Doug Irwin on the History and Political Economy of Trade Policy

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. 

This is our 100th episode and I want to thank our listeners, the guests who have been exceptionally generous with their time and insights, the fantastic team at Mercatus that helps me produce and disseminate the podcast, and to all our donors and supporters. 

Today my guest is Douglas Irwin, who is the John French Professor of Economics at Dartmouth College. He is the author of dozens of books and papers, most recently, Clashing over Commerce, which is a magisterial history of US trade policy. We spoke about India’s liberalization moment in 1991, the five phases of globalization, British repeal of Corn laws, premature deindustrialization, the relevance of the WTO, absolute versus comparative advantage, the future Argentina, and much more.  

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts. 

Hi Doug, welcome to the show, it’s great to have you here.

DOUG IRWIN: Great pleasure to be here.

Impact of Trade Economists 

RAJAGOPALAN: You have this lovely paper where you’re talking about how a handful of trade economists like Ian Little, Jagdish Bhagwati, Anne Krueger, Bela Balassa sort of changed the consensus on trade and economic development. When I think about them, three out of four of them wrote a little bit about India or had some experience in India. Ian Little was Manmohan Singh’s advisor, made trips to Bhopal. Jagdish Bhagwati, of course, wrote with Ramaswami. Anne Krueger wrote a couple of papers, especially her rent-seeking work on India. 

It seems to me that the impact of their work has still been more on East Asia and China than it has been on India. Why do you think it is that even though they had so much Indian context and they wrote so extensively on India, India never quite pushed as far in its trade liberalization as the other countries?

IRWIN: It’s a very rich question. There’s a lot of going on in that question. One way to think about it is just because they learn from India and help change their minds and really reinforce their work and stimulated their work. Doesn’t mean that the lessons from their work is going to be adopted by any particular country. I think that other countries could learn from India, see the distortions and there could be a few key policymakers that say, “We want to learn from that experience and go in a different way.” That doesn’t mean that Indian policymakers will do that.

That said, I do think that their work contributed to the 1991 moment, even if indirectly just by, first of all, to understand the cost of a policy it has to be documented, it has to be publicized, it has to be quantified sometimes. You never know when that informational effort is going to pay off. I think it did to some extent in India, and certainly, you’re right in other countries around the world. Milton Friedman has a great saying about how reform comes about. He says, “We just develop ideas that are lying around in case there’s a crisis and then they can be picked up.” It’s not as though those ideas have immediate impact in any one place.

RAJAGOPALAN: The other way I think about it is—was there something about the East Asian countries and China, which made it easier to take the simple version of their ideas and run with it? Is there something complex about India that doesn’t allow for pushing as far or translating those ideas that literally into simple trade policy.

IRWIN: You would know as much about this as I would, but I would say that with the East Asian countries, particularly Vietnam, China, to lesser extent Korea in the 1950s and ‘60s they had most of labor forces in agriculture. They had this surplus of labor that could be used with foreign direct investment in manufacturing. It was the openness to investment that created a lot of the jobs initially in manufacturing, and then that jumpstarted a lot of domestic producers as well. With India, not being open to foreign investment has really hurt.

Once again, there’s a big, large labor stock that’s ready there to work. For political reasons for the fear of investment. You can go back to the East India Company and the fears about foreign domination that wasn’t quite as present in China and Vietnam because there had been no real history. I take that back a little bit in the case of China because there had been the opium wars and the 19th-century experience. Certainly, they really wantto move out of poverty and opening to the world and foreign investment was an important path that they saw.

RAJAGOPALAN: I think of this group of trade economists, especially the four of them, their ideas first percolated into the East and Southeast Asian countries. They had some impact on India for sure though not as much as one would like. And after 1990s, African countries started unilaterally liberalizing very much based on the Asian experience, but one group, which somehow never quite took their lessons and ran with it is the Latin American countries. Was it just a different set of problems or something was lost in translation? Because there was another group of economists who were the Chicago Monetarists who did have some penetration or impact in the Latin American countries. What’s going on there?

IRWIN: There’s a great deal of diversity across Latin America. Chile is an example where the reform stuck. Now, albeit they were introduced in the Pinochet dictatorship, but they survived the transition to democracy. The center-left governments that took over once Pinochet left, they had some appreciation for the economic model that they inherited. Chile had done pretty well with it towards the tail end of the Pinochet regime. Obviously, some big crises early on.

If you talk to Alejandro Foxley, who’s the first finance minister under democracy, he wanted to run fiscal surpluses to show markets that they were committed to not the excesses of the past. They reduced tariffs. They want to double down commit themselves to keeping the open economy model. Then the question is, why haven’t other countries in Latin America seen the benefits? Some have and some haven’t. Argentina, just to pick another big country has had cycles, and there’s a whole political dysfunction in Argentina 

There’s been this pendulum swinging back and forth with Argentina. They were liberalizing in the ‘90s, then they closed up a little bit in the 2000s, and now maybe they’re moving in a different direction again. Peru’s an interesting case. Because once again, they opened up in around 1991.

RAJAGOPALAN: Had shock therapy.

IRWIN: Had shock therapy. That has stuck as well. Even though there’s continued political dysfunction in Peru, the economy’s done pretty well and the open economy model is pretty much entrenched. Colombia also a country that was never quite as closed as some of the others but opened up also in 1991. When I say opened up, getting realistic exchange rates, getting rid of quantitative restrictions on trade, getting rid of import licensing. Even if the tariffs are relatively high, getting rid of those other things really goes a long way to open up the economy. Columbia’s kept the open economy model. Then we can go to Brazil, another big country, which supposedly opened up in the early ‘90s, but there’s still a lot of non-tariff barriers and what have you.

RAJAGOPALAN: They’re like India.

IRWIN: A little bit.

RAJAGOPALAN: They opened up, but they still have lots of restrictions. We don’t quite get captured in the trade liberalization obvious model or laundry list.

IRWIN: That’s a great way of putting it because what you don’t see when they liberalize is you don’t see imports as a share of GDP going up a lot, whereas you do see that in some of the other countries. I’d say there was a Latin American reform moment early 1990s. Once again, not uniform, very imperfect, but they did try to move in a different direction and shed the Raúl Prebisch dependency theory import substitution policies that had really doubled down on in the 1950s and ‘60s and into the ‘70s.

Do crises lead to liberalization or protectionism?

RAJAGOPALAN: My mental model is for developing countries usually there’s a crisis and some liberalization afterwards. Whereas in developed countries when there is a recession -usually you don’t have crisis there - when there’s a recession or a depression after they become more protectionist. 

One of the things that I learned from your book, Clashing Over Commerce, is actually that’s not true in the United States because what happens after the depression is the US embraces free trade much more. Is that unique or should I now reinforce my model of crisis and liberalization and also include large economies and developed economies in that mental model?

IRWIN: It depends on what the status quo is at the time the crisis hits. The US and the Great Depression we had just passed the Smoot-Hawley Tariff in 1930. That was fresh in people’s minds. Then that’s followed by the Great Depression—Depression had already started but intensified after that. Everyone’s lived experience including people like Ronald Reagan, who often his radio addresses would refer back to when I was a young man, and we had the Smoot-Hawley followed by the Great Depression. I’ve learned this lesson that tariffs are very bad for the world economy and our economy as our ourselves as well. That was the lived experience. 

That’s why the US when the Roosevelt administration took over, they said, “Well, we don’t want all the policies that just happened.” One of them being trade policies, which had really hurt farmers and farm exports and what have you with the foreign retaliation. Unfortunately, in Latin America and other countries that we’re just talking about there’s a crisis they open up, and if the crisis doesn’t resolve itself quickly or there’s an intensification of that crisis. Then the idea is, “Oh, the shock therapy didn’t work. Free trade policies didn’t work.” Then you’re more likely to get a movement in the opposite direction. 

