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This is an audio transcript of The Economics Show podcast episode: ‘Tariffs past, present and future. With Doug Irwin’

Alan Beattie
Tariff man might sound like the world’s weirdest superhero, but tariffs or taxes on imported goods are really what put the wind beneath Donald Trump’s cape. His first term saw the biggest increases in tariffs at the very least since the 1970s. There’s a real possibility the next four years could take us back to the high tariffs of the Depression era. Today on the show, we’re going to ask what Trump really wants with all this and if tariffs ever make any sense at all.

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I’m Alan Beattie, the FT’s senior trade writer, and this is The Economics Show from the Financial Times. To discuss how we got here and where we’re going, we welcome Doug Irwin, economics professor at Dartmouth College. Now, it’s not often you can say somebody is definitively the last word on something in economics. But Doug is the undisputed heavyweight champion of the world on tariffs and specifically on the US history of tax. Doug, hello. 

Doug Irwin
Great to be here. Nice to talk with you. 

Alan Beattie
Do you have the same feeling I do? That like, we’ve been telling people for years, trade isn’t really about tariffs any more. It’s all about regulations and it’s all about services and so forth. And surprisingly, here it comes again. 

Doug Irwin
Absolutely. I think the ’90s and the 2000s, the 2010s, those of us who worked on tariffs, in particular tariff history, it was considered obsolete. We’d moved on from that. This is a 19th-century trade instrument. And yet you’re right, tariffs are back and we owe it to tariff man Donald Trump himself for bringing them back. 

Alan Beattie
So now you’re a rock star. I mean, you’re always a rock star of academia. Now you’re really a rock star of academia.

Doug Irwin
Well, there was a period when no one really cared about history. It seemed like an antiquarian interest of, you know, just sort of a scholarly footnote on sort of where we were in terms of trade policy. But now there’s a great deal of interest in history and people want to know how we got here and where we might be going. 

Alan Beattie
So, we always start off on The Economic Show with a simple question which we ask you to answer on a scale of one to 10. You’ve always talked about US tariff policy going in big historical phases, and roughly speaking, we’re still just about in a post-second world war phase where trade is multilateral, it replaced the high tariffs of the interwar period, we’ve got the World Trade Organization and so forth. Now, what are the chances, on a scale of one to 10, that we’re now at an inflection point, that we’re now at the beginning of a definite shift to a new high tariff era?

Doug Irwin
Well, I would put it around a six. And that might be, seem a little surprising, maybe a little bit low. So it’s not saying that we’re, we definitely know we’re in a new high tariff era. And I’ll sort of explain this through history. There have been periods in the past when there’s an apparent turn to a new direction in the trading system. But it turned out that was a blip. So let me just give you a couple of examples before turning to Trump. The Republican party, which was highly protectionist, dominated American politics at the time, from about the civil war up to the Great Depression. They were, usually held control of Congress and the presidency, but there’s one period when the Republicans split and they allowed Woodrow Wilson, a Democrat into office as president and he cut tariffs quite dramatically. And you might’ve thought during the Wilson administration, well, we’re really in a new era, tariffs have been cut. They seem to persist for more than five years or so but in historical retrospect, that was an exception. And that was just a blip in this long 70-year period of pretty high tariffs. Another time when there might have been sort of this fake in terms of direction was the first Reagan administration, the early 1980s, people wondered if Reagan was a protectionist. He protected the automobile industry, the steel industry, the textile and apparel industry. 

And this is in the early 1980s when the US was in a recession. And there were a lot of people at the time who said we’ve really turned in a different direction, protectionism is on the ascendancy, the world trading system is a shambles and yet that was just sort of a temporary phase. The second Reagan administration really moved towards open markets, signed the US-Canada free trade agreement, moved towards starting the Uruguay round of trade negotiations, which led to the WTO. And so that protectionist blip in the early 1980s was not sort of a big structural change in the direction of trade policy, but just a temporary aberration.

So with Trump, if I had fallen asleep when Trump was inaugurated and didn’t wake up until his term was over, and I said, what happened to trade policy? You know, he promised all these dramatic changes. And you would tell me, well, he protected the steel industry. I’d say, well, that’s sort of normal. You know, George W Bush protected the steel industry. Ronald Reagan protected the steel industry. Richard Nixon protected the steel industry. Oh, he renegotiated Nafta. Well, OK. But we kept the basic framework. We just expanded it with some provisions from TPP and tightened the rules of origin in autos, but nothing really changed there.

The big change was China. And while we could see that coming, but that really doesn’t necessarily harbinger . . . that’s a break between the US and China, but doesn’t necessarily put us on this path of higher tariffs across the board on everyone.

So we’ve had these periods in the past where it seems like we’re at an inflection point in trade policy and yet, in retrospect, they turned out not to be.

