Don Boudreaux on Free Trade, Protectionism, and the China Shock

The China Shock thesis has emerged as an important theoretical development, but it may signal bad economics.

Don Boudreaux is a professor of economics at George Mason University as well as the co-director of the Program on the American Economy and Globalization at the Mercatus Center. He joins the Macro Musings podcast to discuss the future of trade and globalization.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Don, welcome to the show.

Don Boudreaux: I'm very happy to be here.

Beckworth: Glad to have you one, as I mentioned, on as a colleague of mine here. At the Mercatus Center we have a very active trade team. I joke that Donald Trump has been the full employment act for you guys.

Boudreaux: From a very narrow cost benefit calculation Donald Trump has been marvelous to my career. The demand for what I write and what I say in public speeches has gone way up over the past two years.

Beckworth: Yes, and that includes this podcast. We've had several trade episodes and you're the latest one and you've come on in a very timely manner because a lot of developments have happened that we'll get to later. Before we get into those I want to ask you, how did you get into economics and then into this particular area of globalization and trade?

Boudreaux: I got into economics totally by accident. I was the oldest of four children from a working class family in New Orleans and no one in my family had ever gone to college and my mother wanted me to go to college for at least a year. Just go try it out. My first semester I completely screwed. I went to a place called Nicholls State University in typical Louisiana and I hated my first semester so much I wanted to quit at Christmas and my mom's like, "You promised you'd go a year." We rejiggered our agreement so I went to school Monday, Wednesday, Friday and I took Tuesday, Thursday and used those to work at the shipyard where I planned to make my career as a welder or a pipe fitter and I said I needed a Monday, Wednesday class and it was a class in economics. I didn't know what economics was but I took it because it fit my schedule and I was blown away by economics, had a really good teacher and she used supply and demand to show why I remember waiting in gasoline lines in 1973 when I first started to drive and the explanation of how the government imposed price ceilings made a lot more sense to me than well, Exxon is greedy and keeping it's tankers out in the Gulf of Mexico or we're running out of oil.

Boudreaux: I just became blown away almost in a matter of days by economics. I was fortunate. I was at a school, very few people have heard of Nicholls State but I had really good teachers. They're not known researchers, of course, but my teachers at that school were really dedicated classroom teachers. They taught economics as if it's a relevant discipline. They didn't teach at is a branch of applied mathematics. They didn't teach it as if they were training their undergraduates to go on to get PhDs. The irony is it made me want to go on to get a PhD in economics, which I did. It was just having a good teacher who used the economic way of thinking to make the world that I saw around me much more understandable. I fell in love with economics 41 years ago and I'm still in love with it.

Beckworth: Well, we can thank your mother and this lady who taught you-

Boudreaux: The late Michelle Francois. She died a couple years ago. I was still in touch with her. She was great.

Beckworth: Two important ladies in your life.

Boudreaux: Two important ladies in my life, my mom and Dr. Francois as I called her.

Beckworth: Oh very nice. Yeah, teachers have this lasting influence they don't often realize until many years later. What about your specialization on trade? I know you do other areas as well but you're a big trade enthusiast.

Boudreaux: That's kind of by accident as well. My original research interest was in anti-trust. I did my dissertation at Auburn and I did it on theory of the firm and industrial structure and competition theory, which I'm still interested in. In fact, I went to law school in order to learn the legal side of anti-trust but I had bad timing because I started law school in '89 and that was right around the time when anti-trust pretty much became a dead letter. Not as dead a letter as I would like it to be but really the activity on the anti-trust front tamped down a lot and my job ... I got a job out of Clemson after I got my law degree in 1992 in the economics and legal studies department there and Clemson ran an MBA program for foreign students and every summer the students would come to Clemson for a Capstone class so I started teaching at Clemson in the summer of '92 and one of the Capstone classes was a course in international trade. I had had international trade as a graduate student at NYU from Fritz Mackel. I wanted to take, it was a great course. I wasn't an expert in international trade but no one at Clemson wanted to teach international trade so I was the low guy on the totem pole and said, "You, you're teaching this MBA class in international trade."

Boudreaux: I said, "Ah, I really better bone up on it and learn a lot about it." I wasn't happy with that at first but I was happy to have the job but I wish I'd have taught industrial organization or price theory. They put me in this class teaching international trade and I just fell in love with it because you start thinking about all the claims that people make in the public policy arena about tariffs and free trade and import quotas and the incidence of these things and it just became ... I've been interested in trade now for 26 years and it's pretty much become my specialty.

Beckworth: And you're part of the program here at the Mercatus Center with Dan Griswold and Christine McDaniel and so you guys again, are very active in what you're doing.

Boudreaux:        Yeah.

Beckworth: Now I want to step back and take a big picture view of trade and globalization and just ask a very general question. Is the world better off because of the increased amount of globalization over the past few decades?