Here’s where India’s another important case too because once again a history of protectionism, a crisis that triggers some change followed by an economic boom. People said, “Gee, we changed our policies, and we had a good outcome.” A lot of it depends on the macro cyclical nature of how things work out after the crisis, and then what the policies were going into the crisis and whether they were repudiated or not.

RAJAGOPALAN: I think some of it may also be who are the strong interest groups and whether they benefit or hurt a lot. My sense from your work on the Great Depression is that a lot of those interest groups were either not as entrenched, or they fell by the wayside and had to file for bankruptcy. Also struggled with the Depression problem so they weren’t exactly lobbying to keep tariffs high quite in the same way. Whereas when there’s a crisis and a threat to open up in the developing countries, which also tend to be politically weaker have all the standard problems. Have more cronyism and have more entrenched interests, they band together and say, “Okay, we really can’t let this happen.” Is there also something that might be happening in the background?

IRWIN: Yes. For example, in the US. Although I would say sometimes the power of the economic interests, particularly in a crisis can be diluted because there are some overriding concerns. With the Great Depression, there’s basically no sector of the US economy that was really worried about foreign competition. Imports were such a small share of GDP. That even if the Roosevelt administration moved to much deeper tariff cuts, it really wouldn’t have affected many domestic workers or domestic industries because trade was such a depressed state.

Now with developing countries today, even with relatively high barriers they’re much more open to international influences. They’ve specialized in certain commodities; they really need those imports. There’s more vulnerability. It takes a special political leadership in conjunction with the crisis to overcome the vested interest. Once again, just I’m thinking out loud here in terms of Peru, the crisis was so severe. The economy was so dysfunctional that it almost doesn’t matter.

What you do it’s not going to intensify the problems as they’re perceived on the ground. The last thing I’d point out in the context of developing countries that really doesn’t apply in the US is, the exchange rate is a very important variable. If you going to accompany the opening up with a big depreciation of the exchange rate that insulates the import competing producers from an onslaught of foreign competition. You’ve incentivized exporters in a huge way, and that tilts the political balance much more in favor of liberalization.

RAJAGOPALAN: No, you’re absolutely right. This is kind of a tangent. One of the things I learned was how important particular individuals can be. I know this from the 1991 experience in India. In this instance one of the heroes is Secretary [Cordell] Hall and he had a really long term. Just as a random, political question, is it good for secretaries of state or people who formulate trade policy to have long terms, or should they have term limits because it could also easily go the other way?

IRWIN: I don’t think we could generalize because one would think maybe the good ones will last and won’t get kicked out. I’d point out two secretary of states who had pretty long-term, obviously, Cordell Hall in the Roosevelt administration from about to get the dates a little bit wrong, but certainly from 1933—

RAJAGOPALAN: 33 for a decade or so.

IRWIN: —until 44, I believe, it was. That was a very long stretch. He was very much in favor of free trade. Generally, I think he’s considered a relatively ineffective secretary of state because the world’s collapsing and imploding and he’s worried about trade. That’s maybe nice for us as economists to think there’s someone who really cares about trade, but there wasn’t too much the US could do given its isolation stance in the world at the time. Another secretary of state who served a long time was George Shultz in the Reagan administration. Almost two terms although Alexander Haig was in there initially. He was another economist, very interested in freedom and open markets. I think history has judged him pretty well as serving as secretary of state.

How has globalization changed?

RAJAGOPALAN: If you get a good one, then no term limits. If you get a bad one, we got to throw them out as soon as possible. One of your other papers, this was at the end of the last century. In ‘99, you were looking at how globalization and trade have changed over the course of the 20th century, especially since just before World War I. What you find is that actually globalization and trade is quite different in 1999 than it is let’s say in 1910 or 1914.

The main reasons are just how much the world is integrated, not just in terms of manufacturing or something, but specifically in terms of financial entanglement. Now we’re 25 years since you wrote that paper. I thought it might be a good time to rethink what you think has changed. To me one big thing that has changed is, now the entanglement is not just financial or manufacturing. Now the entanglement seems to be across information in terms of big tech firms, and all these network platforms like Facebook and Twitter, and so on.

The other is the knowledge economy, which is a lot of the high-end manufacturing is actually knowledge transfers and tech transfers and not just your standard—you grow something or you make a widget and you put it on a ship, and you ship it over. Given these two things, do you think we have once again had this huge change or is it just a continuation of what you found in 1999?

IRWIN: No, I think we’re in a different era in terms of the depth and the extent of global integration. Just to give you a context for that paper, it was published I think in 1999 may be written in 1998. The period of liberalization really—the growth of globalization starts in the mid-1980s and really accelerates. Some people have called it an era of hyper-globalization, but we were writing at the beginning of that period. There had been some reforms, trade to GDP ratios had been rising. At that time, it was a reasonable question to ask, “Have we gotten back to where we were just prior to World War I or not?”

A lot of the metrics, just the simple numbers didn’t look very different in the mid-1990s compared to 1914. That said, we did notice as you said, the financial integration was much greater. Obviously, information flows and knowledge flows were much greater. I don’t remember the conclusion exactly, but I think we thought we’d been moving beyond where we had been prior to World War I. Certainly, if I was to write the paper now or 10 years later after 1999, right up till the great global financial crisis of 2008, globalization just really continued on a very strong path.

All the numbers exceed where we were prior to World War I. Yes, the pre-World War I world economy was fairly integrated with migration and capital flows and trade, but it’s really nothing compared to what we’ve had in recent decades. Now of course since the global financial crisis the question is, has globalization has the tide turned and are we moving in a different direction? Still a lot of the technological forces you were suggesting, they continue to push markets closer together.

RAJAGOPALAN: Yes, because the big topic of conversation in 1999 or thereabouts is how China is dominating, and how every single good is now made across so many different countries and it’s put together. There’s all this uncertainty that gets built into what’s happening. The internationalization model is much more focused on companies that are larger than nation-states and across so many different nation-states. To me, it just seems like it’s the same conversation again about tech.

You have all these very large tech companies that are situated in a small country or in one of these tax-exempt islands or something like that. Then there’s this ripple effect. The big change to me is how it can affect not just the political economy, but actually the politics of any particular place given the information flow and how fast it is. I’d be very curious to see you do the 25-year-long assessment and 50-year-long assessment on that paper.

IRWIN: What’s interesting too looking back is, in 1988, 1999, India just really begun its reforms in ‘91 and still had some years to go, and then there’s a couple years that takes before there’s a payoff. China really began reducing its tariffs in the early 1990s. Even though of course, Deng Xiaoping had opened up in ‘78, the tariffs really didn’t come down; foreign investment didn’t surge in until the mid-1990s. Of course, that momentum continued into the 2000s. There’s a lot more momentum to globalization at the time we wrote the paper, which is why it would be a very different paper if we wrote—it five years later or today.

RAJAGOPALAN: The 2001 WTO discussions were really important, right? Because that’s when India opens up and joins the consumer goods import-export liberalization platform and then China joins so that to me also seems like a break. In 2001, how WTO started corralling all these different groups saying, “I think you’ve had enough of a rest. You really need to start doing this in a more standardized way,” I guess, or a better “global regulation” way.

IRWIN: Yes. Of course, the Doha Round was started in 2001. Of course, that didn’t lead anywhere. There was still a lot of sense in the system, there’s some way to go in terms of further globalization. We mentioned some African countries earlier on, I think. Their opening up really didn’t start until around 1993, 1994. Once again, that hasn’t gone nearly as far, but certainly, the results weren’t in by 1999.