Alan Beattie
Trump seems aware of the history here, right? He talks about tariffs are what made America rich. And even some more balanced people, people who’ve seen the Hamilton musical in particular, go right back to Alexander Hamilton, first secretary of the Treasury and say, look, there’s a man who, like Trump, introduced tariffs. There’s a man who, like Trump, talked about promoting manufacturing and we all venerate him. I mean, do they have a point?

Doug Irwin
Well. First of all, I’ll never forgive Lin-Manuel Miranda, the star and producer and author of the Hamilton musical for not including a song on the report on manufacturers. So that is Hamilton’s great report, where he does say we need tariffs to help protect American manufacturing for national defence reasons and for economic reasons. And you’re absolutely right, Trump refers back to earlier American leaders that endorsed tariffs and Hamilton was one of them. But I guess I’d add a couple of caveats. One, Hamilton was not nearly as protectionist as he is sometimes portrayed. He did want tariffs and we needed them for revenue purposes at the time. Remember, he was Treasury secretary, so he was worried about balancing the books. The US had a big fiscal deficit, and we needed money to pay war debts from the Revolutionary war. We need to pay for national defence and we need to fund the new government. So he didn’t want to contract imports. He didn’t want to shrink imports. That was the tax base on which he wanted to fund the national debt and the federal government. And second of all, when you read the report on manufacturers carefully, he’s very circumspect in terms of which sectors would need to get protection, should get protection and it wasn’t all-encompassing, autarky program, across the board tariffs. He’s very selective, in the number of industries they want to help out.

Alan Beattie
Now, when you look at this, I mean, having read your work, you say there are three Rs that determine tariff policy. They are revenue, which you just mentioned, restriction, and reciprocity. What do you mean by those?

Doug Irwin
Well, when I was writing the book, I wanted to think back: What is actually the purpose of tariffs? What are our governments trying to achieve? And it seems that you could sort of put them into three buckets. What I call the three Rs. So revenue. Tariffs are taxes. They raise revenue. That was very important early on in US history. Restriction, where actually you’re trying to restrict imports, keep them out of the domestic market to protect domestic producers from foreign competition. That also turns out to be historically an important objective of the federal government in imposing tariffs. And finally, reciprocity. That is the ability to adjust your tariff in line with other countries in terms of trade agreements or in terms of retaliation. So there’s sort of two forms of reciprocity. There’s a positive form where you say, we’re going to reduce our tariff if you reduce yours in a trade agreement. And then there’s a negative form where you raise your tariffs against a particular country to retaliate against what you perceive as unfair treatment or unfair trade practices on their part.

Alan Beattie
So, as you say, from the beginning, people were focused on revenue, right? There was no income tax. It was a new republic. It needed to raise money somehow. You control the ports. And, for how long did that carry on? How long was it the case that the main function of tariffs was raising money before people started getting into thinking about restriction and thinking about, you know, targeting help to particular industries?

Doug Irwin
Well, all three have always played a role, but you’re absolutely right. For the first 70 years or so of the US, revenue was most important. So from basically the founding of the country under the Constitution until the civil war, tariff raised about 90 per cent of the federal government’s revenue. So the tariff was really an instrument designed to raise revenue. There were some efforts to try to raise tariffs beyond that and protect certain industries, but that sort of fizzled out in this North-South division over trade policy during the antebellum period. But it’s really the civil war that changed things. To fight a war, you need a lot of revenue and imports weren’t big enough to fund all that. So that’s when we got the introduction of the excise tax, even temporarily, an income tax during the civil war. And the federal government again diversified away from revenue and using the tariff for that. 

Alan Beattie
And then you get to the period of history after the civil war that Trump really seems to venerate. Right? The golden age of growth from 1870 onwards. And that was a period of high tariffs. The McKinley Tariff of 1890 President William McKinley being, I think, the high point. Now, tariffs were high, growth was high. The US was becoming the major industrial power. You can kind of see, can’t you, why people think one might lead to the other. 

Doug Irwin
Yes, you can see that. But as you are usually taught in your first statistics class, correlation is not causation. So actually, the US industrialised quite a bit prior to the civil war as well, when tariffs were coming down and actually ended up at only 20 per cent right before the civil war. Now, certainly the case that after the civil war, tariffs on average were pretty high, but there are a lot of other things going on in the US economy that was driving industrialisation. It’s sometimes thought that we were sort of fortress America and had a closed economy. But actually, the US was very open to immigration, very open to capital flows, very open to technology transfer from the UK, then the industrial leader of the world, and growth was propelled by all of these things. Also, we had a lot of growth in services, not necessarily in manufacturing. Manufacturing was already pretty big and a lot of the growth was what we call, what economists call extensive growth, adding more resources, more labour, more capital to certain industries rather than increasing the productivity and efficiency of those industries. So it’s a little bit of a nuanced picture about whether we grew rapidly and industrialised in the late 19th century as a result of tariffs. 

