boat. This is gonna be a huge market for us.” And then you had the unions and the import competing industries who were saying, “Slam the Chinese, hit them hard.” And US policy kinda split the difference. The Great Recession came around, we were struggling to emerge from it.

06:20 Dan Ikenson: Low growth, high unemployment by US standards, the government was heavily in debt, as happens to be the case a lot, but the Chinese owned a lot of that debt and policymakers started asking, “Where did we go wrong? And what are the Chinese who are still growing at double digits in 2008, 2009, where did they go right?” There was this insistence that we needed to get tougher with China. At the same time, China was revealing plans, which are really animating the debate today, to sort of leapfrog the United States to the technological fore. We didn’t care so much that they became a manufacturing powerhouse, but now they have their sights set on becoming the technologically preeminent economy in the world, and they’re pretty brash about their plans to get there, “We’ll borrow Western technology, we’ll do whatever it takes to get there.”

07:05 Dan Ikenson: Over the course of the last 10 years, we’ve been pushing back a little bit in the shadows. But we should be pushing back, I think, on certain rules that China is breaking. It was politically difficult, I suppose, for the previous administration to do so. I don’t think there was… The conditions were necessarily right. But I don’t think there was any major affronts that required this kind of response. But now I think there is and I think the rule of law is important in trade. A lot of economists will say, “Well, if the Chinese wanna subsidize their industries and sell us their steel cheaply, we should write them thank you notes.” I’d say that’s the economic argument but you’re gonna lose support for trade liberalization if you don’t enforce the rules and we have rules and I think that we should abide them. There is something to it.

07:52 Aaron Powell: Is there any other problem with China, say, subsidizing steel and selling it to us cheap besides that it violates the rules, and besides the political ramifications, does it do actual harm to us in other ways?

08:06 Dan Ikenson: It makes investment decisions perhaps more difficult for steel producers and aluminum producers. But if you look at our economy and the way it’s structured, for every one person working in the steel industry, there are 46 working in steel-consuming industries. They benefit handsomely from subsidized imported steel; likewise, the contribution to GDP from downstream industries, $29 from the steel-using industry for every $1 contributed to GDP from steel producers. So, yeah, trade is about specialization, it’s about comparative advantage. The Chinese aren’t necessarily… Don’t necessarily have the comparative advantage in producing steel if they’re subsidizing it. But if they want to do that and we can collectively agree here in the United States that the benefits will outweigh the costs, and they will economically, there’s gotta be a way to sort of compensate the losers, I suppose, in order for this to come to fruition.

09:12 Aaron Powell: Baked into to the kind of Trump and Trump supporters’ take on free trade and that the call for action on this is is an underlying argument that also shows up, I think, among the left, which is, call it like a communitarian defense of trade restrictions. Which says that we as a country are, we’re all in this together. There’s a value to this thing called America and that being an American means that you’re part of this. And that, therefore, yes, it’s awesome if domestic steel users can get steel for cheaper. It’s awesome if we can get technology shipped over from China for lower prices, it’s great to get clothing at low cost. But not if it means stripping the livelihoods from Americans, that is essentially it’s selfish of us to think that our need for cheaper undershirts is worth whole towns in Ohio being out of work. How do we respond to that? We could brush those concerns aside and simply say, “Well, but I get to make the decisions I make and you can look for other work.” But is it also case like do these people actually, the people who are hurt, are they actually benefiting, are they misreading it, the reason that there aren’t manufacturing jobs in Ohio something other than the fact that the rest of us want cheaper undershirts? How do we deal with this communitarian concern?