Tech and Energy Protectionism

RAJAGOPALAN: When we think about the modern day super large firms, now we’re no longer in the realm of Nike and IBM, we’re really also in the realm of Meta and Twitter and so on. Do you think Chinese protectionism has worked out well in the context of big tech because they introduced the great firewall, and all their large network goods are their own? Or even if they have network goods coming in from abroad, they have a Chinese version of it, or it has to be adapted local circumstances. Do you think that was the right way to go now in hindsight, or no matter what we’re talking about trade and openness is the right way. There’s a much larger payoff in the longer run.

IRWIN: Well, they haven’t really created internationally competitive sectors in tech in that way, at least in the service side. By having the firewall and what have you, they’re preventing information flows. They’re building up maybe domestic champions, but these are not becoming internationally dominant. There’s no import protections promoting exports or promoting the success of your firm. I don’t think that model is really paid off very well. Even if it did or didn’t, the Chinese government is doing it for political reasons, not so much because they think that they’re making their firm stronger.

RAJAGOPALAN: For me, okay, this is obviously an outlier, but you don’t see TikTok as the big success of this Chinese protectionism that is now actually competing with all these platforms across the world. Almost threatening democracy apparently and threatening the outcome of what may happen in Israel and Palestine and things like that.

IRWIN: Well, certainly that’s the one example of a Chinese firm that has done well internationally. Alibaba, Jack Ma, and that sort of thing, we just don’t see that the international dominance coming there. Of course, it’s a whole different range of issues about information flows, disinformation. Then it’s not just China, but obviously other actors, Russia, and what have you. Even if they don’t have platforms, they can still participate and infiltrate, if you will, the Western platforms with their message.

RAJAGOPALAN: We’re still long on global trade and free economy, no matter what kind of network good we talk about.

IRWIN: Yes. Once again, we don’t have free trade in everything. We still say certain drugs are illegal and we’re going to regulate their distribution and maybe even ban them. It could be the information flows falls under a certain category in terms of if there’s deleterious effects to society, free trade and openness don’t always pay off.

RAJAGOPALAN: Another area where there’s a lot of talk about self-sufficiency, and this is especially after the Russia-Ukraine conflict kicked off is energy. Now, all countries once again are going in the way of energy self-sufficiency. The United States has been lauded for its fracking policy now because it’s again become a net exporter. Is energy another exception and where self-sufficiency will pay off, just given how much regime uncertainty there is and how it’s such a vital input into everything that it can cause this energy or supply side inflation?

IRWIN: Well, here we have to talk about specific policies. If there are policies in place that are trying to make a country energy-independent by blocking imports, by blocking foreign participation, then yes, you might be able to achieve that independence but at what cost, at what price? I think what you point to fracking that it’s not because of protectionism or keeping out foreign suppliers that is a purely domestic development. It was opened up for investment and allowed to go through state by state or what have you, and allowed the US to become a net exporter. That’s a case of using your resources in a certain way, allowing investment rather than protectionism per se.

RAJAGOPALAN: Fracking you would think is an example of domestic openness and foreign trade openness. That’s a different category. It would be stuff like solar and wind and European countries now pivoting towards restarting their nuclear reactors. That would be the case that one needs to consider, do the cost-benefit and then go from there.

IRWIN: Absolutely. It’s not really a protectionism issue. There may be countries out there have deliberately said, we’re going to block imports of what have you. That could be a costly strategy. In general, I think a lot of this is indigenous or new technological developments or resource developments. One case where protectionism plays a little bit of a role is in solar panels in the United States. Here we have two objectives. We want green energy, but we also want jobs. The question is, if you put tariffs on solar panels coming from China, which objective are you trying to achieve? You may not get many jobs, but you may harm the green energy initiatives. That protection I think is not paid off particularly well.

The Five Phases of Globalization

RAJAGOPALAN: Are the days of unilaterally reducing tariffs gone? If I look at your work, this goes back to things like repealing Corn Laws. You’ve written about how Britain unilaterally reduced its trade barriers. In Asia, we saw that happening, especially after the ‘80s. Then in Africa particularly, even after the World Bank influence and Washington Consensus influence have dimmed. You saw some of the countries taking on unilateral steps to reduce tariffs. That doesn’t seem to be in vogue anymore. Has that time just gone?

IRWIN: I think that time has passed, not completely, but largely. The liberalization era has really faded. One paper I’m working on or giving talks about is I talk about the five phases of globalization starting in the early 19th century. The first phase really starts after the Napoleonic Wars when tariff levels are very high, commerce has been disrupted. The UK has the Corn Laws. There’s this gradual process of liberalization in Britain that spills over into Western Europe.

In 1860, there was the Cobden-Chevalier Treaty between Britain and France, which began to reduce tariff levels, and that led to a cascade effect where other countries joined in that tariff-cutting exercise. Certainly, by no means going to free trade, but reducing the burdens on international trade, opening up internal trade within France and Germany through the Zollverein, and getting rid of tolls within France. Getting internal free trade first and then thinking about the external sector.

That’s the period that leads up to World War I, and that’s that first wave of globalization. The second wave is the interwar period. We have World War I, which is tremendous shock, A lot of disruptions in the 1920s in terms of the international monetary system, which is not conducive to liberalization. Then the Great Depression, Smoot-Hawley, and that period, that’s the second period of globalization. It’s really a period of deglobalization if you will.

Then there’s the third period, which is right after World War II, the US leadership to create the GATT, the General Agreement on Tariffs and Trade, but that’s really confined to the Western world, Western Europe, United States, North America, and a few other countries around the world including Japan. It didn’t include the communist bloc; it didn’t include a lot of the developing countries. That’s a third wave of globalization, limited and contained to the West, the OECD countries, if you will.

Then the fourth one is this era of hyper-globalization. I don’t like that term particularly, but it does characterize the fact that there was huge liberalization in Eastern Europe, Soviet Union broke up, China opened up, developing countries began opening up as well. All the geopolitical boundaries, calling it the first world, the second world, and the third world that was erased, and we had the World Trade Organization. It’s for the world. Everyone’s on the same footing.

You’re going to have differences in policies, but every country adopted this Washington Consensus of opening up, and that peaked probably around 2008. 2008 that’s when the Doha Round collapses, that’s when we have the global financial crisis. That’s when we have really the first inklings that the US and China are not on the same page in terms of policy. Brexit comes after that. Many things have really put the world economy on a different path.

There was this period I’d say between the ‘80s and the 2008 or so where most countries were liberalizing and, on that path, and it’s become much more difficult since then. Then the little caveat would be the thing with tariffs at least is that sometimes you can see how they’re an impediment to foreign investment, or to having your own domestic producers have access to the cheapest inputs at world prices. There still are some countries that are still thinking about reducing tariffs to aid in the competitive position of their domestic firms, particularly when their tariffs on inputs. By and large the big liberalizations it’s hard to see them on the horizon.

WTO and the Calculus of Consent

RAJAGOPALAN: One version of why we don’t have something like the WTO as some people say, “Oh, the world was never quite equal and people figured that out, and it made more sense to switch to regional trade agreements, or bilateral agreements, which just ended up being better.”

Another is that the financial crisis just created such problems for countries that had openness in terms of capital mobility that started getting questioned domestically, and people start rolling it back. My sense is that the third part of it is, did it collapse because the WTO never quite paid as much attention to services? That was the next frontier, it was already there in the early 2000s.

More attention should have been paid to immigration to tech transfers, knowledge transfers, intellectual property rights, and some arrangement where India’s exports in terms of services, China’s firewall. These things start getting standardized across the countries, and when it didn’t do that, it just sort of lost its relevance. That’s the other read that I have. What do you think is the correct version of why WTO lost its significance?

IRWIN: I’d say it’s two things right off the top of my head. One is too many countries and too many issues. The big difference between the WTO and the GATT. One reason I think for the success of the GATT is there was a relatively small number of like-minded countries. As we mentioned before North America, Western Europe, mainly Western countries, but a few developing countries as well that basically were on the same page in terms of where they want to go in terms of seeing greater integration both for political reasons, for economic reasons, and what have you.