Alan Beattie
I mean, tariffs didn’t hold it back, did it? That’s what the pro-tariff people would say. You know, it may have been a total coincidence, but they certainly industrialised despite tariffs.

Doug Irwin
Certainly despite the tariffs. But the question is what was the contribution of tariffs? And you can sort of cut it both ways. It seems to have been relatively small one way or the other. One way in which tariffs may have harmed and slowed US industrial development is that a lot of the tariffs were on intermediate goods, and that raised the cost of production for downstream producers. Just to give you a very quick example, the US didn’t develop a tin-plate industry for canning until the McKinley Tariff. And the reason we didn’t is because the cost of the steel inputs behind the aluminium and steel cans was so high because of protection that it didn’t allow this industry to develop. 

Alan Beattie
And one thing about tariffs, I think, is that people always think of them not being between countries, right? It’s one country against another. But of course, they’re also always about one group of people, one group of companies, part of the economy, getting protection. What was it around this time? Who were the people who were politically powerful who said we’re gonna keep these tariffs in place?

Doug Irwin
It was really the manufacturers in the northern part of the US. So Ohio, Pennsylvania, those states still are important today. But yes, they were important back in the 19th century as well. That’s where the steel industry was located. New England was a place where a lot of textiles were produced. And this, of course, was the Republican party’s base in the late 19th century. Northern, above the Mason-Dixon Line, the northern part of the United States. Who was opposed? It was really the south. The south was where we had a lot of export-oriented agricultural producers, tobacco and mainly cotton.

And you’re absolutely right that there’s always a domestic conflict over trade policy. It’s not just between countries. There was a domestic divide over trade policy. If you are a farmer, you are generally tended to be against the tariff because it raises the cost of your goods that you needed to purchase. And it also impinged on your exports indirectly and harmed your ability to sell to foreign markets. So there’s always been this domestic division over what trade policy should be. 

Alan Beattie
Now let’s leap forward in history to the bit of tariff history that almost everyone knows about. It even made it to Ferris Bueller’s Day Off, the great movie of the 1980s, which is the Smoot-Hawley Tariff of 1930, kicked off a big round of protectionism during the Great Depression. Now, as we’ve just talked about, there’s always a particular group of people who want to be protected. And it’s kind of tempting to say, well, this was always inevitable because there was this part of the economy and they were powerful. But is that always true? Was it the case that the Smoot-Hawley Tariff was always going to happen? Or did it involve, you know, some of the personal whims of the politicians involved? 

Doug Irwin
It was really the latter. And this is a surprising part of my research, is that tariffs are not always being driven by self-seeking manufacturers who want the higher tariffs. The Smoot-Hawley Tariff is an own goal, as you’d say in football. It was really an unnecessary piece of legislation. Remember, there was, the discussions of the tariff took place in 1928 and 1929. The US was at a business cycle peak. The unemployment rate was very low. Domestic manufacturers were doing extremely well. There was no reason to seek additional protection. And yet it was Republican politicians that tried to push the tariff as sort of this scheme to help out American farmers who are not doing well during the 1920s. Farm incomes were relatively low. They also want to establish what they called tariff equity. If you’re gonna protect manufacturing, we want to use the tariff code to protect farmers as well. This is a bit nonsensical because most farmers were export-oriented, they depended on foreign markets and they knew they were going to be hurt if you raise the tariff. But the idea was that we could introduce a tariff just on agricultural goods and therefore win over their votes. And yet what happened is when the legislation began to be considered by Congress, the manufacturers got involved once again, and they raised the tariffs on manufactured goods just as much as on agriculture. So it was unnecessary, really, to help out manufacturing. It aggrieved farm interests. And of course, there was tremendous blowback as we moved into the Great Depression. 

Alan Beattie
So it’s kind of amazing that this thing kicked off this whole global series of retaliations and so forth and the high tariffs. And it really was just a series of mistakes by politicians that didn’t need to happen. Now, one thing I found fascinating reading about this is the extent to which the people involved didn’t actually see this coming. They didn’t actually see the retaliation from abroad. 

Doug Irwin
Absolutely not. You know, the proponents of the tariff, Smoot and Hawley in particular, said this is gonna lead to, you know, a stronger US economy and no other country will really care. And, of course, the US entered the Great Depression, not that the Smoot-Hawley Tariff caused the Great Depression, but it certainly exacerbated it, but also led to a lot of foreign retaliation, when all the proponents have said nothing is going to happen in terms of other countries. 

Alan Beattie
OK. So let’s advance on, let’s come towards the present day. You know, it was FD Roosevelt who started to bring tariffs down. And then I think, as I said before, there’s this period that started after the war of reciprocity, in your words, when everyone bargained tariffs down one by one and eventually created, you know, a global multilateral system, created the World Trade Organization. That, too, was that inevitable? Or is that farsighted politicians seeing what the future could be? 