Boudreaux: No, unquestionably so. All the data show it. If you look at country level data and countries that have more open trade, have higher rates of economic growth, they have higher real per capita income. I know correlation's not causation but we have a very good theory, of course, to explain why more open trade does in fact lead to a better performing economy. The division of labor becomes deeper, people can specialize more deeply in what they're best at and when people specialize not just and trade with their neighbors but specialize and trade with people on the other side of the globe you get the best talent from around the world helping you to improve your standard of living and serving as market for you to hone your talents as best as possible. There's no question that trade has improved global standards of living. Everyone knows this but I'll mention for the record, China. I forget the exact number but I think everyone is agreement that the number of people who have been lifted out of poverty on mainland China since the early 1980s, it numbers in the hundreds of millions. This is a great human achievement. It's not just because China became more active in international trade.

Boudreaux: You have the whole range of market reforms but what comes along with market reforms is a greater acceptance of trade across political borders. Ultimately it's impossible, I think, to separate out favoritism of an acceptance of free markets generally from an acceptance of free trade as part of that package. The Chinese have benefited from free trade. Just one other example, people don't think of it as free trade because the term wasn't used back then but heck, the 1787 US Constitution. One of the things that that did and one of the things that it was explicitly intended to do was to create what we now today call a free trade zone so the constitution took away from the states the power to regulate interstate commerce because governments then, as governments now will always try to protect politically salient domestic producers and so the founders fear that the state governments will try to do that, probably sensibly, and so the US constitution took away from the states that power, gave it to the national government and one can complain about all the bad things the US supreme court has done over the years.

Boudreaux: Some people think it's been more successful than others but my gosh, one of the ways in which the US supreme court has been remarkably, consistently good over the past 200 years is to interpret that document that was ratified in 1789, interpret the commerce clause consistently as correctly as one that maintains free trade within the United States and so we think nothing of people in Georgia trading freely with people in Virginia and Hawaii and clearly we're a wealthy nation. That's not the only source of our wealth but it's very difficult to argue that it's not a key part of why we grew so wealthy and there's no economic reason to suppose that what is true of trading across state borders in the United States is not equally true of trading across political borders. If I can be made wealthier, if I live in Buffalo, New York and I can be made wealthier by trading with someone across the border in Vermont then surely I can be made equally wealthier by trading with someone across the border in Toronto, in Canada. Economically, those two exchanges are identical but they're treated politically and legally very differently.

Beckworth: Yeah, we had Dog Irwin on not too long ago with his new book, which is a great-

Boudreaux: It's a great book.

Beckworth: Yeah, great book, big book but it's a great book on the history of trade policy in the US and one of the things we talked about is this often misperceived idea that because there were tariffs in late 1800s that somehow that led to more growth but his argument and what he says the literature shows is that that growth occurred despite those tariffs and one of the reasons it grew rapidly is because we did have a huge internal market-

Boudreaux: Internal market.

Beckworth: All the free trade within the huge market was a key part of that success story.

Boudreaux: Yeah. Our growth I think would've been even higher had we had freer trade but you can't look at the growth we had and the fact that we also had tariffs, which by the way, particularly after the civil war but the tariffs weren't always very high. A couple things to keep in mind, which maybe Doug mentioned. Back then tariffs were a major source of revenue for Uncle Sam so they couldn't become too protective because if they became too protective then Uncle Sam would lose a lot of revenue so that probably put some kind of constraint on the level to which the tariff was raised. That said, there were protection pressures in the US and oftentimes the political process succumbed to those protections pressures but as you just pointed out, David, we had this large internal market and we were freely trading within that. We had open immigration pretty much. There were certainly no quotas anytime in the 19th century. There was a really nice paper published a few years ago in the independent review by Norman Van Cott and Cecibel Hannon on 19th century US economic growth and immigration and what they show in that paper, with empirics not just theoretical argument. They show that the open immigration policies were a major contributor to US economic growth and that helped to mask the depressing effects that the trade restrictions that we did have in place put on US economic growth.

Boudreaux: As Doug also showed in his research, when Doug looked at the different industries in 19th century US that were protected and those that weren't protected. The protected industries actually grew more slowly than the unprotected industries. This is a classic case of correlation not being causation. When you dig down into the details you find no justification for the claim that the United States grew because of tariffs, nevertheless because protectionists like to point to tariffs as a major source of growth. They never let go of that myth-

Beckworth: Yeah, it's very popular for sure. Doug mentioned that the service sector in particular was the one that had the most rapid productivity growth during this time and that was largely a non-traded sector so.

Boudreaux: Yeah, yeah.

Beckworth: It had no bearing whatsoever, or no relation to the tariffs at the time.

Boudreaux: That's right.

Beckworth: Okay, so going back to the original question. Globalization has dramatically affected the world in a great way, lifted over a billion people out of poverty within the past few decades so in an absolute sense the humanity is far better off because of increased globalization. I think most people would agree on that point in the aggregate however we step back to where we are today and we see things like President Trump's push back against trade and he's not the only one. There's a rise of nationalism and protectionism around the world-

Boudreaux: And on the American left, you know Bernie Sanders and Hillary Clinton was not great champion of free trade during the last campaign.