Now you have with the WTO more than 150 countries at the table. WTO operates by consensus. It’s not majority rule, it’s not weighted voting, it’s every country has to agree. That’s a recipe for a least common denominator trade agreement. The former Director General of the WTO, Mike Moore, has likened it to a car with one accelerator and 150 hand brakes, and any country can pull up the handbrake at any point in time. Having a lot of countries around the table it’s very difficult to negotiate.

Then, for the reasons you pointed out. Two, the number of issues that are on the agenda have just multiplied, and that makes it even more hard to reach a consensus on a whole package. You might be able to reach a consensus on fisheries, or a digital trade, or one of these things, but trying to put together a package where trades are made across these it’s just incredibly complicated. There are a few farsighted economists and lawyers who when the WTO was created, saying, “Mm, I’m not sure this is going to work out very well.” I think they’ve been proven right.

When we talk about Indian services, just to make it where you are coming from there, there’s something called the GATS, the General Agreement on Trade and Services, but the problem is, unlike tariffs, it’s dealing with regulation. Every service sector has its own set of regulatory issues, whether it’s in electronic appliances and electronics in general in terms of chords and adaptability, or financial services in terms of the regulation. First of all, it’s incredibly complicated and it’s going to be very hard to reach a consensus on that one issue alone.

Even though India is poised to do well from a more open services regime around the world, having that through international negotiations is really, really tough. Just to sum this up, as you were saying, countries have found it easier to do small agreements on a regional level, where you get like-minded countries around the table. Once again, you can leave certain issues off the table if there’s consensus not to do that, rather than try to deal with everything at the WTO.

RAJAGOPALAN: Was it a design problem? Now I’m thinking like a George Mason public choice/constitutional economist. We know from Buchanan and Tullock that unanimity rule is bad. It’s exactly what you get, a car with one accelerator and 150 handbrakes. The idea was good enough, but they should have broken up into smaller bits and people should have had options on what level they can sign up at. Or some majority rule system where if it’s so harmful to your domestic politics feel free to leave.

The benefit of having that relative to the small regional platforms is not too many developing countries are interested in joining or creating small regional agreements or bilateral agreements because the benefits aren’t that great. Because they’re also so easy to get out of, they are not a very good constraint on the leaders who are forward thinking and using the WTO or using World Bank and IMF as a way to constrain the interests in their own government or to tame their own domestic politics and so on.

To me, it just seems like the people who had to gain the most from it are going to sort of not get anything at all in the absence of the WTO. Countries like the United States are always going to be able to get fantastic bilateral agreements. It just feels like a terrible loss to me when I think of the entire situation. Is it just bad constitutional design, constitutional lawyers could have solved the problem.

IRWIN: It could be, and I think that’s an ex-post view, because I’m trying to think back to what was the thinking in the early 1990s when we were moving in this direction. Certainly, the US wanted services as did India on the agenda, the US wanted the agriculture, and other countries maybe not so much. You can understand how this agreement came together. The US wanted a very strong dispute settlement system, which is ironic since the US is now pulling away from that. Each element you could see why it’s on the table.

The US ironically wasn’t pushing for a WTO per se. I think the Canadians were saying, “Okay, we need a larger institutional structure to oversee all of this.” That came in very late in the negotiation too. I’m not sure how much it was part of the design versus last-minute negotiating agreements. I don’t condemn them in some sense and think they just really went off in some bad direction. I can understand what came out with the Uruguay round.

Certainly, looking at it in retrospect, it was setting up something to not really succeed well to further the idea of more open markets. Now that said, even if the WTO, which has done nothing and continues to do nothing, in principle it serves a very useful purpose. Their tariff bindings provide certainty, there’s a judicial system to resolve disputes. Once again, even though that has fallen in disrepair, it did work for most disputes very, very well, and countries did adhere to their obligations under the WTO.

I would hate to throw all that out because it hasn’t achieved much in recent decades, but the same time it’s not the way forward in some sense. A lot of WTO scholars think we may need plurilateral agreements, which is allowing regional and a subset of memberships to agree on certain areas, and not have the consensus rule, which can undermine everything.

Has tariff reduction hit its limit?

RAJAGOPALAN: Have we also reached the end of create policy that was really focused on tariffs? Because it seems like in most parts of the world tariffs are down to the teens in most countries. It seems like in most countries now the barriers are different. It’s a host of subsidies and benefits that are given to the incumbents or the locals, the domestic producers or it’s other things. It’s things like not getting agreement on certain standards or labor law in particular sectors. What is the next frontier for trade openness if tariffs have jumped the shark?

IRWIN: That’s a great question and I think you framed it very nicely. When you open up and get rid of quantitative restrictions, then you start bringing tariffs down. There’s a lower bound—zero. 5% or 10% it’s maybe not ideal, but it’s not a huge impediment trade. It sort of runs its course naturally and that’s a great success in many ways. I think you’re right that there continue to be impediments to trade, and it comes down to regulation and subsidies. I think you hinted at that in your remarks.

Every sector, every country still has its own regulatory regime, and that can be used in a discriminatory way against foreign providers of services or foreign investment or what have you. We certainly see that with the Inflation Reduction Act in the US trying to give a preference to domestically produced electric vehicles and what have you. Regulation is a key thing and then subsidies as well. Where we’ve seen a return of industrial policy, return of trying to help out domestic firms with subsidies that obviously foreign entities won’t be receiving for jobs or for the green transition or for whatever rationale is given.

These things aren’t really regulated at the WTO level. I think what will get international negotiations going about them is when they become a problem enough. That a number of countries say, “Look, we have to have an agreement on subsidies, and we have to have an agreement on regulation.” Then we might see some progress and they might start at the regional level or the OECD level first and then spread to other countries. We’ll just have to see.

RAJAGOPALAN: The other part of this is given how fertility rates are in different parts of the world and the developed world now is in trouble. They have aging populations dropping fertility rates. It seems like now the trade openness has to also switch from goods and services to humans. It was always focused on goods and services. Capital mobility was integrated into that like you had talked about in that paper. Now it seems like the real work for trade economists is also to double up as immigration economists, otherwise that piece of the puzzle without it none of the trade openness can really work.

IRWIN: I think you’re right. This is really a huge issue confronting the world economy. Here I defer questions to Michael Clemens. Your colleague at George Mason who is the key person on the benefits and the gains from international labor migration. You write the demographics across so many countries in the world is quite amazing in terms of the reduction in fertility and the population pressures in Africa and other high fertility countries where there aren’t so many economic opportunities. It’s a pressure cooker and there’s a need for workers in some set of countries and a desire among many people to move and leave their countries. There’s sort of a natural match there, but the politics obviously is very difficult. What’s striking is that countries like Japan and Korea, which are really facing quite stark population declines don’t seem very open to the idea of letting in people from other countries.

RAJAGOPALAN: I guess what I’m asking you what will trade economists do. Because this conversation was so dominated by tariffs and then very specific models, which had tariffs-plus, as I like to call it, between countries like two countries or multilateral agreements. Now if all those things have reached their—maybe not the floor, but they’re sort of not big-ticket items on the table. What will trade economists of the next generation do? 

IRWIN: I think there’s always going to be some exciting issues to deal with. Even if they’re not in the realm of trade policy per se, how trade is being reshaped by information technology, global supply chains, the desire for resilience, the geopolitics of trade as well. Trade is going to continue trading goods, even if the barriers are relatively low. There’re always going to be political factors that shape how that trade looks like. Just understanding how firms source and make their decisions, where they invest and where they don’t I think will remain a fascinating question. 

You’re right that as academic field here, not getting away from policy. There’s been much more interest in spatial economics and urban economics. Then also much more interest in labor migration issues.