Doug Irwin
That’s a good question. I’m not sure exactly how to answer that, because I think there was a confluence of circumstances. Not only do we have the Great Depression, which led to a lot of foreign protectionism against the US, which got the attention of US policymakers, but we also had World War II, and that really changed the US’s position in the world. The US shed its isolationism and became really active in terms of trying to be a leader on the world stage. And so I think without World War II, there may not have been this dramatic shift in US trade policy, but the conclusion of US policymakers at the time was we can’t be isolationist, we can’t be protectionist any more. It led to this disaster. We had a second world war in a generation. We can’t have a third world war. So we need to set up institutions and set up a productive and prosperous world economy to ensure that fascism doesn’t rise again and we don’t fight another world war. So that sort of was the conditions under which the US said, OK, we’re gonna take explicit steps to move the world towards more open, lower tariff equilibrium. 

Alan Beattie
And in terms of the politics, was that easy to do at home, since all politics is local? Or did they actually get pushed back with the protectionist forces they had to overcome? 

Doug Irwin
There was some protectionism. Once again, the Republicans, which had passed Smoot-Hawley, were a little bit reluctant, but once again, World War II was a game-changer. And even Robert Taft and other American politicians who had been very protectionist and isolationist, actually, most famously, Arthur Vandenberg began to change their position and at least allowed the Roosevelt administration and the Truman administration after the war to follow through on some of its efforts to reduce tariffs around the world. Because, remember, the US had a great world market that it could sell to. So that was on the minds of policymakers and farmers in particular. And also the US didn’t face a lot of competition, at least initially, because Germany, other western European countries, Japan had been destroyed because of the war. And so there was this opportunity to rebuild the world economy and the US would be the basis for that. 

Alan Beattie
I’m bringing us up to the present day. You could say we’re still in the multilateral era, but even recently in the US, even before Trump, there was quite a lot of unhappiness about the way things were going. 

Doug Irwin
Yes. So, you know, the 1990s and the early 2000s, we had the North American Free Trade Agreement. We had the World Trade Organization being created. President George W Bush signed a lot of bilateral free trade agreements in the early 2000s. But then I think what really changed things was the global financial crisis of 2008, 2009, which was devastating for American households, led to prolonged higher unemployment and really was a shock that said, we have to step back on trade and think about rebuilding our own economy. And that, combined with the rise of China and other factors, really led to this new position of the US in trade policy. 

Alan Beattie
So we kind of got to this peak. The cold war had ended. All these countries became capitalist countries. China came into the global trading system. And in that exact moment, the time when it should have been the great triumph of multilateral trade, it actually started to crumble a bit. 

Doug Irwin
It did. So it was a relatively short period where after the cold war, when most economies were open to trade, trade seemed to be flourishing. And yet very soon after that, things began to crumble. And we’ll get into the geopolitics of that. But I think it’s really a geopolitical rather than an economic explanation for why the world trading system has its problems today. 

Alan Beattie
OK. And so even before Trump, even before we had Trump, where could you see the discontent coming in the US? 

Doug Irwin
Well, even in the mid-2000s, Senator Charles Schumer from New York was introducing legislation in Congress to impose 27.5 per cent tariffs on China for currency manipulation. So there are some concerns about China in the early 2000s. It was the Obama administration, not the Trump administration, that began to throw sand in the wheels of the World Trade Organization’s ability to adjudicate trade disputes. They had become concerned about over-reach. So even the Obama administration was concerned about some of the decisions the WTO was making regarding the adjudication of trade disputes and feeling that US interests were being neglected and the WTO decisions were not appropriate. So both there was concerns about China and there were concerns about the WTO in the mid-early 2000s. 

Alan Beattie
OK. We’re going to go to a break now. When we’re going to come back, we’re going to relate all of this history to what Donald Trump might do now. And the first question I’m going to ask Doug after the break is which historic president you think Trump most resembles? But we’ll go to a break now.

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We’re back from the break. So, Doug, relating what we’ve heard to the present day, which of the historic presidents you think at this point, given what we know, Trump most resembles? 

Doug Irwin
Well, this is something I’ve given a little bit of thought to and the president that Trump most reminds me of in terms of his trade policies is Richard Nixon. There are some similarities to the two administrations. The Nixon administration was the one that imposed a 10 per cent across-the-board surcharge on all imports. He was the one who wanted to get tough against other countries. This is a period in the early 1970s when the US is shifting from a trade surplus to a trade deficit. And that was very alarming to policymakers at the time. And it was thought that other countries had taken advantage of the US. So just to give some examples of that, the treasury secretary at the time, John Connally, made a statement that was very Trumpian. He said, it’s my philosophy that foreigners are out to screw us. It’s our job to screw them first. That’s very Trumpian in rhetoric. And there was this concern that other countries weren’t paying their defence bills and were taking advantage of the US in terms of trade.