10:56 Dan Ikenson: Well, you prefaced that by saying people on the right and the left have articulated this concern, Obama said it. He said, “Who cares about having a cheaper T-shirt if your neighbor’s out of work.” Trump in a more inarticulate fashion said something similar to that. And I think what’s being overlooked is it’s not just the lower prices, this is part of a process. This is creative destruction. Maybe we need a better word than that. It’s too much of an affront to say, “Hey, submit to creative destruction here.” But when I can get a T-shirt for $5 instead of $10, that means I have $5 more to spend somewhere else in the economy. It might not be in the town where the apparel plant shut down, but it may be out in California, I may be buying a tech product or something. But it’s underpinning value added creation in other parts of the country, and job creation as well. That seems to be overlooked. The only real argument that provides oomph is that if that competition is coming through channels, that we have agreed internationally to be cheating and outside of the rules.

12:06 Dan Ikenson: So if it’s regular trade, if the Mexicans are better at assembling certain products and the Chinese are better at producing certain products than we are, we should allow it to come in and John McCain, of all people, had the best response I have ever heard to a question similar to yours, Aaron. He was at a paper mill in New Hampshire, I think in 2000, when he was running for president, and some guy got up and said, and the mill was closing, and this guy that worked there got up and said, “My grandfather worked here and provided for his family, a good middle class living. My father did the same thing, provided for me and my brothers and sisters. I’ve provided for my family and now it’s closing, what should I tell my son?” McCain said, “Frankly, I’d have higher aspirations for my son.” He didn’t win the nomination or didn’t win the election. [laughter]

12:54 Trevor Burrus: Tell him to be a lawyer. Tell him to do something else.

12:56 Dan Ikenson: Yeah. So there are a variety of reasons for why the labor market continues to have frictions. There are regulations in place, different tax policies, different infrastructure policies, and there are reasons that some states are better than others at attracting investment. Well, they have maybe a more investment-friendly or business-friendly environment. We have 50 states, we have these laboratories to experiment with policy. Let’s look at what’s working. In the tax code, there are incentives for businesses to retrain welders, for example, on a new welding machine. Well, if you’re gonna spend that, if you’re gonna incur that cost of training, you can write it off. Well, what about a welder who wants to become an information technologist or something? Wants to move up? There’s no such provision in the tax code, and I’m not saying that we should use the tax code in that way. But I’m saying there are variety of other ways to reduce the adverse impact or the perceived adverse impact of trade on jobs. Technology creates much more destruction in the short run than trade does.

14:08 Trevor Burrus: In the discussion of trade we always have to talk about trade surplus and trade deficits and the balance of trade, and a lot of people are not really sure what that means. It seems with the use of the word deficit, it means that you’re losing and just inherent in the concept. Massive trade deficit sounds really bad, but then you hear sometimes, libertarian friends of mine of mine on Facebook make this comment that, “I have a massive trade deficit with Amazon.com. Like I buy way more stuff from them than they buy from me.” So two questions there, what is the deficit surplus analysis and is that analogy to Amazon a good one? Is it as simple as being like trade deficits don’t really matter as long as you’re getting something of value in return?

14:56 Dan Ikenson: I think it’s a good analogy for the following reason, because as individuals we seek to optimize. We want to get as much bang for our dollar as we can. We go to the grocery store, the hardware store, Best Buy, we want to fill our basket up with as much value for that dollar. We want to have a trade deficit with that provider. When we add it up at the national level, the intuition gets lost. It’s all of a sudden, “Wait a second, nationally we need to export more than we import.” But it’s the same thing nationally. The benefits of trade come on the import side. It’s the things that we get to consume without having to produce that are the benefits of trade. To get those things, we have to give up things that we’re producing, we don’t get to consume. Economists did us all a disservice by talking about trade deficits and trade surpluses. When the current account, which is basically the trade account plus returns on investment that cross borders, when the current account is in deficit, which, and the US has had a current account deficit since 1975, every year, we have a capital account surplus by the same amount.