Cross Country Comparisons

RAJAGOPALAN: I read empirical papers that do cross-country comparisons. They code different trade barriers in different ways and then run these regressions. The papers I read maybe was a bad set of picks. They were very unnuanced and didn’t really tell me much about whether trade openness works, or either they weren’t very conclusive or they didn’t capture what was going on. Probably because they were looking too narrowly.

What is a good way to think about trade? Is it cross-country studies? That is you look at them in-depth and do what Ian Little, and Bhagwati, and Krueger, and sort of that group did. Is it historical work the way you’ve picked one country and looked at it over a hundred years, or people have done this for the British economy since the 17th century and so on. What is a way to think about how we capture the nuance of trade?

IRWIN: There’s no one way and that’s both good news and bad news. The good news is there’s an opportunity for many different types of methodologies to address the question. Historical institutional case studies, cross-country studies, in-depth industry studies. I have a paper called Does Trade Reform Promote Economic Growth? It’s a survey paper of a lot of the work that’s been done over the past 20 years or so looking at very narrow question about whether trade reform has an economic payoff. There it gets into one point you’re making just measuring across countries what the trade barriers are is extremely difficult. It’s hard for one sector. It’s hard in one country alone to come up with an indicator, let alone if you’re going to do cross-country work. That measurement is really, really difficult. 

Then, okay, let’s say you have an acceptable measure, what do you do with it? There’s all sorts of different ways one can approach that cross-country regressions within country studies. What I take away in terms of that paper is that when you have different approaches, the question is do they lead to generally the same answers or are the answers just all over place and depend on the methodology?

What I tend to find is that cross-country papers, synthetic control papers, country case study papers they’re all leading in the same direction that trade reform does have a payoff. Trade openness does have a payoff that as I put it, it’s an opportunity, not a guarantee. You can open up and things can go very badly. Usually, that’s due to other factors that are complimentary to trade rather than trade per se. You do have to get the configuration of policies right, but in general, there is a positive payoff and that’s what many, many studies using many different methods tend to find.

RAJAGOPALAN: Do you find the cross-country comparison papers irritating when you read them? Just as a curiosity, maybe I’m just a very irritable person, but they are very, very narrow. They don’t look at domestic labor regulation or how difficult it might be to get a vote on something. They’re sort of lacking in the political economy nature of it. Is that why they are so bad in measurement?

IRWIN: So, I’ll both attack them and defend them. One is, I guess the positive spin would be what you’re looking for in cross-country work is generalizations or patterns. It’s not going to be the solid answer the gold standard, if you will. Identifying patterns can be a useful thing. That said, a lot of the papers I think are bad, and this gets into I think a footnote in my paper on trade policy reform is that when you’re looking at levels, the comparison becomes very odd.

What people will find is if you look at levels of trade barriers and rates of growth that high tariff countries will grow faster than low tariff countries. If you’re looking at the post-World War II sample, that’s because developing countries have high barriers and they’ve been growing more rapidly than the advanced countries, but it’s not because of the high barriers. They’ve come down. Still the cross-section will give you a very misleading indicator and it’s certainly not an indication of causality. You do have to approach a lot of these studies with a grain of salt.

Premature Deindustrialization

RAJAGOPALAN: Another big conversation now is about premature deindustrialization because so much of trade policy was again focused on manufacturing, probably because of the way the developing countries opened up starting in the ‘80s especially. One is do you buy into this conversation and the big trend on premature deindustrialization? If yes, I have a couple of follow-up questions on that.

IRWIN: I do think for certain countries, particularly in Africa, when they did open up they may have lost their textile industry. They could have managed that process of adjustment better. I still think there’s opportunities for manufacturing. If you look at where the labor force is, huge number of people in agriculture, huge number of people in services. These sectors tend to get neglected. Historically, agriculture has been a very heavily taxed sector in Africa in particular. Allowing farmers to sell at market prices is a big improvement. You want to improve productivity where a lot of labor is employed.

Fetish would be too strong a word, but too much of an emphasis is placed on manufacturing. I think that if national policy is focused more on improving productivity and liberalizing and ensuring competition in agriculture and in services, these economies could do much better. Services are very important input to manufacturing. If you’re a small country and you “liberalize in manufacturing,” but you don’t really get competitive deregulated service sector that’s internationally competitive, you’re handicapping your domestic manufacturers with high-cost inputs, and you won’t get that process going, so you need to look at other sectors of the economy as well.

RAJAGOPALAN: Two big countries where this premature deindustrialization trend has been particularly talked about are India and Brazil. One, do you buy that that’s actually what’s taking place, or if not deindustrialization some kind of stagnation when it comes to manufacturing? Second, how are the experiences of these two countries different when it comes to manufacturing and especially manufacturing driven by trade openness?

IRWIN: I was going to hesitate to say too much about India because I’m sitting across from you. [laughs]

RAJAGOPALAN: No, no. I want to hear from you on this because I don’t know the trade and protectionism literature anywhere close to as well as you. That seems to be at the core of the industrialization argument, so I really do want to hear from you on this.

IRWIN: If you contrast India with Bangladesh. Bangladesh has done very well with the model of exporting garments and labor-intensive manufactured goods. It seems like India should have that potential as well. One thing Bangladesh did was open up to foreign investment, so very open investment regime is the [South] Korean firms that initially came in with the garments. That also leads to this virtuous cycle of more investment, higher wages, higher productivity.

I don’t know enough about India and the manufacturing sector per se to say what are the impediments to more of a Chinese model or a Bangladesh model, but the service sector obviously has been one of the leaders there, so I’m not sure I have too much insight into India per se.

On Brazil, one of the big problems with Latin American countries in terms of achieving more internationally competitive industry is the natural resource endowment is so rich that that crowds out manufacturing. You get much higher real exchange rates because you don’t have to try to export. You’re going to export, whether it’s coffee, or tin, or copper, or any other products that come from Latin America, and then that naturally leads to an appreciated exchange rate, which hurts manufacturing and makes it less internationally price competitive.

How to deal with that is a huge challenge because you want a diversified economy. Luckily, some countries that have opened up like Chile and others is you get a real exchange rate depreciation. You allow new exports in new sectors that you wouldn’t have anticipated become internationally competitive. In Chile, it’s been wine, fruits and vegetables, and things of that sort. Peru has certainly done well there as well. Opening up does expand exports, but it may not be manufacturing goods per se.

RAJAGOPALAN: Yes, that’s been my sense, too. My sense is the contrast between India and Brazil will be that India is going to push more towards services, also because it’s got a young population pushing towards being more educated and integrated to the global service economy in some sense. Brazil will switch the other way, which is going towards, you know that idea after World War I, which is developing countries really need to focus on agriculture and export commodities. I think Brazil seems to be going in that direction. Is that the sense that you get that that’s the focus?

IRWIN: I haven’t looked at Brazil in such great detail that I would weigh in on that.

Seventeenth Century Mercantalism

RAJAGOPALAN: I want to go back to 17th century and some of your earlier work. This is mercantilism, the 17th century before Adam Smith, that time period. In one of the passages in The Wealth of Nations, this is, I think, the third or the fourth edition, Smith’s criticism of the East India Company, and its policies, and its excesses are not really about corruption, and individuals, and the sovereignty and imperialism issues. It’s just really about the mercantilist nature of East India Company.

I have a quote here that said: “Such exclusive companies, therefore, are nuisances in every respect, always more or less inconvenient to the countries in which they are established and destructive to those which have the misfortune to fall under their government.”

This is very specifically about East India Company. In your work from the early 1990s, you actually find mercantilism to be not just about, if I may say, a kind of crony capitalism or getting a royal monopoly charter, but for it to be a strategic response to imperfect competition that is taking place. Especially in the context of long-distance trade, very long-distance trade in that time period. Where do you and Smith agree and where do you part ways on this question?