Beckworth: Yeah, so how do we interpret that? Globalization has been good on balance for humanity, yet we see these strands of thought and movements that push back against it.

Boudreaux: I don't have a very good answer to that question but it is one, as you can imagine, I've thought about a lot and I have some strands of hypothesis about it. One is we economists have not done a very good job of making the public case for policy of free trade. Adam Smith started us off very well 243 years ago but we just haven't done a very good job. For every Milton Friedman and Frederic Bastiat and Russ Roberts and Steve Landesberg and Doug Irwin that's out there, we have just a lot of economists who either refuse to talk to the public or when they talk to the public about trade they do it in a way that it puts the public to sleep and so there isn't a widespread public understanding of the benefits of free trade and that's important because the political forces for protectionism are always very powerful. It's trite to say but it is very true. The benefits of protection are concentrated and they are very easily seen. The cost of protection, while always in practice greater than the benefits of protection are spread widely over all consumers and other producer groups who don't have a lot of political power.

Boudreaux: Particularly in a country as large as the United States when you spread those costs out that thinly they're just not seen and so the economic ignorance of the public about trade combined with the rent seeking forces that push for protection and have an interest in promulgating spurious yet superficially a plausible argument in favor of protection. That combination is a powerful force for protection. Why it arose when it did, I can't say. Perhaps the great recession of 10 years ago had something to do with it but even if that's true the veneer was very thing even prior to that of protecting the case for free trade. Even in the supposed heyday of free market American capitalism in our lifetime, the Reagan administration. Reagan spoke a good game on trade and he did some courageous things on trade. He also did some pretty politically calculating things on trade that no free trader would applaud so protectionism has always been there. It has ramped up lately both in practice and certainly in rhetoric and I believe that Deirdre McCloskey is right, that the way we talk matters and I'm more scared ... Well, I don't like and I'm frightened by the policy that the Trump administration is putting place.

Boudreaux: I'm even more scared by the potential long run consequences of the anti-trade rhetoric that is so prevalent now. That gets into people's brains and it creates mantras and thought processes that almost take on a life of their own. They become memes so I am not as optimistic as I would like to report about the future of trade.

Beckworth: Okay, let me throw out a suggestion for maybe why this push back against globalization has occurred when it has and this has to do with the fact that within the past decade there's been a rapid acceleration of trade throughout the world. One of the biggest developments was the China shock as some people call it, the introduction of China and it's just a one time event. It's this massive increase to labor supply and it should peter out over time, not a big deal as we go forward but just a big shock and the losers were a bigger group, more painful, more vocal. What do you think of that?

Boudreaux: I don't think much of it.

Beckworth: Okay.

Boudreaux: The China shock paper, I think it's the one that was published in 2016. This is by David Autor and Gordon Hanson and Dorn. They looked at US employment from 1999 through 2011 and China entered the WTO in 2001 so they look at it fairly, they look at a 13 year period and they find that over that 13 year period, according to their empirics, US increased trade with China destroyed 2.4 million American jobs and they claim that's a net figure but I think it's a preposterous claim. I don't think they can make that claim. If you look at data from the bureau of labor statistics you can find the number of jobs that are destroyed every month in the United States, plus the number of jobs that are created. I went back and looked at these data not long ago for the past 10 years on a monthly basis. Do you want to guess how many jobs are destroyed in the United States each month over the past 10 years? What's the average number of jobs destroyed, where workers lose jobs because their employers gone out of business, they get laid off because their employer doesn't need as many workers or because innovation has replaced the need for labor? Take a guess of the average number of jobs.

Beckworth: I'm going to guess 500 to a million.

Boudreaux: 1.6 million.

Beckworth: Wow.

Boudreaux: 1.6 million jobs on average destroyed over the past ... By the way, this is not just driven by the great recession Currently you have about 1.6 million jobs being destroyed every month in the United States. Of course every month there are also jobs created, which is why the net figure that we all hear in the first Friday of every month, you hear if we're not in a recession say well you know, 120 thousand jobs were created last month. That's a net figure. That's a figure over and above that average of 1.6 million and so the China shock figures, if you take that average that means that over the period they studied, that's 15 thousand three hundred and 85 jobs destroyed each month. Well, if each month 1.6 million jobs are being destroyed I don't see how it's possible for researchers to say, "Oh, 15 thousand three hundred and 85 of them on average are destroyed because of trade with China."

Boudreaux: The amount of job churn in our economy including the size of our labor force is so huge that a level of job destruction of 2.4 million over the course of 13 years is so small that there is no way you can say that trade, no legitimate way that you can say that trade with China has resulted in jobs in the United States today being 2.4 million less than they would've been absent trading with China. Those authors don't deny that the number of jobs over the 13 year period went up. What they're claiming is that well, it didn't go up quite as much as it would've gone up had we not traded with China. I think it's an indefensible statistic.

Beckworth: So you would call it a China whisper right, maybe?