16:10 Dan Ikenson: So basically what that tells us is what Americans purchase from foreigners in goods, services and assets equals exactly what foreigners purchase from Americans in their goods, services and assets. So if we have a trade deficit or a current account deficit, we are buying more goods and services from foreigners, than we’re selling to them. But foreigners are buying more US assets than Americans are selling them. Those assets that they purchase, whether they’re equities in the stock market, whether they’re corporate debt, government debt, factories, foreign direct investment, underpin economic activity in the US. Believe it or not, even buying T bills to shore up profligate government spending does create some values, an inefficient channel, but it does. People who are deficit hawks who are concerned about a growing deficit view a deficit as leakage in the economy. “Oh, you’re buying something from abroad that could have been produced here.” Well, the fact is, those dollars come back.

17:14 Dan Ikenson: They may come back in greenfield investment or a purchase of a US company, which creates value and creates jobs. Oftentimes, and I’ve been trying to make this case, and I will continue to try to make this case, that a trade deficit is actually good for the United States, because what we win, what we gain, is new blood, new companies coming in that understand, that have best business practices, that have succeeded in their home markets, and they’re replacing companies in the US that are old, tired industries that we shouldn’t be having here anymore. One other thing about the deficit, people like to point out that we owe, we’re putting our children into debt with this trade deficit. There’s no debt, the only thing that’s a debt about our trade deficit is funding for the US Government, purchase of US debt, and corporate debt. Corporate debt, Americans writ large don’t have to pay back, that’s the companies and the shareholders. Government debt we do have to pay back. And is that a trade problem? No, that’s a government spending problem. That’s the way I feel about the deficit.

18:17 Trevor Burrus: If we talk about unfair trade, which you seem to have at least endorsed the concept in some way, that someone could be breaking the rules. And you mentioned subsidized industries and, of course, China is still a state-run economy and so it subsidizes a bunch of industries. But if that’s an indication of unfairness, it seems like almost every country on the planet is playing with a stacked deck. Just the US farm agricultural business is subsidized massively. We give tax breaks to solar cell producers and green energy and all these things. The US economy and US businesses, it does not look like an equal, a free market would produce it. There are businesses that only exist due to government subsidies or are huge because of that. So does that make us unfair trade practices, if we’re trading solar cells with a different country, for example?

19:15 Dan Ikenson: Certainly, and the United States has been brought before the WTO more than any other country. There’s the reason for that, we have the largest economy in the world. But the US has been a defendant and a complainant more than any other country. Yes, sometimes we do violate our obligations. The obligations are fairly clearly spelled out, so some industries can continue to subsidize, as long as it’s not affecting trade in some way, then you can get away with it. But yeah, I think that we should have rules against impositions that prevent the market from working in the way they’re supposed to. And where do you start, of course, because that happened in the Garden of Eden. But there are rules that prevent export subsidies and particular types of subsidies that act as trade barriers to imports. And if you’re engaging in those kinds of things, and you expect to have your domestic constituencies supportive of the quest for continued trade liberalization, you should enforce them. There are lots of trade infractions that go un-prosecuted and the US trade representative says, “Ah, it’s not worth it.” And foreign governments don’t pursue these because there’s a trade-off.

20:33 Dan Ikenson: But I think the rules-based system of trade is important. And one of the big threats that Trump presents, is that he doesn’t seem to think that they should apply to the United States the way they do everybody else. And if the US is gonna break the rules, certainly others will start to do the same, and trade will descend into the wild, wild west, and it’ll be very difficult to make investment and commercial decisions going forward.

20:58 Aaron Powell: We’ve mentioned the WTO a few times and so outside of something that hippies and anarchists in Seattle protest…

21:05 Trevor Burrus: You’re dating… That’s a long time ago now.

21:09 Dan Ikenson: That’s 20 years ago.

21:09 Trevor Burrus: That’s like 1999, yeah.

21:10 Aaron Powell: They’re protesting it elsewhere, I guess.

21:12 Trevor Burrus: Probably, yeah.

21:15 Aaron Powell: What is the WTO, and what does it do?

