Econ Focus

Third Quarter 2017

Interview

Douglas Irwin

Article by: Aaron Steelman

PHOTOGRAPHY: ROB STRONG

Douglas Irwin

There is arguably no proposition more widely held among economists than the free trade of goods across countries generally benefits the citizens of both the exporting and the importing countries. Yet, support for trade often faces resistance among the public and policymakers. In the United States and other developed countries with broadly liberal trade policies, such skepticism, at least rhetorically, seems to have gained momentum recently.

Douglas Irwin, an economist at Dartmouth College, argues that nations would be well advised to retain or to adopt a commitment to free trade. The overall benefits remain large — and the costs of protectionism are often understated.

Moreover, Irwin notes, the arguments that proponents of protection frequently advance are many times questionable. For instance, he acknowledges that the United States had relatively high trade barriers during the late 19th century, a time of rapid industrialization. But it seems likely that such economic growth was due to a number of other factors instead. In other cases, Irwin argues, protectionist policies, while unwise, have not been as destructive as some have claimed. For instance, the importance of the Hawley-Smoot Tariff of 1930 to the deepening of the Great Depression generally has been overstated.

Much of Irwin's work falls at the intersection of economic history and trade theory. His most recent book is a comprehensive, more than 800-page history of U.S. trade policy, Clashing over Commerce. In addition to authoring and editing many other books and publishing widely in professional journals, Irwin occasionally writes for the popular press. He started his career at the Federal Reserve Board of Governors, moved to the University of Chicago's Graduate School of Business, and has been at Dartmouth since 1997. Aaron Steelman interviewed Irwin on the Dartmouth campus in August 2017.


EF: Why did you decide to write a general history of U.S. trade policy — the first, as you note in the introduction, since the early 1930s?

Irwin: I have long had a general interest in trade and history, but what solidified my interest in U.S. trade policy in particular was spending a year at the Council of Economic Advisers (CEA) while in grad school. That was in 1986-1987, and it was a momentous period for U.S. trade policy. There were trade disputes with Japan, a lot of protectionist pressures to block imports of textiles and steel, and many other trade issues on the agenda. So that CEA experience, seeing how policy is made, and learning from people at the U.S. Trade Representative's (USTR) office, got me very interested in how U.S. trade policy functioned. And then, pretty naturally, I became very interested in looking to the past.

The last major book of this sort was The Tariff History of the United States by Frank Taussig. It's a great book, a classic, but it's been a long time since his last edition. And I thought it could be updated on multiple dimensions — first of all, to discuss the Great Depression and then bring it up to the present. We have also learned a lot more about the trade history that he did cover. He was writing before cliometrics, before the use of statistical methods to test a lot of the propositions he was discussing, such as the effects of protectionism in the late 19th century. In addition, economists have become interested in the political economy of policy formation. There's not a lot of political economy in Taussig, so it can be a little bit dry sometimes as he's going through changes in the wool schedule, the cotton schedule, and so on. I think people are less interested in that sort of detail than the bigger picture of how the political parties were functioning, the pressures members of Congress faced, and how we shifted toward freer trade. So that's sort of how it came together.

More specifically, I distinctly remember being in my Chicago office in 1995 when Michael Bordo gave me a call (email was still a novelty) and asked if I would write a paper on U.S. trade policy during the Great Depression. I really hadn't worked much on U.S. trade policy up to that point, though I had the latent interest. I thought it would be a really easy paper to write because I assumed that there would be a large literature on trade policy during the Great Depression. But when I did my literature survey I discovered — to my horror — that there was almost nothing really analytical on the period. So I actually had to write something like five background papers just to write this one conference volume paper. After that, I started doing a lot of analytical and empirical work on various episodes in U.S. trade policy history. Once I had written enough papers, it became obvious that I really ought to synthesize them and turn it into a book. That was around 2000. After various delays, I came close to finishing the book in 2006, but then 2007 came, and like many economists, my work got diverted by the financial crisis and I returned to looking at issues related to the Great Depression. After more delays, I finally got back to the book around 2013 and pushed it through to completion.