One manifestation of this was that the US wanted to return Okinawa to Japan, and Japan very much wanted it back. The US had occupied it after World War II, but the Nixon administration held that up to get concessions from Japan to limit its exports of textiles to the US. So there’s a very Trumpian tying of a foreign policy issue, a defence issue to a trade issue.

And then, of course, there’s also Nixon’s rhetorical excess at times and overstatements. He described what turned out to be a very minor international military agreement in 1971, something known as the Smithsonian Agreement, as, quote, the most significant monetary agreement in the history of the world. And, of course, President Trump also has, you know, is prone to rhetorical excess about the benefits or the costs of various policies. 

Alan Beattie
So Trump as Nixon is an interesting one. I think maybe people made that comparison in another way, but not necessarily in trade. 

Doug Irwin
Right. 

Alan Beattie
And it strikes me that if you look at Trump and the people around him, it’s really hard to tell what he even wants because he and they talk in very different terms and they talk in all of your three Rs. Right? Sometimes he and others talk about revenue. They’re going to place the, replace the federal income tax purely with higher revenue. Sometimes they talk about restriction, again, going to protect manufacturing, particularly from China. And sometimes they talk about reciprocity that they’re going to bring down, you know, trading partners’ tariffs. You can’t do all of these at once. So which do you think he is actually most keen on? Which do you think he will end up doing?

Doug Irwin
That’s a great point and it’s absolutely true. All three Rs are at play in the Trump administration. Revenue, restriction and reciprocity. And you’re absolutely right as well that there are always trade-offs between them. If you want to use tariffs to raise revenue, then you can’t really use them to restrict imports to any great extent because then you don’t have the revenue because imports have shrunk too much and then you can’t bargain them away in reciprocity agreements. But I think despite sort of all three Rs being in play, the one that’s most important to him is restriction.

And so I ask the question, has he ever brought tariffs down? Has he ever been willing to reduce the US tariff by getting a good deal from other countries? I don’t think so. And so I think that sometimes he will say he ultimately wants free trade and wants a level playing field and wants trade agreements. Ultimately, he really doesn’t. He cares about American manufacturing and the jobs behind it. And that’s, I think, what is most important to him. 

Alan Beattie
And also with Trump, it strikes me that there’s an extra dimension. Maybe it’s part of the restriction dimension, which is he’s not just angry about trade deficits with China. He’s angry about the overall trade deficit, right? And sometimes he really seems to think you can use the trade tool — tariffs — to reduce the overall deficit, to reduce the overall trade and current account deficit. What will happen if he tries doing that? 

Doug Irwin
Well, what will happen is he won’t make much progress in reducing the trade deficit because you can’t really affect the trade balance by imposing tariffs. Trade balances are determined by macroeconomic phenomena such as relative rates of economic growth, the flow of capital between countries, exchange rate policy. And I think what we saw in the first term was you can impose higher tariffs, but other countries do retaliate. So if you think imports are going to go down and exports will continue on their merry way, well, your exports are going to get whacked as well. And so it’s not clear the difference between the two will be any different at the end of the day. And what you’ll end up doing is just shrinking trade without changing the net trade flows across countries. 

Alan Beattie
So let’s say Trump goes ahead, he tries to put up tariffs for a variety of reasons but let’s say on China. What’s going to stop him? What within the US system is going to stand in his way? Will Congress stop him? Will the business lobbies try and stop him? Will even the labour unions manage to stop him? What’s between Trump and his tariff nirvana? 

Doug Irwin
Well, one question is what legal authority does the president have to raise tariffs? And it turns out there’s a lot of legal authority out there. Congress has delegated a lot of powers to the president. And so the president is relatively unchecked in terms of trade policy actions. That said, I think the only thing that will really be a brake on him is not sort of convincing him about the benefits of free trade. He’s very stubborn and he’s had his views for a very long time. And there are some wonderful anecdotes about advisers in the first term trying to convince him that tariffs would be a bad idea and him ultimately dismissing that advice. But I think what will be a break is public opinion, business opinion, the stock market reaction, the impact on farm states and the agricultural sector, the possible impact on consumer prices. In other words, if there’s enough negative feedback from various sectors of the economy or different market reactions, that might give him a second chance or a pause, put a pause on his policy actions on tariffs.

Alan Beattie
Did this happen during the first term at all? Is there any time you can point out where he said he was going to do something, you know, really quite radical and then he drew back?