21:16 Dan Ikenson: The WTO is the World Trade Organization. It was created in 1995. It was the product of the last successful round of multilateral trade liberalization. After World War II, we had the General Agreement on Tariffs and Trade in 1947. There were 23 original contracting members, and they got together and said, “Maybe if we reduce trade barriers, we’ll be able to get along better. Maybe it’ll be good for economic growth. And maybe we should have some rules.”

21:45 Trevor Burrus: International security too.

21:47 Dan Ikenson: All of those things, and we had eight successful rounds of trade liberalization after 1947 through 1994, the end of the Uruguay round, where more countries joined in, and more products were liberalized, services were liberalized. But since 1994, we’ve hit a road block with respect to that channel. It’s very hard to achieve consensus now with 165 members in the body. But the WTO is often characterized as this faceless bureaucracy that renders decisions that usurp government, US national sovereignty.

22:25 Trevor Burrus: That’s run by the Illuminati and the New World Order, I’ve heard.

[chuckle]

22:29 Dan Ikenson: Exactly, it’s not like that at all. It’s the embodiment of the rule of law. It’s the rules that have come through, and its adjudicative function works as follows. If the United States feels that China or Europe is violating a provision and wants to do something about it, it files a formal complaint. Then there’s a six-month time period or so for them to try to work out their differences through consultation. If they don’t, then a panel is convened to render judgment on the dispute. And that can be appealed to the appellate body, which is like the Supreme Court of the WTO.

23:06 Dan Ikenson: But what’s important to note is that when judgment is rendered from the panels or the appellate body, in the last paragraphs it’ll say something like, “We find the United States in violation of Article 2.42 of the Anti-Dumping Agreement, and we recommend they bring their law into conformity with their obligations in the agreement.” They’re not compelling us to do anything. And in fact, we don’t have to do anything. And if we don’t do anything, the complainant can then apply for retaliation and say, “We want to suspend the concessions that we have granted to the United States because they’re not complying with the rules.” And if the WTO authorizes them to do that, all that does is shifts the debate back to the United States. If there’s a steel tariff, for example, and the Europeans say, “We’re gonna retaliate against Florida citrus and cheese from Wisconsin and textiles from North Carolina.” What that does is it says, “Okay, you figure it out, the United States. Those interests in Wisconsin and Florida and North Carolina that didn’t have a dog in this fight, all of a sudden do, so you figure it out.” They’re all of a sudden animated to deal with the steel industry thing.

24:16 Dan Ikenson: To me it’s an ingenious way of preserving national sovereignty in these cases. And so I think the system has worked very well. The current administration, certainly the current US trade representative Robert Lighthizer has been a foe of the appellate body and the WTO’s dispute settlement system since the outset, and the US is gunning for it and wants to have certain carve outs, wants to have, the administration wants the United States to be treated exceptionally at the WTO.

24:44 Trevor Burrus: That’s the… It seems like you’ve alluded to the bigger fear. The fear here is undermining the WTO… If the US decides to ignore… How often would we ignore a WTO recommendation? Do we do that? Or have we generally historically obeyed it in its own way?

25:01 Dan Ikenson: The United States more than any other country has been out of conformity, has blown off… [chuckle] Blown off these decisions, but not that often, five or six times. And one of the reasons, so we already have an advantage in the sense that, if you think of it as Team America, we have an advantage in the sense that we are the world’s largest economy and we can endure retaliation, much more so than a smaller country can.

25:32 Trevor Burrus: And you also wrote in… You said that the US is much less dependent on trade than almost every other country, trade accounts for 27% of US GDP, as compared to a world average of 53%.

25:42 Dan Ikenson: Yeah, so I think that is also animating Trump’s quest. He recognizes that we can endure a trade war if one were to ensue. The analogy I’ve been using as like limited nuclear war. He’s saying, “Well, we can beat the Chinese in a trade war.” They may lose 3 million Chinese. We’ll only lose 800,000 Americans. Well, isn’t the object to avoid loss of life across the board? We will certainly be hurt by a trade war with China, but we are less exposed than most countries.