IRWIN: Oh, that’s really interesting. Thanks for bringing it up.

RAJAGOPALAN: It’s a very nice paper. This is, I think, 1990 JPE or there about, something like that. It’s just such an elegant paper that you’ve written. I really enjoyed it.

IRWIN: Before I get into your question, the reason I wrote that paper is that there was this vogue interest in strategic trade policy in the mid-1980s or so. A very famous model by James Brander and Barbara Spencer at the University of British Columbia that was getting a lot of attention at the theoretical level, but no one was saying, “Well, where’s a real-world example of the framework that they’re setting out, and does it really apply?” I couldn’t think of anything in the 1980s that applied to that so industries the model would be appropriate to.

Paul Krugman and Richard Baldwin did something on semiconductors because it was thought there was two major countries there but setting that aside. I started thinking where can we go back and see a real duopoly in action? It turns out I had to go back to 1610, 1620 and the competition between the Dutch East India Company and the English East India Company. Now, Adam Smith is talking about a much later period in the 1700s, so it’s a little bit of a different comparison.

I certainly wasn’t looking at political economy effects or the corruption of the industry, but I was just making a point that we had these two companies. They’re competing very ferociously by sinking each other’s ships over the very valuable spice trade between Indonesia, and Britain, and Western Europe, and that there might have been some benefit to helping out your domestic firm in terms of shifting profits away from foreign producers to your domestic ones.

I think by the time that Smith was writing, those profits had been well beaten down. There’s much more competition on those routes, so there’s no strategic trade policy incentive to help out a domestic firm. By creating a monopoly, arguably, you’d be handicapping your country because you’re not getting the most cost-effective, innovative firms engaging in that trade. Anyway, so I just say it’s a different situation a little bit.

RAJAGOPALAN: One of the things that I found striking when I read it is the way the Dutch East India Company and the British East India Company paid their company officers was actually quite different. The Dutch paid their officers much better, provided better incentives.

When we’re talking about when Adam Smith is writing, one of his chief criticisms of East India Company officers is he says something like, “I have nothing against those individual officers. It’s not like they’re terrible people, but if you work for such a firm, you are bound to be a corrupt person because you’re going to try and trade for yourself.” As mercantilists, you want a situation where supply gets constrained.

He gives examples of how company officers may burn down certain crops just so that it drives the price up so that they can get their little pot of gold in the immediate short run. That was another interesting contrast that I was thinking about when I read your paper because I had no idea that they had such different ways of compensating their company officers.

IRWIN: Right. The English, they would just get a share of the profits, or the shareholders would. Whereas with the Dutch, they were giving the firm participants part of the profits so they would produce more. 

I think what’s interesting about this period is when we think about international competition today, we think about competing over price, and quality, and trying to appeal to your customers, and try to expand your market share that way. Maybe a little industrial espionage to steal trade secrets, but we don’t think about burning down your rivals’ factories. We don’t think about raiding their lands, or hindering their ports, or sinking their ships.

This is a period, early 1600s, when trade was warfare. The easiest way to make profits is just to confiscate a Dutch ship as its coming around Spain, take its cargo and then sell it for yourself, and then sink the ship maybe to reduce capacity. We just don’t think about burning down rivals’ factories and the cutthroat competition of that period.

RAJAGOPALAN: When I read about all the various trading companies the Dutch, the Portuguese, the British in the early 1600s, they’re basically pirates. East India Company’s first venture was very successful but that’s because they basically took over a Portuguese ship. They took all the goods, they sank the ship, and they came back, and they sold everything for an enormous profit. They’re maybe pirates with a royal charter. I don’t know exactly what to call them, but they seem very pirate-like.

IRWIN: Right. The Pirates today in here, I think of Peter Leeson’s stuff, are a little bit different in Yemen and Somalia, they just like to attack ships. They don’t like to confiscate the cargoes and sell it for themselves, which is what’s going on there.

Nineteenth Corn Laws and modern day agriculture 

RAJAGOPALAN:  Moving to the mid-19th century, There’s a recent paper that you wrote about the British corn laws and the big idea being eliminating import duties on imported grain, which was pretty high duties and had quite large welfare implications for different groups of people. What you find is that you don’t see this huge benefit or huge adverse effect on trade when these duties get eliminated. What you see is these distributional effects, right? The top 10% of the people actually lose in terms of welfare, the bottom 10% gain because now food is so much cheaper, and so on.

It ends up being a very pro-poor policy if I had to say it in modern terms. Two parts to this question, if it is so clear from this example that unilaterally removing tariffs on food, especially agricultural produce, is so beneficial to the poor, why don’t we, one, see more countries reducing agricultural tariffs, developed or developing [countries]? Second, why don’t we see unilaterally decreasing those tariffs because it’s so obvious from your paper that there’s going to be this big benefit to the poor?

IRWIN: Well, it goes back to the British case too. In some sense, there’s a parallel here that farmers are very politically powerful. In the 19th-century British case, it was the few landowners. It was a very concentrated group that fought this. Getting into the politics of the repeal of the corn laws is really interesting. 

There’s a book by Cheryl Schonhardt-Bailey that gets into this, and what she finds is that the landlords had begun to diversify their portfolio. They realized that there’s only so much money you can make off the land, but there’s this new manufacturing sector that’s really growing. Once they started investing in that, they saw the benefits of exporting there and seeing that sector flourish far exceeded the income they’re going to get from keeping out foreign grain, so they allowed this to happen. Plus, there was a lot of agitation. The majority of the people are going to be better off with cheaper food and what have you.

Even today, although agricultural protections declined a bit in the US and the European Union with the reduction in the cap payments, at least in terms of protection, the subsidies are still there. Farmers are still politically powerful. They may be small in number, but they dominate in certain states. In the Midwest, they have a big electoral impact. If that’s true in the US, it’s going to be true in other countries as well.

I know there are a lot of farmers in India that are very fearful of open competition. They see the threat of imports. They don’t see the possibility of exporting. That’s sometimes a mistake too, in many countries. You could be a net exporter. You don’t have to worry just about the imports, or if you are going to have to adjust as a result of imports, there’s other crops you can produce with the land that can be potentially exporting. Because there’s that risk aversion, there’s a view of trade as a threat, and therefore, you don’t want to open up. And because there’s so many votes at stake, they tend to get their way, or they often do.

RAJAGOPALAN: I completely agree with your explanation on the developed world, which is the United States, Canada, Europe, and so on. In developing countries, one major difference between what was happening in the mid-19th century and present-day developing countries is most of them have universal adult franchise. There are more poor people [voters] who will benefit from cheaper food than there are farmers who will benefit from restrictions on trade policy.

Is this just a bootleggers and Baptist story of people who are very well organized and manage to get things moving and farmers make for a great lobby and great media examples? Is there something else going on, just in terms of broader trade literature and trade policy that it hasn’t paid attention to agriculture in quite the same way as it did, say, in the 19th century?

IRWIN: That’s a great question. I’m not sure I have a really good answer. I could give you the example of New Zealand, which has always been a major farm exporter, but they had a lot of subsidies that were introduced when Britain joined the European Union or economic community in the early 1970s. They needed to compensate farmers. They introduced these subsidy schemes. The farmers were very fearful of opening up and getting rid of those subsidies. Even though they did have to make that adjustment, they’ve flourished ever since.

There’s a group in the WTO called the Cairns Group, which are agricultural exporters that have opened up to some extent and are pushing other countries to open up. I think Brazil’s part of it, Argentina, New Zealand, Australia. I think where you have already farm exports, it’s a little bit easier to see the benefits of trade. Whereas if you’ve had the barriers in place, even though the population itself may benefit from the cheaper food, it’s hard to overcome the entrenched interests that are opposed.