Boudreaux: I would call it the China nothing. When you make startling claims the long standing and well documented and well argued theory that economists have for the affect that trade has on jobs in total is of course that trade has no net effects on jobs in total. In the short run the number of jobs is affected by macro economic matters as you know. In the long run the level of jobs is determined by the flexibility of the labor market and by the size of the labor force. Trade doesn't affect any of those things. What trade does is rearrange where jobs are. The more trade we have the fewer jobs we have in industries at which we have a comparative disadvantage and the more jobs we have in industries at which we have a comparative advantage so the China shock thesis makes a claim that is at odds with basic economic theory meaning that there's no reason to think that trade in the long run is going to have any affect on the net number of jobs. When you make that kind of claim you really number one, have to have a good theory for why it occurs and number two, have to have overwhelming evidence and I don't take 15 thousand three hundred and 85 jobs a month compared to 1.6 million being destroyed each month as coming close to being adequate evidence for the China shock.

Beckworth: Okay, how about this? Maybe more in the spirit of that paper is just the fact that their has been growing trade because that's fair right?

Boudreaux: Yes.

Beckworth: And it's visible and even if it's not the fault of trade, someone that loses their job maybe to automation, it's just the political economy of growing trade. China's this big menacing threat. Even before China it was India with outsourcing of jobs. Just the political economy of increased globalization may have made us more sensitive.

Boudreaux: Perhaps. We've always had a dynamic economy except in the 1930s it wasn't very dynamic. By the way, in the 1930s we ran trade [inaudible 00:22:17]. We always had a dynamic economy and although the portion of our economy that can legitimately attributed to international trade has about doubled over the time since I started studying economics 40 years ago. Double, maybe a little bit more than double. It's still pretty small. It's still less than 20 percent of the US economy. Exports and imports. Most of our economy is still domestic because we're a gigantic transcontinental economy with 327 million people in it and so most of the economic change we get comes from, it's just internally. Consumers changing their tastes and new labor saving machines being introduced, new means of transportation being introduced. Of course, no one likes to lose a job and some particular jobs are lost to imports but returning to the point I made earlier. The vast majority of jobs that are lost are lost simply to economic forces that have nothing to do with international trade and it's just the ordinary churn of a dynamic competitive entrepreneurial economy.

Beckworth: All right, so with that said, do you think we've done an adequate job with the losers from trade?

Boudreaux: I don't like the term losers from trade and when I say this people think, oh you're being, you Boudreaux being extreme, of course they're losers to trade. I don't think there are losers to trade. There are people who lose jobs because of trade. There are people who lose jobs if you decide to go on a diet and you stop buying some of the food that you bought before so to say losers from trade implies that trade is unique in creating losses that no other form of economic change creates and that's simply untrue. An example that, there are many examples and one of my favorite examples is when the Atkins diet became very popular in the United States about 25, 20 years ago, Krispy Kreme announced that it was closing down several of it's donut shops and it blamed the Atkins diet and probably correctly.

Beckworth: Oh really? Interesting.

Boudreaux: Yeah, because people were buying fewer donuts and were buying more chicken and pork so some jobs, brewers and bakers, some of them lost their jobs, people working on ranches and chicken farms, some of them got jobs. It had nothing to do with international trade so I can see no reason for describing someone who loses a job to an import as a loser compared to someone who loses a job because you decide you want to eat a diet lower in cholesterol, or excuse me, lower in carbohydrates than before. Also, one of the rules of living in a market economy to get the benefits of a market economy is producers respond to consumers. It's not the consumers respond to producers so part of the rules of playing this game, I'll put it in quotation marks, game, quote, unquote, is if you're a producer you're free to produce whatever you want but you're not free to force people to buy whatever it is you're selling so you have to make something that people want to sell, excuse me want to buy. If they want to buy it today and tomorrow and the day after, that's great. Good for you.

Boudreaux: If they decide four days from now they don't want to buy it you're not losing. You've chosen to play that game and by entering that game one of the rules is okay, if people stop buying what I'm selling I have to sell something different. I'm not saying it's easy. I'm not saying that you can persuade something politically that they should accept free trade because this is the rules but I think those of us who analyze and discuss trade in a sober and economically informed manner should stop talking about the losers from trade unless we're willing to talk about the losers from competition. I never hear economists talk about the losers from competition. That's what they would be. Yeah, more intense economic competition. Well, yeah, when you have that you have some losers. some firms that go out of business, while other firms will increase their sales. There's nothing unique about trade in creating job losses, business closures.

Beckworth: It's the nature of capitalism.

Boudreaux: It's the nature of capitalism and you cannot have capitalism, a dynamic market society without people in their roles as producers being willing to adjust to people in their roles as consumers spending their own money. It's like if you and I agree to play a game of poker. We know what it means if I say, "Well, I lost when we played poker together", but you wouldn't say I'm a loser at the game of poker if I choose to continue to play the game of poker. If I continue to choose to play in the game of capitalism I have to be willing to play by those rules and by the way, virtually no one does it. It's easy to drop out of the game of capitalism. Get yourself a couple of acres of land and live in a subsistence way. You don't have to trade with anybody. Then you don't have to worry about what the Chinese are doing, you don't have to worry about what currency values are, you don't have to worry about what trade policy is. You just live on your own.