Doug Irwin
Absolutely. So the best example is the North American Free Trade Agreement, which was between the US, Canada and Mexico. He had campaigned vigorously against that agreement and he wanted to withdraw from it. And he almost did it. He was planning on giving a talk in, I believe, Scranton, Ohio. And a few days before that people got wind of this and his agriculture secretary went to the Oval Office, showed him a map of which states exported a lot to Canada and Mexico. They are largely farm states in the midwest and supposedly the agricultural secretary said, look, Mr President, these are your constituents. They will be harmed if you pull out of Nafta. And apparently, that convinced him, along with lobbying from Canadian government, lobbying from other farm groups, that he should renegotiate that agreement rather than just pull out of it precipitously. 

Alan Beattie
OK. So that’s the domestic resistance. What about international resistance? I mean, they can’t surely believe by this point. They can’t surely have the Smoot-Hawley delusion, can they? That nothing will happen internationally. That China won’t react, that the EU won’t react.

Doug Irwin
That’s right. And I think they’ll be aware of that. And the question is, how much of a part will that play in their deliberations about whether to impose the tariff or not? And that’s very hard to see. What’s very interesting is how strategic the EU and China have been in the past in terms of hitting US pressure points when they set their retaliatory tariffs. They really set it on individual products from individual districts in the US, where the pressure point of those politicians representing those districts can be maximally effective in the administration. But once again, President Trump has very firm convictions about tariffs. And even if there’s collateral damage, it’s not clear that he will change course. 

Alan Beattie
And do you have a sense about how much of an appetite for tariff war other countries have? Because, you know, the US is the biggest economy in market exchange rate terms in the world. It’s quite a big deal to take on the US in a tariff war. Do you think the other big trading partners think they can match the US, tariff for tariff, they can actually go into a hot trade war?

Doug Irwin
I think the objective of other countries would be to, first of all, be firm. So you might have to retaliate, but also then try to negotiate. So it’s not just imposing tariffs and walking away. It’s imposing tariffs to inflict costs, hopefully bringing your trading partner to the bargaining table to reduce those tariffs ultimately or reach some mutually advantageous solution. So that’s the way I think other countries would probably approach it. You can’t approach it from a standpoint of weakness because President Trump won’t respect that. But if you have something that you could take away, higher tariffs on US exports that might be advantageous to him, it might push towards an agreement to get rid of the tariffs altogether. 

Alan Beattie
I mean, one other thing they can do, of course, is just shrug their shoulders and trade with each other. Right? I mean, the US is big, but it’s not the only economy in the world. And the more you use tariffs, presumably the weaker they get because you’re just cutting yourself off more and more from trade. It is possible that, you know, all the fast-growing economies in Asia, Europe and so forth, they can just trade with each other and they just let the US sit there behind its tariff walls?

Doug Irwin
Well, Mexico’s been very aggressive in pursuing free trade agreements with other countries. Obviously, the US pulled out of TPP, the Trans-Pacific Partnership, in the first Trump term, but that hasn’t stopped the TPP from moving forward. So you’re right, the rest of the world can move on and reach new trade agreements and deepen trade ties and sort of work around the US and get by that way. 

Alan Beattie
So that could be a way in which this doesn’t turn out to be an inflection point, right. The US puts tariffs on. There’s some limited retaliation, but the rest of the world says, well, we’re not going back to Smoot-Hawley and just doesn’t retaliate. 

Doug Irwin
Actually, one of the impacts of Smoot-Hawley was it deepened ties between Britain and its colonies in the 1930s through imperial preferences. So that was an example of Canada, for example, saying, look, if the US doesn’t want to trade with us, we’ll deepen our ties with the UK and the greater Commonwealth. So you’re right, the rest of the world has a deep interest in trade and benefits from trade and will try to move around the US if the US sort of isolates itself in that way. 

Alan Beattie
The big economy, of course, we talk about is China. And the reason the US got disillusioned maybe with globalisation or disillusioned with the WTO is they felt it couldn’t constrain China. China’s always used tariffs. Right. So what will China do going forward? It’s always built up these industries, electric vehicles and so on behind tariffs. Those have kind of irritated other countries. Does China stay where it is? Does China actually cut tariffs and become more of a trading nation? Or does it just react to the US by doing the same as the US? 

Doug Irwin
In the 1990s, China cut its tariffs quite dramatically, and that really accounts for some of the surge of its exports because it was able to source global parts much more efficiently at much lower cost. So lower tariffs have definitely been in the interest of China. However, of course, they are very aggressive with their industrial policies. That usually takes far more of subsidies than tariffs per se. But there are a lot of regulatory barriers that they can create to limit US penetration of their market and affect US firms. And it’s really those regulations rather than tariffs per se, except in the farm sector, where tariffs are important, that China can ramp up and really squeeze the US to some extent. 

Alan Beattie
And you were talking before about geopolitics. And, you know, when Trump and people talk about tariffs, they talk about it in the context of a much bigger confrontation with China, which is also technological and potentially military and so forth. We’re in a different game from that point of view, I think. How does that affect how people will be using tariffs? In that sense, it’s an old tool, but it’s going to be used in a new and potentially very dangerous game. 