Absolute and Comparative Advantage

RAJAGOPALAN: I have a different question on Adam Smith. We’re all taught Adam Smith’s division of labor, specialization, economies of scale, the cliff notes version of that. Then, we learn about absolute advantage in about five minutes. Then, we set it aside and start thinking about comparative advantage. 

The first question I have is does Adam Smith’s basic model of division of labor, specialization, and economies of scale anticipate the comparative advantage trade models, or does it actually undermine the comparative advantage trade models in the way that Krugman wrote about or something else? 

IRWIN: I think that Adam Smith has a broader view of trade, a much richer view of trade than what I would think is of the narrower David Ricardo theory of comparative advantage. If you have to read one of the two, read Adam Smith because it’s much more fun to read. Reading David Ricardo is more like reading a textbook in the sense that he doesn’t have this broad historical sense and these new rich ideas and how they’re interacting that leaves a lot to the imagination and leaves a lot to future research to flesh out.

He’s saying, “England can produce wine and cloth. Here are the labor coefficients, and we’re going to do this static comparison between England and Portugal.” That’s a very narrow way of thinking about trade.

RAJAGOPALAN: So badly written, you want the wine by the end of it. 

IRWIN: There’s a wonderful quote by George Stigler saying: “the only thing that someone will take away from reading Ricardo’s theory of comparative advantage is that they need a bottle of wine to get through it,” or something along those lines.

RAJAGOPALAN: I agree.

IRWIN: Adam Smith isn’t technically as sophisticated if you will, but in terms of the ideas, they’re very sophisticated. Obviously, he wasn’t thinking in terms of an economic model directly, but it’s a much richer overall discussion of trade that I think you can learn a lot from, even reading today.

RAJAGOPALAN: When you see the world today, what do you think the world looks like more? Does it look more like Ricardian comparative advantage and the more recent models like Heckscher–Ohlin, and those things that came about? Do you think it really looks like the Adam Smith story, which is much more nuanced, pay attention to what’s happening in the domestic economy in terms of division of labor, specialization, and that is the lead-in to foreign trade, which is so deeply entangled with domestic trade?

IRWIN: Well, I hate to waffle, but I think you need a little bit of both. It depends on the question, depends on the country, depends on the issue that you’re examining. These are just tools that you draw to help out your understanding of a particular situation. I will confess I’m a little bit more in favor of Adam Smith. I’ve always said that his theory of trade, and in particular his analysis of trade policy, which I think is underrated, is very sophisticated, and very wise, and has a lot to say to us today.

RAJAGOPALAN: Beautifully written, if I may add.

IRWIN: Absolutely, yes. It’s much more interesting, I think than Ricardo’s, but you wouldn’t want to discard Ricardo either in terms of the role of technology in determining what country’s going to export and trade.

RAJAGOPALAN: Were we wise to discard absolute advantage in favor of comparative advantage because that’s how we teach it in class? There was absolute advantage. By the way, it wasn’t correct because Ricardo came up with a better theory. Is that still the correct way to think about it, or is it both? Then, give real-world examples.

IRWIN: Well, actually, if you read historians of economic thought who looked into this, they discard this notion that Smith or anyone else had the idea of absolute advantage. Just Google Adam Smith, absolute advantage or something like that. Some of these papers will come up. That said, I still talk about absolute advantage just because it’s a great setup for students. It’s a great way to get them to understand the difference, which is an important difference. Even if Adam Smith didn’t quite make the error of absolute advantage, I still peg it with him sometimes just as a heuristic or as a pedagogical device.

The Future of Argentina

RAJAGOPALAN: I want to finally come to Argentina. I recently visited. I was there in December. This was right after the election.

IRWIN: We may have overlapped.

RAJAGOPALAN: This was with your class, right?

IRWIN: Right, yes.

RAJAGOPALAN: This was my first visit to Argentina, unlike you, so I have a number of questions about Argentina. Maybe looking from my lens, which is very much 1991 reforms and what I’ve been following or studying, is this Argentina 1991 moment, or is it closer to what happened in Peru? The problems of Argentina seem much more like the Peruvian problems.

 But the attitude of the Argentinian reforms seem a lot more like the Indian attitude towards reforms, which is - the time has come to get these ideas together. This needs to be driven by a mental model. We can’t just cherry-pick different policies or do Washington conditionalities. We just have to have a very clear understanding of what we think an economy should look like. He’s now got all sorts of policies right, from striking down rent control to getting, of course, their big solvency, and fiscal deficit, and hyperinflation under control. I guess the first question is how do you observe this present moment? Where are they in history?

IRWIN: That’s great. Chou En-Lai famously said about the French Revolution, “It’s too early to say,” I think he said this in the early 1970s. We really won’t know until it’s over, but it is a moment in which things could change. There’s reason for optimism and reason for pessimism. I was just reading the Financial Times before we started. The labor unions are going to have some massive protests against the reforms that Milei is trying to introduce. 

I think there was resistance in India a little bit, but I think there’s more of a consensus at the top of government. When there was a change in government, they didn’t revert back, and so things stuck in India. Even if the reforms were incomplete, they moved in a new direction. 

I think what the history of Argentina showed is that the pendulum does swing. Milei could introduce a lot of reforms. Even if he gets them through over a lot of the opposition, the opposition could kill it because he doesn’t have much political support in the Congress. Let’s say he gets them through, another four or five years, there’s going to be a new administration. If it’s a Peronist, they could try to undo everything that they’ve done. That’s really the difficulty of getting a political consensus. One of the reasons why Reagan and Thatcher were so historically important is that their successors didn’t really undo a lot of their work. Famously, Margaret Thatcher said her greatest achievement was Tony Blair. I think one of the 1991 reformers too, their great achievement is it wasn’t undone.

RAJAGOPALAN: Even the very Swadeshi, the BJP government that came after had a decade prior to that been all about ‘Making in India’ and things like that, but they never turned back on tariffs.

IRWIN: Exactly.

RAJAGOPALAN: In fact, they went the other way. They further reduced.

IRWIN: Yes. That’s like Chile as well where the Chicago Boys under the Pinochet’s dictatorship, it wasn’t undone when the dictatorship was over. In Argentina, you can’t say with much confidence, even if a lot of progress is made that they don’t revert because the Peronist ideology and the social groups that benefit from that are so entrenched and so politically powerful. Four years or five years may not be enough time to see the payoff from moving in a different direction that it could get reversed. That’s one of the big political economy problems is ensuring that reforms don’t get reversed.

RAJAGOPALAN: That’s true. I’ve only spent about two weeks in Argentina, and this was my very first visit, but the cost of hyperinflation imposed on regular people is just so enormous. I literally saw people changing the prices, and they don’t have menus, they have QR codes. I don’t even mean how do people deal with retirement and so on. This is just everyday people. They’re consuming durables. They’re trying to spend their money down as soon as possible. The poorest people are experiencing starvation because of hyperinflation.

Something about that situation makes me quite optimistic that what they’re going through right now is already so bad that maybe there is a broader popular consensus, even if there isn’t an elite political consensus, that none of this can be rolled back. In that sense, to me, it feels very Peruvian because in India, even in those terrible times, even in crisis, I think inflation was 12% or 13%. It wasn’t 145%. That makes me optimistic. Am I just being over-optimistic, and you’ve seen this song play out in Argentina many times before?

IRWIN: The previous center-right government of Mauricio Macri, they were also very reformist, but they wanted to do things gradually because they didn’t want to shock the population. The problem with that is that three or four years into your administration, as you’re beginning to do things, and they begin to bite, and the initial impact is negative, you don’t have the time to see the positive, and then you own it. You don’t blame your predecessor.

I’ve always thought most of the reforms that are big ones come with a change of administration where they do a lot of things quickly. The pain is felt upfront. You get the benefits a few years later, and you can blame your predecessor for the pain. That’s one reason for optimism. I’d take exactly what you said but put it in a negative way is that many of the poor people are still Peronist.