Boudreaux: Now you're not trading with it you'll be desperately poor and the reason people don't do this is because for anyone to do that they understand they would be desperately poor so what people want, it's kind of selfish. What people want is to have all the riches of being part of the dynamic competitive market order but they individually would like to be excused from it. Well, I'm kind of an old fashioned guy. I think any rule that's justified has to be generalizable. Everybody has to play by it. You can't just single out yourself and say, no I'm excused from obeying that rule and if you generalize the rule, if the rule is no producer has to adjust to the demands of consumers then if you generalize that to all producers then everything shuts down. Then there's no more competition, there's no more change, there's no more innovation and that would be the end of the prosperity that we all take for granted today.

Beckworth: Let me take that reasoning and apply it to an issue where I think President Trump gets the most credit or at least the most recognition that he's onto something. In many cases we say Trump just doesn't get it right with his squabbles with our North American trade partners or with Europe. When it comes to China you hear more people being sympathetic with his concerns about intellectual property theft. Are we to just sit back and say, look when we trade with China that's just the way it is, it's the nature of capitalism internationally or how would you view that case?

Boudreaux: It depends on the level of the tale at which we want to discuss matters. First of all, China is not unique in subsidizing industries, not unique at protecting certain industries from foreign competition. United States is not and as we discussed earlier, has never been purely free trade. The export/import bank, for example, in the United States dates back to the great depression, the new deal era. The United States government is just as prone to satisfy rent seekers as many other governments around the world. It's not the worst but it's not the best either and so with China the Chinese government obviously does things that every decent economist would say, oh that's economically damaging but let's keep in mind the main victims of China's mercantilist policies are not Americans. The main victims are the Chinese people themselves. China's mercantilist policies are mostly harming the Chinese. Yes, China's mercantilist policies does take some market demand away from some American firms that might otherwise export more to China or sell more to Americans who are buying things imported from China but the vast majority of those harms inflicted on the Chinese people themselves.

Boudreaux: It's curious to me, it's very interesting to me to hear American conservatives today who still believe or they still say they believe that when American government intervenes in the economy the government is so heavy handed and it doesn't know what it's doing. It makes Americans poor with these regulations and high taxes here. Somehow though, those same Americans who complain rightly, I think, about US government interventions, they think that foreign governments, when they intervene in their economies they're terrific. They make their economies strong and rich. Well, those are interventions abroad are no better for their economies than our interventions here at home are for our economies. They make us poorer. Yes, some particular industries abroad benefit from their government subsidies or import restrictions. Some domestic industries here and workers do suffer because of those foreign interventions but overall those interventions by the Beijing government, by other foreign governments weaken China, weaken other countries and in some cases we actually benefit in a positive way.

Boudreaux: If the Chinese government is subsidizing, oh I don't know, Chinese production of steel and we get to buy steel at an artificially low price, contrary to what President Trump thinks that's not a bad thing for Americans. That's a good thing for Americans. It's a bad thing for the Chinese. I don't favor it. I don't particularly like having poor Chinese people subsidize my consumption of products made with steel. I'm richer than almost everyone in China. Almost everyone in America is richer than almost everyone in China but we are not the main victims of the Chinese mercantilist policies. The Chinese people are the main victims and therefore, when the Chinese government, for whatever reason, reduces the extent to which it practices mercantilism the main beneficiaries of that policy move are the Chinese people and not Americans.

Beckworth: What would you recommend we do with intellectual property issues? Should we just as global citizens or think as US citizens? Should we worry about the theft-

Boudreaux: Let's just stipulate that intellectual property and both in general and the way it's administered in the United States is fine because there's some disputes about, well to what extent should property be, intellectual things be accorded property rights? The simple answer, but I think it's a good answer and goes a long way is that the WTO, the World Trade Organization, an organization that President Trump holds in contempt, I think mistakenly and with pretty bad effects. The WTO has dispute resolution mechanisms for solving precisely these kinds of issues. China has been a member of the WTO since 2001. The United States is a charter member and so that's where these disputes should be settled. To slap tariffs on American consumers and by the way, that's where the tariffs ... I think that we should discuss, we should describe tariffs. They are slapped on American consumers who choose to buy goods from abroad. To slap higher punitive taxes on American consumers who buy things from China in the hope of getting the Chinese government to reduce, to change it's policies toward American intellectual property is at best ... It's like shooting with a shotgun, trying to hit a very small target. You might hit that small target.

Boudreaux: It's possible the Chinese government will say, oh all right in the interest of not losing our markets we'll change our policy toward intellectual property but you're hitting a lot of other innocent people and that's especially unfortunate again when there are dispute resolution mechanisms available in the WTO and the Trump administration is just ignoring them. My fear is, not a fear, I'm pretty certain it's true, that the whole intellectual property issue however real it is, is used largely as an excuse by protectionists here at home for protectionist policies because if it weren't they would be much more open to using the available dispute resolution mechanisms in the WTO and let me say one final word about the intellectual theft argument. I obviously oppose governments stealing things but as far as I can tell very little intellectual property is actually stolen in the way we think of it being stolen. What the Chinese government does is tell American companies if you want access to our markets you have to reveal to us your intellectual property secrets and let us use them and the American companies can then choose to agree or not.