26:19 Aaron Powell: How do you come up with a figure like 27% of GDP is from trade? You can measure the value of imports and exports and look at that as a percentage, but then, given how just utterly integrated into everything in the economy, stuff that’s moving across borders is, how do you measure something like 27%?

26:39 Dan Ikenson: Well, you just got at that. That 27% is actually imports plus exports divided by GDP. But it’s very difficult to disentangle. Half of the value of US imports are intermediate goods, the purchases of US manufacturers, primarily, to produce their products. Back in the 1930s, that was not the case at all. A product made in the United States, most of the components in that product were US made as well. When a trade war broke out, there wasn’t a lot of lobbying in Washington to say, “Stop, we need access to imports.” Nowadays, the factory floor has broken through its walls and spans borders and oceans. There’s this massive interdependence between countries. Two thirds of global trade flows are intermediate goods, and the best example is the Apple iPhone, of course. The components are made in something like 16 different countries. Only $6 of the $150 or $170 it costs to produce this is Chinese. Yet the entire $170 cost registers as an import from China. When people talk about this $350 billion trade deficit that we have with China, well, we’re not accounting properly for these things. If we impose trade barriers on China on iPhones, for example, we’re imposing trade barriers on the Japanese, the Singaporeans, the Koreans and on us, so we need to avoid that.

28:19 Trevor Burrus: When people talk about winning a trade war, I think Trump’s quote was, “When a country is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good and easy to win.” Now, I don’t want… I’m not sure if it’s fair to ask you to suss out Trump’s psyche and maybe what he thinks winning is in this, I think the most generous interpretation for people who maybe agree with him who know more about trade is that we push back, use our market power and then China changes the things that you said, there are things that China does that are not good. And so if they do that at the end of putting a bunch of tariffs on them, then that would be winning, and that would be maybe easy if we’re not as exposed.

29:03 Dan Ikenson: I think that is what Trump is trying to do. He’s trying to compel China and other governments to sort of bend to our will and to do things that we’ve asked them to do, but the fundamental disconnect here is that Trump sees the trade account as the scoreboard, so when he says, “We’re losing billions of dollars,” he’s looking at the trade deficit. Well, wait a second. We’re not… First of all, looking at a bilateral trade account in a globalized economy is silly. Let’s look at the overall trade deficit. And as I was saying earlier, we’re not losing these dollars, they come back to the United States. He sees it as a zero sum game, whereas previous presidents, previous administrations, assumed properly, I think, that trade is a win-win, in that you create value from these exchanges. Trump thinks that we’re in a Hobbesian jungle here, and since we have the biggest weapons, we should be wielding them to compel others to get down on their knees before us, and it’s not a good idea.

30:07 Trevor Burrus: Is it not a good assumption that… Or just the idea that if we do get China to change some of its practices, like stealing American technology and things like this, that it could be worth it, if that, in fact, happens? But is something like that likely to happen from trade wars in the past? Two of those things, do they tend to have the lower position person go, “Oh, yes, we will change our things for you.” But if it does happen, that would be a good thing, I think.

30:41 Dan Ikenson: I came around to viewing Trump’s approach as not entirely uninformed, because there is an objective here, and previous administrations have not succeeded at getting China to change practices that were previously identified as unfair. We’ve had a strategic economic dialogue under the George W Bush administration, we had a strategic and economic dialogue under the Obama administration. And this administration, we’re tired of talking, and we’re gonna start to… We’re gonna let the Chinese know what we intend to do unless they act right away. And I think the Chinese, the Koreans, the Japanese, the Europeans to a lesser extent, are seeing in Trump, “Okay, there’s a new sheriff in town, and he’s not particularly predictable.” And I think there’s a view within the White House that predictability puts us at a disadvantage. And so let’s act like we will follow through and do these things and get them to change their behavior. I think in the short run, there could be some gains. But in the long run, if we’re actually threatening to violate the rules to get what we want, or we do violate the rules to get what we want, then there’s gonna be some huge costs to Americans as well.