EF: You argue that the United States has gone through three major eras in trade policy — and structure the book accordingly. Could you describe those?

Irwin: I tried to start the book with principles about what government officials and representatives are trying to achieve with trade policy, and it seems to me that they use it to achieve three things. First, they are trying to raise revenue. Second, they are trying to protect domestic industries from foreign competition. Third, they are sometimes bargaining with other countries to reduce tariffs or retaliating against them by raising tariffs.

Those are the three Rs: revenue, restriction, and reciprocity. When I looked at the broad canvas of U.S. history, those three categories really apply to three different periods of U.S. trade policy history. Although all three elements are always present, to some extent, the question is: Which one is dominant at any given point? From the founding of the country to the Civil War, the debate was really about using the tariff to raise revenue. Under the Articles of Confederation, Congress did not have the power to levy taxes. The federal government was broke and couldn't pay its bills, leading the country toward a crisis. So one of the major reasons for the Constitutional Convention was to give Congress the power to raise revenue. The Tariff Act of 1789 was really just a revenue measure to pay debts and to finance the spending of the federal government. Revenue remains the major issue in trade policy through the antebellum era.

Then, with the Civil War, of course, there is a transition of political power in the United States. The North becomes politically dominant, and it was the home of a lot of import-competing industries. Republicans from the North were overwhelmingly in charge of Congress, and so we get protection as a policy outcome. Once those high tariffs were in place, they become very hard to dislodge for a lot of reasons and they continue for a long time — long beyond when we actually become a net exporter of manufactured goods.

In 1929, we have another shock: the Great Depression that redistributes political power once again, this time away from the protectionist Republican Party to the more pro-trade Democratic Party, which at the time drew much of its political support from the South. Also, we have this trade war after the Hawley-Smoot Tariff of 1930, which leads many people to think trade policy should take a different direction. So President Franklin Roosevelt and Secretary of State Cordell Hull introduce the Reciprocal Trade Agreements Act (RTAA) in 1934 and we move on to this third era of reciprocity where we're willing to reduce our tariffs in conjunction with other countries reducing their trade barriers as well.

EF: The Founders could have looked to other ways to raise revenue. Was the tariff broadly seen as simply the least bad way?

Irwin: Absolutely. There was a consensus among the Founders that it was the most efficient way of raising public funds as well as the most politically acceptable. Consider sales taxes in the early post-colonial period. They were very controversial and very costly to enforce; just think of the Whiskey Rebellion. An income tax just doesn't make sense at this time for many reasons. But imports were coming into a relatively small number of ports, such as Boston, New York, Philadelphia, Baltimore, and Charleston. So it makes sense that if you have a lot of goods coming in to a small number of places, you just tax them right there, which is pretty easy to do. In addition, people don't easily see the tax because it's built into the consumer price, so there is less political resistance to it.


WEB EXCLUSIVE

EF: You touched on the fact that, in large measure, support for trade has historically fallen along geographical lines. How has that changed over time?

Irwin: For very long periods there is tremendous continuity in terms of congressional voting on tariff measures. Early on in the book I have a map of House voting on the Tariff of 1828, better known as the Tariff of Abominations, and then on the House version of the Hawley-Smoot Tariff of 1930. The maps look very similar; the correlation in terms of the state votes is something like 0.7. You see this very pronounced North-South divide, and it's pretty clear why. A lot of manufacturing took place in the North, and for much of this period the United States was a net importer of manufactured goods. Producers there had an interest in keeping out foreign products, such as steel and textiles. In contrast, the South was largely the export platform of the United States. It exported cotton and tobacco, and so the South had a strong interest in keeping trade open to maintain its overseas markets. The Hawley-Smoot Tariff of 1930 is the last tariff bill that Congress voted on. After that, the North-South pattern is still somewhat evident — for instance, if you look at the North American Free Trade Agreement (NAFTA) vote, you can still detect it — but it begins to become a little more blurry as the geographic location of various manufacturing industries shifts south and become more diffuse. 