Boudreaux: There's not actual theft going on. It's more or less an in kind tax. Now I'm a low tax kind of guy. I'm kind of a no tax kind of guy and so I think the tax is bad and the tax obviously does harm those American companies that are subjected to it whether they choose to pay it or not. They're still harmed by it but like all taxes, the main victims in this case are the Chinese people. This tax makes it less attractive for American companies that would otherwise go to China in order to participate in that economy and help to improve the performance of that economy and hence help to improve the lives of the Chinese people both in their role as workers and in their roles as consumers. That tax means that there's less, fewer companies outside of China coming into China because some of those companies don't want to reveal their intellectual property. It's a tax and it's a tax the main burden of which I believe probably falls on the Chinese people and not on Americans but I close this part with my first point on it.

Boudreaux: The WTO is the place where we should go to resolve that and the Trump administration's just not doing that and that tells me that all their protests about intellectual property are really not sincere. They're just looking for excuses to impose protective tariffs. In fact, I suspect that some of the Trump people would be disappointed if the Chinese government suddenly changed it's policy on intellectual property because it would rob them of what has become a very potent excuse to impose protectionist policies on Americans.

Beckworth: Well, let's talk about President Trump's trade policies more generally and specifically as well. We just had announced in the news today that NAFTA 2.0 or more precisely the new US, Mexico, Canada agreement and the acronym is USMCA, which is not very-

Boudreaux: It doesn't drip off the tongue.

Beckworth: It doesn't. NAFTA is so much easier so you and I on this interview can talk-

Beckworth: Okay. I don't know how you would say it.

Boudreaux: I don't know how, yeah.

Beckworth: But we'll call it NAFTA 2.0 but I've read several accounts and I want to hear your take on this but they've basically said, this is not all that different. It's not the catastrophic end we thought it would be. There's been some changes made but it's kind of NAFTA repackaged with some changes to autos, to dairy. What is your sense of this new bill?

Boudreaux: So as you point out, David, this has just been announced today. We're recording this on October 1st so I've read some of the reports so far. I haven't looked at the details but from what I understand, yes it is good that this is not the worst case scenario. A lot of people right now celebrating, oh this is not the worst case scenario but keep in mind the worst case scenario is something that Trump himself would've been responsible for. We're going to blow this thing up. Well, compared to blowing NAFTA up this is a better outcome but there was no need in the first place to blow NAFTA up. We could've just said, we'll just let NAFTA keep going and so yes, I'm relieved that NAFTA is not being blown up. I'm relieve that we'll continue to have more or less free trade between Americans and the Canadians so what Trump, as far as I understand, what he got out of this deal and again, by the time this airs maybe this will change or we'll have more details but what Trump got out of this deal is a more open market in Canada for American dairy farmers. Well, that's good for American dairy farmers. By the way, it's mostly good for Canadian dairy consumers. Now, I like Canadians just as well as anybody else. I'm happy for Canadian dairy consumers.

Boudreaux: What Trump also got though is higher domestic content for cars sold in America. I think it went from 62.5 percent to now it's going to 75 percent so the content has to be North American content in cars sold in America. That's going to raise the price of automobiles sold in America. American autoworkers, some of them will benefit as autoworkers. American auto buyers will suffer so President Trump's boasting that this is a win for Americans. It's not a win. It's a lose for Americans. The vast majority of Americans are going to suffer losses because there's now this artificial restriction on selling cars, a more strict restriction on selling cars in the United States and there's also this provision, I don't fully understand how it's going to be monitored and enforced but there's this provision that some minimum percentage of workers in auto plants throughout North America have to be paid at least, I think it's 16 dollars US per hour. This is a minimum wage imposition. I've seen people say, "Oh this is great. This is going to help these poor Mexican workers." It's not going to help the poor Mexican workers. It's going to put many Mexican workers out of jobs. This is, for anyone who knows how these things work, this is a blatant protectionist measure masquerading as a humanitarian measure.

Boudreaux: Oh, we're going to demand higher wages. Well, a lot of Mexican workers simply can't produce that level of value per hour and so some of what they would produce is going to be now produced in the United States because it's going to be produced at a higher cost so some American workers will benefit. American consumers are going to suffer so I'm glad, again, that NAFTA is not blown up. I am not impressed with what we're getting out of this. President Trump is quoted in today's Wall Street Journal. I forget the exact words but he said something like, "Well, this is a great win for Canada, Mexico and the United States because it now enables us to compete better against the rest of the world", and this reveals his total misunderstanding of trade. He thinks of trade as competition. He thinks of a country, one country as competing against other countries or one block of countries, North America in this case, competing against other countries. This is, perhaps, a natural view for a business person but it is a mistaken view about trade. Everything President Trump says about trade reveals to me that he is just a naïve, unreconstructed mercantilist. He has this mercantilist view -