32:07 Dan Ikenson: It seems to me that a potential long term concern in this is that… This gets framed as the Chinese beating us on trade, and that’s what’s causing… All these people like, “I’m out of work because China is beating us on trade.” And so we use the rhetoric of trade war and this unpredictability to maybe get these concessions from China on these rule-breaking things. But what that’s done is put the… Kind of using trade war as a viable tool into acceptability. But fixing, getting China to stop those things is not going to bring back manufacturing jobs in Ohio, because those jobs aren’t gone because of trade. And so, does it then just say, “But we want a little bit, but the problem was, we just didn’t do it hard enough.” And now, the political will gets mobilized behind, “We need real trade war and extensive tariffs on everything and to subsidize industries.” And if that happens, if we go down that route, we do what it takes to protect, to bring back those manufacturing jobs, do we have a sense of what it would cost the American economy on a per job saved basis?

33:27 Trevor Burrus: You mean, so we just start making T-shirts again and…

33:30 Aaron Powell: Yes, like…

33:31 Trevor Burrus: Doing more of stuff that doesn’t exist anymore.

33:33 Aaron Powell: Right, these people who are demanding that the rest of us stop buying cheap stuff in order for them to have comfortable middle class jobs in factories. How much money are those people demanding from the rest of us, in effect?

33:45 Dan Ikenson: First of all, the manufacturing job loss story has been pretty blown out of proportion. Manufacturing jobs peaked in 1979 with 19.4 million jobs at the time, and they’ve been on a downward trajectory ever since. Some economic studies say, yes, China’s rise accelerated the trend. Maybe it did a little bit, but one point that you made, Aaron, that I’ve thought about and that concerns me, is the reaction to Trump’s tariffs so far and tariff announcements so far on washers, and solar cells, steel and aluminum, and now these Chinese tech products, has from free traders and well-meaning people who wanna point out that there are gonna be big costs, is that we’re screaming about this. And ultimately, if Trump backs away from the magnitude of the tariffs that have been discussed, and it’s a much smaller thing, the adverse impacts will be a lot smaller than we have been predicting.

34:47 Dan Ikenson: And I think it does lend some support to the view that, “Hey, it’s not always like the 1930s. Yeah, we had a little trade spat back in 2018, and we imposed tariffs, and the US economy continued to grow, and the job scene was pretty good. Next time, we’re gonna really hit hard, ‘cause this seems to work.” I am concerned about that, but at the same time, when Trump was elected, I think I sent an email to David Bowes, and I said that Trump will be the best spokesman for free trade since Adam Smith, because he… Look who he surrounds himself with, guys who are trying to make a case for protectionism, like Peter Navarro and Wilbur Ross. They make a mockery of it, and most Americans know now about tariffs. Everybody’s a trade expert in the United States now [chuckle], and everybody’s been talking about it. And what’s funny, he’s turning protectionists into free trade. Joseph Stiglitz, “Oh, let’s get back into the TPP.” and, “Free trade is great.” Come on, this guy is…

35:50 Aaron Powell: I don’t know. I thought Wilbur Ross’s soup can thing was pretty compelling stuff.

[laughter]

35:56 Dan Ikenson: Yeah, he held up the soup can to show the per soup can cost of the aluminum tariffs which is what, like one cent, but if it’s a dollar to make the can, multiply it by the millions of tonnes of aluminum that were gonna be restricted.

36:11 Trevor Burrus: But Aaron’s point, I think, about the question of, if you did put enough tariffs on your country to bring those jobs back, it would cost billions, if not trillions, of dollars, of just pure subsidies paid by taxpayers buying their goods, right?