Doug Irwin
When we think about the history of the world economy over the past few centuries, what is striking is how important geopolitics is. So the reason why Britain was able to unilaterally repeal the Corn Laws and move towards open markets is that it was militarily and politically dominant in the mid-19th century. And as it began to lose its dominance in the late 19th century to Germany, there was a big increase in trade frictions. It’s very hard to have or to sustain an open, free-trading world economy when you have major players that are in potential military or political conflict with one another.

So earlier we spoke about this period after the end of the cold war and the fall of the Berlin Wall when the US was dominant. It was sort of a unipolar moment. Most countries were opening up to world trade. What really brought that to a close was the rise of China and the rise of tensions with the US in terms of what China’s motives were. And inevitably, in some sense, that brings about trade friction. And it was the Trump administration that really changed the game in terms of actually explicitly confronting China, in terms of its trade policies and in raising tariffs. That tension had been there before under the Bush and the Obama administrations, but none had been willing to pull the trigger on higher tariffs. And that’s what Trump did. 

Alan Beattie
And what’s interesting is the Biden administration, you know, Joe Biden was always a great alliance builder, a great multilateralist in foreign policy. But Biden actually left most of Trump’s tariffs intact. 

Doug Irwin
Absolutely. And so when you think and when historians write in another generation or so, what is the legacy of the Trump administration? I think it will be that it changed US policy towards China in terms of trade, and that was going to be a lasting impact and a lasting feature of US policy, regardless of whether it’s Republicans or Democrats in power. 

Alan Beattie
So, you know, another dimension of this, we said at the beginning that trade is about much more than tariffs or trade has been about much more than tariffs. And if you look at some of the ways that Biden has used tariffs, for example, 100 per cent tariffs on electric vehicles from China, just clearly trying to wall off the market. Now, sure, that’s about creating jobs in the car industry, but it’s also because the US wants to have a lead in, you know, a leading cutting-edge technology. 

Doug Irwin
It is. And the question is whether it will succeed because what you need is a lot of resources and a lot of competition and the very best technology. And you can protect your industry, but that doesn’t necessarily make it a winner. And it certainly doesn’t look at this stage that US auto manufacturers are in a position to do well, not only just in the US but to export to other markets when the Chinese have this incredible technological advantage and this credible cost advantage vis-à-vis the US and other western automakers. 

Alan Beattie
When the US is looking for allies, it says everyone should be with us. You know, we’re going to use tariffs to build, friendshoring, they call it, to build supply chains that include our foreign policy allies. Are they consistent about that? Does that really work? 

Doug Irwin
Well, what we’ve just seen in the past few days is the Biden administration blocking the takeover of US Steel from a Japanese company. That doesn’t sound like a very friendly action on our part. We’re talking about an ally where there really wasn’t much of a national security interest, at least on its face. So the problem, I think, with both the Trump and Biden administrations is that they might say that they want to get along with other countries. Maybe the Trump administration doesn’t even say that. But if you want to protect domestic firms, it’s very difficult to do that and yet also be working with allies to, in a co-operative way to foster the alliance. 

Alan Beattie
So let’s just be cynical for a while, because we’ve been talking here about tariffs being used, you know, in an economic way to achieve public policy objectives. There’s another thing about tariffs, right? Which is as soon as you announce them, people start lobbying for loopholes for them and start lobbying from exemptions from them. And this happened in Trump’s first term. Now, tell us about the political economy of that. Tell us about the issue of who and how people get exemptions from tariffs. 

Doug Irwin
Yeah, what’s interesting is that you can announce an across-the-board tariff and you think that that’s creating a wall against other countries. But there are a lot of exceptions. There were a lot of exceptions to Nixon’s 10 per cent tariff, and there would be a lot of exemptions or holes in the tariffs that the Trump administration might impose.

And that’s because domestic firms will come out of the woodwork and say, look, we want to import a part or a component or a piece of equipment that there’s no domestic substitute for. We cannot purchase this at home and you have to give us an exemption. And then it becomes very transactional between the administration and private interests about who doesn’t have to pay those tariffs and who does on imported goods. And some have said that that’s exactly what the Trump administration wants, other businesses to come to it and try to extract these favours.

One economist once said that if politicians have discretion, someone will pay them to exercise it. One example of this was Apple being exempted from Trump tariffs during its first round of tariffs against China. It did not hit consumer electronics, iPhones and other electronics imported by Apple and other consumer electronics importers. And so that will become writ large if we move to a second round of tariffs in the next Trump administration. 

Alan Beattie
So when you see companies at the moment sort of clustering around Trump, trying to get his favour, funding his inauguration, that sort of thing, that might be prefiguring an even bigger sort of scramble or an even bigger drive to be exempted from what will be even bigger tariffs in the second term. 