Boudreaux: Yeah. It's a very zero sum game. With this trade agreement Trump believes, I don't know if he's correct or not, that somehow the North American countries are going to be better able to compete against the Europeans and the Chinese. It's just a totally mistaken way to look at the matter and the fact that he says this indicates that he and his trade advisors, they don't know what the point of trade is and that's very scary. They think the point of trade is to sell more to foreigners in exchange for buying as little as possible from foreigners. Of course, the point of trade is the opposite. It's to get as much as possible from foreigners in exchange for giving them as little as possible but Trump as all mercantilists, has the opposite view so he judges the success of trade policies and trade agreements according to how much we export under them relative to how much we import and the more we export relative to the amount we import the better says President Trump. Of course, a congress understands that's the worst. If your employer says, "Hey, look work longer hours for me and work harder and I'll pay you less", you don't go, "Oh boy, great. Sign me up", but that's effectively what President Trump says about Americans trade with non-Americans.

Beckworth: Well, this goes back to your earlier observation that we need to communicate better about free trade. The pie is growing. When we engage in trade the pie expands. It's not a fixed pie, we each get a slice. It's an expanding pie. This goes back also to the point I made earlier about the political economy of trade. It's true as you mentioned that trade may not be that big a part of the churn in jobs and in changes in industry but because they're foreigners and we're Americans unfortunately that's the way it is. It may be we're more sensitive or the body politic is more sensitive. My question to you is, given that reality should we be paying a price ... In other words, we have to deal with that political economy and it takes a toll on us. We have to pay a price. In order to keep trade going we're going to have to deal with that somehow.

Boudreaux: It is a reality. That's what Bryan Caplan calls the anti-foreign bias. It's just the reality. I wish it didn't exist but it's there so people are more averse to jobs being lost to imports than they are to jobs being lost to your changing your diet or to some piece of labor saving innovation. They somehow think it's something special and uniquely dangerous about jobs being lost to imports. It's incorrect but that is the belief and I think we have to take that belief as a political given because it's true. I am no big fan ... I'm a unilateral free trader as many economists are. Unlike a lot of my libertarian friends I actually applaud the free trade agreements that we've had during the post World War II periods starting with GATT, WTO, NAFTA. Of course, my idea would be unilateral free trade but politically we're not going to have unilateral free trade therefore, these trade policies, and they do in practice, make trade freer than it would otherwise be.

Boudreaux: I'd rather have trade be freer than it would otherwise be than to not have trade be free and holding out for total unilateral free trade. Again, I want total unilateral, unconditional free trade but it's not going to happen and so steps to get us closer to free trade, I think are worthwhile and I know that GATT, WTO, NAFTA, these agreements however imperfect they are and Lord knows they are full of all manner of imperfections and in some cases just downright evil things. They have made world trade freer over the past almost 80 years and that has made the world richer over that time period.

Beckworth: Some would take that reasoning and go a step further. They'd say, look because of that, because we do have to acknowledge this reality of the foreign bias maybe it's worthwhile to have a bigger social safety net that's geared directly to the losers, the term you don't like but even though it's there we need to deal with it.

Boudreaux: Yeah, so this is a very practical question. It's an empirical question. I don't know if having those policies would in fact make trade freer.

Beckworth: That's a fair point.

Boudreaux: One thing I fear is that by having these policies those policies would reinforce the notion that there is something unique about trade and I would like to move to a world where people understand there is nothing unique about foreign trade in creating or destroying jobs but I can't say as a matter of principle that we should reject some policies. If someone could convince me that having such policies would in fact make trade freer, not just today but over the long run compared to not having those policies, I would hold my nose and say well let's have those policies.

Beckworth: And we have some policies like that already, right, like these trade adjustment acts that are supposed to retool, and my understanding is they aren't used very widely. They're not very effective.

Boudreaux: Well Doug Irwin has done empirical work on these worker retraining programs related to trade and he finds that they're not very effective but of course the point here is not how effective they are. They are a political-

Beckworth: Throwing a bone.

Boudreaux: Yeah, and if people think that having these policies in place make freer trade acceptable then I can't say as a matter of principle that we shouldn't have them if the alternative is less free trade. It depends upon the cost of the policies and how effectively they open up the political door to freer trade.

Beckworth: Right, so there's the throwing the crowd a bone that says, look we're doing something for the losers but maybe also you can hope that that bone also has a good return on the investment. Maybe we do retool some workers and I guess the evidence suggests that's not the case, which is discouraging.

Boudreaux: Yeah, again from Doug Irwin's ... Research I remember reading from Doug Irwin, evidence of success of those programs is pretty scant.

Beckworth: Okay. Well, let's go back to President Trump's trade policies. We mentioned the new NAFTA, NAFTA 2.0 or the USMCA. He also has a trade deal in the works with South Korea, Japan and people who look at this new NAFTA are hopeful that those won't be big catastrophes as well. We have China though. China's we touched on already. President Trump is working through some of those issues. He imposed just last week a new 10 percent tariff that will rise to 25 percent on a 200 billion dollars worth of new goods and services so my big question maybe stepping back is this. All this noise, all this drama we're seeing about trade policy from the president, I could look at the NAFTA and say, eh not that big of a deal or I could look at the China trade war and say it is a big deal and what would be interesting to think about and I'd like to hear your perspective is, is President Trump's trade policy a bump on the road to further trade integration in the world or is it actually an entirely new path away from it.