36:29 Dan Ikenson: Just like if the three of us decided, “I’m not gonna work at Cato anymore, I’m just gonna stay at home. I’m gonna build my home, make my own clothing, hunt my own food, grow my own food. And that’s how I’ll live, because that’s more attractive than specializing in what I do at Cato, getting my salary as my monetized output and trading that for other goods and services. [laughter] We put up protectionist walls, there’s gonna be…

36:56 Trevor Burrus: Around ourselves.

36:56 Dan Ikenson: Yeah.

36:57 Aaron Powell: If they got me out of having to ride the metro, they’d be worth it.

[chuckle]

37:00 Trevor Burrus: That’s a good point.

37:02 Dan Ikenson: The point of trade and specialization, and the larger the number of participants in the market is as workers, as consumers, as investors, great, let’s go for specialization. And that’s how we benefit.

37:18 Trevor Burrus: Isn’t it important when it comes to aluminum and steel that we make enough to feed our military? That we don’t want our military dependent upon there being just no metal manufacturing in America whatsoever, and a war breaks out and we have to go to China, who we might be at war with, to get our steel, and I think Trump kind of invoked some of those ideas.

37:39 Dan Ikenson: Yeah, so The national security card, which is usually the national security canard, is played by every industry. Steel, the sugar industry, they say, “Hey, we make these ready-to-eat meals for our troops in Afghanistan or Iraq, and you know that they’re full of sugar, and we need to be here for them.” We are not over-reliant on the world for our steel needs. The US military has weighed in on this question of steel reliance and says that there’s just no need for any restrictions. We don’t need to cultivate and develop sources here for the past several decades. 80% of US demand was met by the US production and the other 20% or so came from imports. On aluminum it’s a similar situation. The Trump administration in this case drew a distinction between primary aluminum and recycled aluminum, and was saying that certain kinds of aluminum have applications that can’t be met by other forms of aluminum. As long as we don’t go around alienating the entire world, there will be plenty of friendly nations to supplement our own domestic production if we go to war with China or anybody else.

39:01 Trevor Burrus: What if we’re at war with the whole world, though? That’s a problem. That would be a different problem than this.

39:04 Aaron Powell: We’re doing a pretty good job of alienating everyone now.

39:09 Dan Ikenson: Well, that’s just it. We hit our allies with steel and aluminum tariffs. We pulled out of the Trans-Pacific Partnership, which was a way to sort of fortify our relationships.

39:20 Trevor Burrus: Of which China was not a member, right?

39:21 Dan Ikenson: Of which China was not a member. And China, I think, would have had no choice but to join the TPP, or the Free Trader area of the Asia Pacific, whatever it would have been called, in five years or so. But we do all that, and then we pick a fight with China. It’s like we don’t want any allies to be supportive of our efforts. But anyway, I’m skeptical of the national security argument. I think one does exist, and I think national security is the most important… Protecting national security is the most important of the few obligations that a government has, But we need to be very careful about how we define it. The law that President Trump invoked in order to assess these tariffs gives broad latitude to the President to define a national security threat and to come up with a remedy to mitigate it. And that just provides plenty of scope for mischief, but it’s a slippery slope. If we start saying, “Hey, there’s a national security case here,” then the milk farmers will be in Capitol Hill saying, “We need milk.”

[chuckle]

40:24 Trevor Burrus: Now, it’s not just China, and every time I say that word I think about Trump, especially in this context saying… Hearing Trump say, “China.” But he also doesn’t like NAFTA, seemingly, the North American Free Trade Agreement.

40:36 Aaron Powell: We’re gonna renegotiate it.

40:37 Trevor Burrus: Yeah. Which… There’s a bunch of legal issues with this. But that, is he complaining… In that regard, is he complaining about something that Mexico is doing that is kind of like China, or is he just now complaining about, “They took our jobs,” kind of situation? ‘Cause I don’t have a problem with Canada. They’re pretty cool. I don’t know why we would want to not trade with Canada, but apparently Trump has some problems.