EF: Regarding regional cleavages surrounding trade policy, how important do you think the tariff issue was to the frictions that led to the Civil War?

Irwin: You do see the argument out there that trade restrictions were one of the principal reasons the South seceded, not so much among academic historians but among others who write on the topic. I think the tariff issue had very little, if anything, to do with the Civil War. After the 1828 Tariff of Abominations, South Carolina essentially said we're not going to enforce this law and we may withdraw from the union unless the policy is changed. That precipitated a real crisis, and it was defused with the Compromise of 1833 proposed by Henry Clay, which gradually reduced tariffs. From 1833 until the Civil War, tariffs were basically on a downward path. We reduced the tariff further in 1846 and then again in 1857. A year before the Civil War, the average tariff was below 20 percent, which was about the lowest it had been in the entire antebellum period. So the South and the Democrats really held the cards in terms of trade policy right up to the Civil War.

What the revisionists of the Lost Cause group will say is, well, the Republicans assumed power and passed the Morrill Tariff in 1861 and that led to the conflict. But the only reason the Morrill Tariff passed was because most of the South had already seceded after the election of Lincoln. If their representatives had stayed in Congress, they could have stopped it. It wasn't that the South left the Union because of the Morrill Tariff; we got the Morrill Tariff because they left. In fact, it wasn't Lincoln who signed it but the Democrat James Buchanan before Lincoln took office. So I think there's basically no evidence the tariff was a major cause of the Civil War.


WEB EXCLUSIVE

EF: After the South seceded, what sort of trade policy did the Confederacy adopt?

Irwin: After seeing how vociferously the South had opposed high tariffs in the antebellum period, it is interesting to see how the Confederate Congress dealt with the issue. They thought about abolishing the tariff, but they needed the revenue and they basically adopted the Tariff of 1857. There was some debate about imposing an export tax on cotton, which is ironic because the South insisted at the Constitutional Convention that export taxes be prohibited. They did impose a small export tax in the belief that Britain would pay for it, as the South believed it had market power in cotton. That didn't work out very well. There was even some pressure to raise tariffs on manufactured goods to create a steel industry in the South and protect infant manufacturers, somewhat ironic given that the South had strongly opposed such a move when it had been part of the Union.


EF: At the end of the book you discuss how predictions for U.S trade policy have been really dire. But you offer some caution about such claims.

Irwin: It was a tricky matter for the book because I completed the manuscript in September of 2016. And I had every expectation that Hillary Clinton was going to be elected and there would be significant continuity in trade policy. When Donald Trump was elected, given his extreme rhetoric on trade, many people expected big changes in trade policy. I did have the opportunity to add a few paragraphs on Trump, and as you can see I tried to hedge my bets. If you listen to the rhetoric, it might be reasonable to think that there is a big shift coming for U.S. trade policy. But I also noted that if you look back over the past 250 years, you see that we have had these periods where trade policy sort of veers off and then eventually returns to the old status quo. For example, Democratic President Woodrow Wilson slashed tariffs dramatically and tried to introduce much freer trade, but the Congress soon reimposed high tariffs when the Republicans were returned to power. When you look at what Franklin Roosevelt did with the RTAA, the introduction of trade agreements was a policy of evolution not an overnight revolution. The Reagan administration imposed a lot of protectionist measures in the 1980s, but those restrictions soon faded away.

As a result, I try to suggest in the book's conclusion that there's still a lot of status quo bias in the system. We can't always believe the strong rhetoric, and maybe things won't change as much as promised. And so far, as of August 2017, I think Trump hasn't changed much in terms of U.S. trade policy. Yes, he pulled out of the Trans-Pacific Partnership, but maybe Hillary Clinton would have done so also; Bernie Sanders too. Trump did say he wanted to renegotiate bilateral agreements with these countries. There's no evidence we've moved forward with that but that's at least saying that he's open to the idea of trade agreements. He hasn't pulled out of NAFTA, although the renegotiation of it is not likely to go well. He might go after China a bit, but consider his announcement: He signed an executive order for the USTR not to initiate an investigation but to look into initiating an investigation. So there's nothing there yet. I think the administration is quickly learning that there is a process, there's a reason why things operate slowly, and you have to work within the laws we have.