Boudreaux: Yeah, so this gets back to something we were talking about earlier and the rise of populism. Certainly the trend until Trump or until the past 10 years certainly has been toward freer trade largely for all the wrong reasons. Well, it'll increase our export markets but the evidence is unmistakable. We had a trend toward freer trade. Trump is reversing that trend now. I certainly hope the reversal is small and temporary and as short lived as possible but I don't know. Speaking as of today, I see no particular reason to be optimistic that over the next year or two or even five the public support for freer trade will return. Trump seems to have a lot of, he's got passion support among his base and of course there are a lot of people in the political left who share the same views and when you combine that with the fact that many of the people in the middle who politically support free trade don't really understand the case for free trade. Again, they think free trade is good because it increases exports. That's also Trump's view and so the only different between the standard and so called Washington consensus free trader and Trump's protectionist view is their disagreement over the means of pursuing trade policy.

Boudreaux: Trump thinks that having these bilateral trade negotiations is the best way for America to increase it's exports. An American middle of the road Washington consensus man or woman thinks that having the bilateral trade agreements or even some unilateral tariff reductions are good because that will increase America's exports. I think unilateral tariff reductions are good too but because they'll increase America's imports, not because they'll ... Export to the cost we pay for imports. I do worry about the rise of populism. I do worry about the rise of nationalism. There are all kinds of books being published now by people across the political spectrum about how wonderful nationalism is and this has me very disturbed and I think that intellectual trend combined with Trump's populism and populism around the world, I think we're in for at least a half a dozen years of some pretty rocky protectionist, mercantilist travels. What happens after that is anybody's guess. I don't know.

Beckworth: Don, that is a downer.

Boudreaux: I'm sorry. I'm normally optimistic.

Beckworth: Wow. Let me try to push back and get some reasons to be optimistic and then I'll leave you the final word and you can push back on my hopeful optimism.

Boudreaux: Okay.

Beckworth: Let me give some reasons why maybe this is just a bump in the road but you've done a pretty good job convincing the listeners, I'm sure, that it's more than a bump. First off, our economy seems to be getting really hot. We're getting close to full employment and usually you think when that happens people being to become less irritable about-

Boudreaux: Opposition to free trade does fall, yeah.

Beckworth: Yeah. I'm hopeful on that front. Secondly, this new escalation with China, which has now, it's gone up to two hundred billion dollars worth of goods, at some point consumers are going to begin to feel that. They go to Walmart, to the Target stores, they're going to see it and maybe Trump's base might begin to second guess. Congressional republicans, there's one thing they've been nix on. They don't say anything but you can tell some of them are uncomfortable with it.

Boudreaux: Yeah, I believe it.

Beckworth: I'm hopeful that maybe as they being to see that the real pain that it puts on their constituents they may respond. The other thing is and I've heard this from some other folks and this is expected of it of course. Trump may be actually galvanizing more free trade in the rest of the world because he's such a reactionary against it so maybe while we're sitting here there's a TPP on it's own occurring somewhere else in the world. Then finally, just the fact that we've made so much progress. There is already so much trade. Going back to the earlier point, we have global supply chain. You disrupt those, you disrupt jobs, people get unhappy and they want someone else elected to office so are those reasons enough to maybe have some optimism?

Boudreaux: They could be and I'll give you another related reason to be optimistic so I don't end on a down note. It seems to be unlike in the past, unlike in 1930 when Smoot-Hawley was passed. Because global supply chains today are so much more complex and indeed global, any tariff imposed in the United States has effects not just on disperse to consumers. It does have more, these tariffs often have concentrated costs on domestic producers and so you see users of steel in the United States pushing back against the steel tariffs. The washing machine manufacturers got tariffs but they're unhappy with tariffs on aluminum steel because it's raising their cost of production and so one cause for optimism is that it's a little bit easier today to see some of the costs of protectionism because some of those costs of protectionism fall on domestic producers, not only fall on domestic producers but in many cases concentrated on some domestic producers and they have an incentive to fight against that so that's a positive development that for raw political reasons might help temper this head long rush we seem to be making toward protectionism but that said, I think we got to get our ideas and our rhetoric right and better so that the general public has a better understanding of trade.

Boudreaux: We want free trade not because it makes our producers more efficient. That is in effect a free trade. We want free trade because it makes us as consumers, us as heads of our households, us as human beings. It makes us freer and richer and that is the ultimate reason for free trade. That is an idea that we economists, David, we haven't really been very good at communicating. We have to step up our game.

Beckworth: All right, well on that positive note and challenge for us economists our guest today has been Don Boudreaux. Don, thanks for coming on the show.

Boudreaux: My pleasure.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.