Even though they’re the ones hurt by these policies, they still identify with the government because of the subsidies they get or what have you. They’ll think that Milei is taking away the subsidies for energy and what have you. That’s what you were pointing out earlier that a lot of poor people in developing countries, they’d benefit from farm reform because the prices would go down, but often, they don’t always are the constituent group that’s pushing for reform. The same thing could happen in Argentina.

RAJAGOPALAN: The way you framed it is making me think very much that this will be like the Peruvian story where initially, they thought they’ll start with gradual reforms. They very quickly switched to shock therapy. At least in the current Argentinian moment, they’ve been very clear all along that there will be some dramatic changes right away. 

Do you think Argentina will dollarize? I know he ran on the campaign and then said, “Okay, not right away. I’ll dollarize in a few years,” but to me, it seems like if you can get the fiscal problems under control enough to dollarize, you may not need to dollarize.

IRWIN: I agree. I think the consensus of a lot of Argentine economists who are pro-reform agree as well. Dollarization is not really the solution. You have to solve the underlying problems. Now, dollarization may have proved to be useful in the campaign because what he was saying is that inflation is the problem number one. I’m going to do extreme things to get rid of inflation. We just can’t tolerate it. You can’t bring it down gradually. If it’s 20% or 30%, you can bring it down gradually. If it’s 150%, gradualism really doesn’t work so well. You can’t have a 10-year path of bring it down, 90% next year and 80% after that. 

It was more of a signal of frustration that we have to do something dramatic because right before I think even the election, he was beginning to walk away from that. They simply don’t have the reserves. Once again, if you fix the fiscal problems and that leads to the monetary solution, then you don’t have to, and then you can keep an independent exchange rate as a shock absorber, which many countries have benefited from.

RAJAGOPALAN: I just loved Argentina so much. I’m just so optimistic for it. Maybe my optimism comes from what happened in India, but I’m really optimistic and hopeful that they resolve this. I’ll show you some pictures from my interaction with hyperinflation.

IRWIN: Oh, great. I’d love to see them, but you’re absolutely right. Buenos Aires is a beautiful city. The people are so wonderful, great restaurants. There’s no reason why it shouldn’t be a flourishing place with a poverty rate much less than 40%. Your heart goes out to them. The question is just do you have the political fortitude and the right policies in place to get rid of the problems that they’ve been experiencing? Obviously, yes, we all have to be rooting for Argentina.

American Exceptionalism

RAJAGOPALAN: I have last couple of questions about the United States. In terms of history, the Founding Fathers of the United States were quite protectionist. How is it that they decided to have this fantastic internal domestic free trade zone? Over a remarkably long period, the US has been very consistent on free trade. It’s never had these crazy periods of insane trade barriers. There are ups and downs, but it’s all within a pretty small range, unlike most other countries. Is this a kind of American exceptionalism, and where does it come from?

IRWIN: Well, actually I disagree a little bit with the way you characterized the founding fathers as being protectionist. A lot of them believed that the United States had flourished because of commerce. They wanted to see commerce and the economy do well. They weren’t nativist or isolationist in any way. We were basically an eastern seaboard country with very few people, 100 miles off the coast. We were very much focused on the Atlantic, and we wanted freer trade with Britain and what have you. That said, levying an income tax is impossible in 1780s or 1790s. Excise taxes were very unpopular, so the most efficient “way of raising revenue” was through customs duties.

There were tariffs that were imposed at the border. If you look at the first tariff, it will say to protect domestic manufacturers, but they weren’t really exceptionally high tariffs. They really were for revenue purposes. Obviously, you get special interests, you get changes in economic circumstances, and so those tariffs begin to get ratcheted up. I talk about in my book Clashing Over Commerce that regional politics of all this where the Mid-Atlantic States wanted higher tariffs, and other regions didn’t, and they were outvoted and the reasons for that. Then, there was a backlash in the 1830s, and the tariffs actually unilaterally began to come down.

Then, the civil war is the big shock. That’s when the US really becomes a protectionist country. I wouldn’t say it was right out from the starting gates with the Founding Fathers. I’d say it’s after the Civil War, there’s a political coalition in place that really wanted higher tariffs to protect workers and industries from foreign competition.

RAJAGOPALAN: I guess what I’m asking is why is it that American protectionists are so bad. Even their worst protectionists are never anything like you’ve seen in other parts of the world. What is it about the United States, either in terms of political economy, or culturally, or in terms of the core ideas that even the protectionist version has a good handle on keeping trade relatively open and on keeping your standard tariffs, import duties is relatively low?

IRWIN: That’s a great question. I’d say the answer is that the US has never really had capital controls. We’ve always allowed free movement of capital. We definitely tried to protect certain industries at certain times, but our capital count has been open. We never had really quotas or quantitative restrictions. We didn’t have foreign exchange restrictions. When you look at India, for example, the problem at least initially, was not the tariffs. It was all the foreign exchange restrictions. I’m sure you’ve heard stories, and you have this in The 1991 Project—

RAJAGOPALAN: We still have them.

IRWIN: —of people waiting at the airport for family members to come back from abroad with suitcases filled with foreign goods. It wasn’t protection, it was just you couldn’t get the foreign exchange. The US has never had a foreign exchange constraint. Either we were on the gold standard and there was free convertibility, or obviously more later, the dollar, the international currency.

A lot of the problems with developing countries, its restrictions imposed for balance of payments purposes to conserve foreign exchange reserves, and so you want to prevent those outflows. Tariffs are one way, but the foreign exchange restrictions are very difficult to disentangle. The US never had those, so the tariff was really the only game in town.

RAJAGOPALAN: Then, you’re saying that there’s a natural pressure, or a lack of pressure on raising tariffs too high, right? If that’s the only game in town for revenue, then there’s a natural limit to how far you can go with tariffs. Is that a good way to think about why tariffs were still somewhat under control?

IRWIN: Partly, but I’d say a bigger influence was the fact that other regions of the country that depended on exports were a countervailing political force. There’s only so far you could push the tariffs as you get closer to autarky. Those export-oriented regions of the country and those producers would fight back politically.

RAJAGOPALAN: This is still basically, the US has been always a big exporter of agricultural products, right? The constituency that really wants these tariffs of protectionism is manufacturing, and they can very easily get outvoted by agriculturists. Is that the political economy way of thinking about this?

IRWIN: Yes. Even think about a more recent example when President Trump put on the steel tariffs, there was a foreign retaliation against US agricultural exports. Now, a lot of the agricultural states in the Midwest, those farmers were very pro-Trump, and they voted for him and what have you, but they were very much against the trade policy because they were the ones that were getting hit with foreign retaliation and blocking the agricultural exports in the US.

RAJAGOPALAN: What do you see happening in terms of US trade policy? Will the US become more protectionist, say in the next 15 years, or less protectionist?

IRWIN: I’d say the recent trend has not been good. We had obviously the Trump administration, which was fighting against the trade deficit and protecting American jobs and all that and didn’t do quite as much as I thought they might do. We had steel tariffs, aluminum tariffs, and then the tariffs against China. That’s a lot. Your colleagues have talked about the negative consequences, but a lot more could have been done. A second term might bring about a lot more.

The Biden Administration’s kept most of those policies in place. Now, we have subsidies as well, mainly, in terms of forms of tax breaks and what have you. I don’t see a lot of liberalization coming, but whether there’s more protection, I think we could. I guess I’m a little bit worried about where we’re going.

RAJAGOPALAN: I wish we were more optimistic, but the good news is that trade economists will have lots of stuff to do.

IRWIN: Always, true. Good point.

RAJAGOPALAN: Thank you so much for doing this. This was such a pleasure.

IRWIN: Oh, you’re welcome. It’s so much fun to be here.

Photo credit: Aspenia