Also, any big change in trade policy — in any direction — is going to generate a lot of opposition. In relation to NAFTA, when you look at a map of where U.S. agricultural exports are produced, you see that a lot come from areas that the president carried and a lot head to Mexico. So hopefully government officials begin to realize pulling out of NAFTA would not only reduce imports to the United States, it would also lead to reduced market access for U.S. exporters. There are a lot of trade-offs in any policy change. It's not a black and white process of you stop imports, you create jobs here, and that's the end of the story.

EF: What do you think about Brexit and what it portends for trends in trade policy?

Irwin: A lot of people have said that it's an indicator of an antiglobalization backlash. Yet I don't believe it represents a backlash against trade per se because Brexit proponents want to maintain Britain's access to the European Union (EU) market and have actually argued for even freer trade outside the EU. So it wasn't an anti-trade movement. I think immigration, regulatory, and sovereignty concerns about the EU were dominant.

If they go through with it, however, Britain could be making a big mistake. First, Europeans are not going to give them free and easy access as they had before. Britain has no trade negotiators because they outsourced that to the EU. So all of a sudden they're looking for qualified staff to negotiate new trade agreements. Second, trade agreements these days are much more about regulatory harmonization and coordination than tariff levels. If you were dealing with only tariffs, that would be much easier to address. But these are really complicated policy measures where you really need a lot of expertise. To pull out of the EU and try to replicate that — not just with the EU but with a whole bunch of other countries — it's going to take a long time to repair those networks. With global supply chains being so important, that can do big harm to one's country if you stand outside the system for a while and then try to get back in.

There's actually a cautionary tale here from the American Revolution. After the United States won its independence from Britain, American leaders thought that the political settlement would restore U.S. access to the markets of the British Empire. They were sorely mistaken: Britain sought to punish the United States by keeping it out of its markets, and the United States paid a hefty economic price.

EF: How would you assess the claim that more restrictive trade policies in the late 19th century fueled industrialization in the United States?

Irwin: This is one of the biggest questions in the history of U.S. trade policy: Did protectionism foster U.S. economic growth and development in the late 19th century? I'm not convinced that we can attribute America's industrial advance in the 19th century to high tariffs or protection. There are a couple points to make on this. There is certainly a correlation between high tariffs and industrial growth in the late 19th century, but we can't leave it at that. That would be a post hoc, ergo propter hoc argument. Instead, we need to know the mechanism by which high tariffs might lead to this growth. Usually the mechanism identified is that agriculture is a relatively low value added per worker sector and with the tariff you are going to shift resources into manufacturing, which is a relatively high value added per worker sector. So not only do you industrialize, but you also raise national income because you get workers into more productive activities. I have done some back of the envelope calculations about how much labor could possibly have moved across sectors as a result of the tariff, and the numbers are pretty small in terms of any possible gain. And, actually, this intersectoral switch is happening anyway. It's a natural process. A lot of the industrialization occurred prior to the Civil War, between 1840 and 1860 when we had low and declining tariffs. A lot of the growth in the late 19th century when we had high tariffs is extensive growth, not intensive growth. In addition, there are so many other things going on. We had open immigration, so there was a lot of growth in the labor force. We revamped our banking laws during the Civil War, finance became very important, and we got capital deepening. That's not because of the tariff; that's because the whole financial system of the United States was really developing.