41:02 Dan Ikenson: Trump called NAFTA, “The worst deal ever negotiated.” He called the Trans-Pacific Partnership, “The rape of our country.” The Trans-Pacific Partnership was a renegotiation of NAFTA to make it better, to update it, to update the rules. But Trump’s fixation on NAFTA, I think, speaks to the fact that he was weaned on NAFTA negativism from the…

41:25 Trevor Burrus: Like Ross Perot-style.

41:27 Dan Ikenson: Ross Perot-style, yeah. ‘Cause that’s when Trump started developing his protectionist portfolio. And so he came into office, look, to be fair, Hillary Clinton and Barack Obama in the Democratic primary in 2008 were both tripping over one another to say who was gonna reopen the NAFTA first to stick it to the Mexicans and the Canadians. And they never did anything about it. He came in and said, “You know what? There’s a problem here.” But the problems he identified were primarily problems that labor unions speak about. The wage disparities are so great that it causes all this outsourcing. A lot of what he was concerned about, I think, are imaginary problems. But I do think that there is going to be a successfully renegotiated NAFTA.

42:13 Dan Ikenson: Some of the ideas put forward by the administration are silly poison pills to make the rules of origin more onerous, meaning that requiring more US content for autos, more North American content to qualify for the duty free access, having an expiration clause, so that unless the three parties get together and say, let’s continue, it would automatically dissolve after five years. That just impedes, deters investment. Anyway, I think there will be enough changes in here, many of which we’ll be happy with because it updates the agreement, but enough changes in here that are sort of cosmetic, where Trump can say, “See, I finally did something about this and reopened it,” but a lot of bad blood is created in the process, I think.

43:06 Trevor Burrus: In the process of discussing trade wars and trade in general, we haven’t really touched on it, we’re out of time right now, but… But the way the world should look in terms of trade and tariffs and things like that. If Dan Ikenson is made Trade Tsar with unlimited…

43:25 Dan Ikenson: Global Trade Tsar?

43:28 Trevor Burrus: Just US Trade Tsar, with unlimited power, tomorrow, would we have tariffs at all? Should we have tariffs against countries that have tariffs against us or does it make sense to unilaterally disarm, or what would you do as Tsar Ikenson over trade? How should we be thinking about it in order to enrich the world and ourselves in other countries, maybe, too?

43:51 Dan Ikenson: Yeah, well, to specialize, if specialization is the purpose of trade, we need to get rid of border barriers. So let’s get rid of all tariffs, tariffs are just taxes. They have no, make no economic sense. They have political rationales behind them, get rid of all the tariffs, but the problem remains. In the 21st century we’re dealing with not just trade in manufactured goods across borders, we have foreign companies setting up shop in the United States, US companies abroad. There has to be some commonality to the regulatory environment in which they operate. There has to be some… We can’t allow regulation of services, regulation of investment to be trade barriers. As the obvious border barriers come down, there’s going to be a greater focus on these regulations, but that’s harder to do something about…

44:51 Dan Ikenson: We don’t want to necessarily have the exact same set of regulations. We wanna have some competition who’s got a more market-oriented regulatory environment, if that’s even a word that can… But anyway, something called mutual recognition is, I think, the most liberal way to move forward on with respect to services, trade and regulations. And that says, if we will agree to admit… Our regulations are good for your producers and our producers and your regulations are good for your producers and our producers. Producers can decide which regulations they wanna comply with, so that’s a way to liberalize it. Yeah, we should do that and we should get it in writing. The United States could lead the way and say, “We’re committed to doing this, others should follow suit,” so that we can prevent backsliding when the next Donald Trump comes around.

[music]

45:52 Trevor Burrus: Thanks for listening. Free Thoughts is produced by Tess Terrible. If you enjoy Free Thoughts, please rate and review us on iTunes. To learn more, visit us on the web at www.libertarianism.org.