Doug Irwin
Absolutely. And it’s a form of corruption in many ways. And unfortunately, the firms that will be hurt will be small firms that can’t pony up a lot of money, that don’t have a lot of political influence. They’ll be the ones who have to bear the burden of the tariff. Whereas the big multinationals that have contacts with the Trump administration, they can get the exemptions and get an advantage.

It sort of goes back to the Smoot-Hawley days when Congress was setting the tariffs and the corruption, if you will, the lobbying for exemptions or for higher tariffs all took place in the House ways and means committee and the Senate finance committee. And if you bought off the right member of Congress, you could get your way with the tariff bill. Now that’s being shifted to the administration. 

Alan Beattie
So part of the aim, which happened after the second world war, of shifting power over tariffs across from Congress to White House, was to reduce that, those temptations for corruption. 

Doug Irwin
Absolutely. The idea was we’re going to shift the trade negotiating authority to the president. President will just act in an across-the-board way without picking particular winners or losers in terms of particular sectors and in particular, won’t tinker around with particular tariff rates to help out certain firms and harm others. It’ll get it make it, less of a political, more of a technocratic process. And yet now we’re moving back to a very political process for the setting of those tariffs. 

Alan Beattie
Do you think it would make a difference if it moved back to Congress at this point? 

Doug Irwin
I’m not sure it would make it cleaner because I think you’d just get as many lobbying, as much lobbying as you did in the past. But there have been some efforts among some members of Congress to say, look, if the president doesn’t want to act on behalf of US exporters and takes sort of a balanced view between exports and imports, we may have to restrain the president and try to recapture some of the authority that we delegated in the past. The problem, of course, is any legislation that would withdraw from the president some trademark-making powers would be vetoed by the president. So unless it can be overridden by Congress, it’s very hard to get pull back all the authority that’s been granted. 

Alan Beattie
So we may be on the cusp of a new paradigm. We don’t really know. Whether we are or not is going to depend on what happens with the markets, what happens with business and so forth. What should we be looking for in the months and years ahead, at the beginning of administration? What should we be looking for to say which way is this going to go? 

Doug Irwin
I would think the first six months would give us a pretty strong indication about the direction of trade policy. We should also, of course, look out for within administration bickering over tariff policy. Whether the Treasury secretary will try to act against some of the president’s instincts and whether these policies are going to be sort of carefully designed and phased in over time, or whether we’re just going to go right for, you know, an across-the-board tariff with very few exemptions from the get go.

I mean, part of the problem is during the campaign, there are so many different tariff proposals that were sort of put out there. We don’t know whether it’s really going just after China, whether Canada and Mexico will also be targeted for migration issues at the border and fentanyl flows, or whether it’s going to be the EU and Korea again will be targeted. So many different ideas were floated. It’s very hard to know exactly where they’re going to come down, which countries and sectors they might be targeting. 

Alan Beattie
You’re making the comparison with a president like Nixon. Is the way Trump operates, in this sort of chaos, in this sort of, you know, rats fighting in the sack, in public as we saw in his first administration, is that typical of anything else? Has that happened before or is this a new thing with Trump? 

Doug Irwin
It’s certainly not new. And I think what Nixon liked and Trump likes, as well as sort of strategic ambiguity, you like to keep other countries sort of on their back heel, so to speak, keep them a little bit uncertain about what you might do and that softens you up for when the blow comes. Nixon certainly liked that, and I think Trump likes that as well, creating that uncertainty, creating the drama, if you will, that makes other countries want to come up with potential resolutions even before any tariffs have been imposed and diffuse the conflict that way. He likes other countries coming to him and saying, what can we do to you or for you so that we can avoid this catastrophe of higher tariffs?

Alan Beattie
I mean one thing is tariff’s a theatre, right? People find it difficult to get their heads around regulations and even financial sanctions and so on. But tariffs, it’s a thing. It’s a percentage. It’s a wall. It’s the kind of thing that appeals to Trump just because it’s simple. 

Doug Irwin
Absolutely. And once again, taking a sort of a hint from the first term, there’s a lot more talk of tariffs than there actually was action, except in the case of China. And so the question is, will all the talk manifest itself in action or is just talk to bring other countries to the bargaining table and make concessions before anything really happens? 

Alan Beattie
So, Doug, thank you very much for your time. It’s been fascinating. 

Doug Irwin
It’s been a great pleasure to be here with you. 

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Alan Beattie
That’s all for this week. You’ve been listening to The Economic Show with me, Alan Beattie. If you enjoyed the show, then we’d be eternally grateful if you would rate and review us wherever you listen. This episode was produced by Lulu Smith with original music from Breen Turner and sound engineering by Joe Salcedo. It’s edited by Bryant Urstadt. Our executive producer is Manuela Saragosa. Cheryl Brumley is the FT’s global head of audio. I’m Alan Beattie. Thanks for listening. 



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