Another point to be made is that when you look at the high productivity growth sectors in the U.S. economy in the late 19th century, John Kendrick and others have shown they're mostly in the non-traded goods, service sector. Transportation and utilities were growing very rapidly. It's hard to see how the tariff would help the non-traded goods, service sector of the economy improve its performance. Also, Steve Broadberry has done some work showing that increasing productivity in the service sector was very important to the United States catching up with Britain in the late 19th century. That, too, doesn't seem to be tariff related. All of this doesn't lend itself to an easy story where the tariffs are the key factor behind U.S. growth and industrialization.

In addition, when you look at particular manufacturing industries, such as iron and steel or textiles, once again the story doesn't seem to be particularly strong. For example, I once looked at the tinplate industry. It's true that we didn't have tinplate production until the McKinley Tariff, but the reason we didn't have it was because we had high tariffs on imported iron bar, which is an important input to tinplate. So you had a high cost of production on your intermediate goods and that hurt downstream producers. When you look at the whole tariff code in the late 19th century, it's not geared toward the production of final manufactured goods. There are high tariffs for everyone, including on intermediate goods, and you're not really helping out downstream producers when you do that.


WEB EXCLUSIVE

EF: Following up on that, a lot of people seem to treat all industrial goods the same when considering trade policy, but producers might have very different interests.

Irwin: Absolutely. This is sort of a theme throughout the book, and it has a long history. It goes way back to the iron and steel industry in the 1840s and 1850s. If you produce farm equipment, you are going to have very different interests than if you produce forged iron. Perhaps the biggest conflict of interest involves wool producers and wool manufacturers. The sheep farmers want high tariffs on wool, but the wool manufacturers want cheap wool. The way this was overcome in the past was that the wool manufacturers and the wool farmers got together and agreed on a tariff schedule that would meet both of their interests and then presented it to Congress. Because Congress doesn't like disputes between one industry and another, they very much prefer industries coming up with their own plans. That has, to some extent, broken down in the post-World War II period, and you get industries basically willing to fight one another.

We don't see a lot of consumer interests in freer trade today because households spread their consumption over so many goods. Individual consumers are not going to worry about the sugar tariff or things of that sort. But if you're an industry — say, if you're the candy industry — you worry about the sugar tariff; if you're the auto industry, you worry about the steel tariff; if you're the computer industry, you worry about the semiconductor tariff. So you get these industry battles that can prevent a ratcheting up of protection.


EF: It is often asserted that the Hawley-Smoot Tariff played an important role during the Great Depression. What is your view?

Irwin: I would say most economists have been skeptical of the claim that the Hawley-Smoot Tariff led to the Great Depression or even exacerbated it to any great extent. In their Monetary History of the United States, Milton Friedman and Anna Schwartz hardly mention the tariff at all. Whenever Friedman talked about the Great Depression, he always said that it was a very bad piece of legislation, but it didn't cause the Great Depression, it didn't generate 25 percent unemployment. I think that's basically true. There is something else going wrong in terms of monetary policy or other macroeconomic factors that cause depressions. Tariffs change relative prices and reallocate resources between industries but don't change the level of activity to that extent. There's a lot of evidence for that through history. For instance, in 1922 Congress passed the Fordney-McCumber Tariff, which raised tariffs more sharply than even the Hawley-Smoot tariff, and yet an economic boom followed. Now, the tariff certainly had nothing to do with that boom, as the economy was recovering from tight monetary policies after World War I. But the point is we have had a lot of tariff increases in the past that didn't lead to depressions and a lot of tariff reductions that didn't lead to booms.

My view of Hawley-Smoot is that it was unnecessary, it was ineffective, and it was harmful. It was unnecessary because it was introduced in the House at a time of almost full employment, the spring of 1929. It was ineffective because the motivation was to help out farmers, but we were a big net exporter of farm goods so the domestic price that they faced wasn't going to be affected by import duties. It was harmful because it led to a lot of retaliation against the United States, so our farm and factory exports were actually harmed.


WEB EXCLUSIVE

EF: Perhaps this may be an example of before you have a coherent explanation for a major event, people are searching for something that seems to fit the timeframe.

Irwin: I think that's correct. People were trying to figure out what was responsible for this economic cataclysm. People pointed to the stock market crash in 1929, Hawley-Smoot in 1930, a tax increase in 1932. They were looking at all of these factors and trying to explain what was happening.  To me, it's astounding that it wasn't until 1963, more than 30 years after the onset of the Depression, that we finally had a good, coherent explanation for it.


EF: In addition to legislation like Hawley-Smoot, you and Barry Eichengreen have looked at some other factors in the rise of protectionism during the 1930s.

Irwin: Everyone knows a trade war broke out in the 1930s. But what really caused it? The standard explanation is that there was chaos and that everyone was trying to protect their own market in light of the Great Depression. We found something different. There is a very pronounced pattern in terms of which countries were adopting protectionist policies and which weren't. That hinged on something that naturally follows from Barry's work — how long you stay on the gold standard.

There's a trade-off that different countries made. If you are being confronted with a deflationary shock, you can use monetary policy to adjust to that. But if you're on the gold standard and the hands of the monetary authorities are tied, you look for other policy instruments to try to prevent gold outflows and reflate the economy. Trade policy is one of them. So what you find is some countries are breaking off the gold standard very early and they pursue reflationary monetary policies. They are able to mitigate the worst effects of the depression and they don't face as much protectionist pressure. In contrast, there are other countries that stay on the gold standard and their economies remain relatively depressed. Those are the ones precisely where the protectionist pressures are really strong, and they impose exchange controls and higher tariffs and things of that sort.

EF: Why do you think protectionism has such enduring appeal, at least rhetorically?

Irwin: I think protectionism has always had a lot of appeal because, politically, it's sort of an "us versus them" situation. You're helping out your domestic firms against foreign firms that are stealing our jobs. It is a nationalistic view that many people naturally have a desire to try to help one's neighbors first.

Also, with protectionism it's easy to see who's helped and harder to see who's hurt. There are tangible benefits to some group when you erect a trade barrier, but it's much harder to see those who are harmed or pay the price. It's a bit of a case of the seen versus the unseen. One way I try to illustrate this in my classes is to explain one of the most fundamental theorems of international economics, the Lerner Symmetry Theorem. It states that a uniform tax on imports is equivalent to a uniform tax on exports. But just think about how this plays in the public mind. If you went out into any city and asked people whether we should impose an across-the-board tariff on imports to protect jobs and stop foreign countries from taking advantage of us, a lot of people would support that. But if you went to the same people and asked whether we should impose a uniform tax on all exports, on all farm exports and manufactured exports, there would be very little support for that. But the Lerner Symmetry Theorem says they're equivalent. So it's the same policy, but how you frame it determines the response you will get.


WEB EXCLUSIVE

EF: Do you think there is much practical relevance for the theory of optimal tariffs?

Irwin: I tend to think of optimal tariffs in the context of export taxes, where some countries plausibly have market power in certain goods. It doesn't really matter much in the U.S. context, of course, because in the Constitution we ruled out export taxes. The reason we took that policy instrument off the table is that the South, which was the primary export platform for the United States for most of the 19th century, didn't want its cotton and tobacco exports taxed. But you can think about it hypothetically. I have done some counterfactual simulations about what would have happened if we could've imposed an optimal export tax. It would have been pretty high, about 40 percent or 50 percent, because we accounted for 80 percent of world production of cotton. Still, the gains from that would have been really small as a share of the South's GDP and even smaller as a share of U.S. GDP. So I tend to think that the optimal tariff argument is a useful theoretical idea, but implementing it in a way that is particularly beneficial, even in cases where countries have substantial market power, is really difficult. 

EF: You will sometimes hear self-identified free traders arguing that regional trade agreements are distortionary — shifting production from relatively efficient nonmember countries to relatively inefficient member countries. What do you make of those arguments, and do they, at least partially, undermine the case for the type of regional trade agreements that have been particularly popular for several decades? 

Irwin: There was a great debate in the 1990s about multilateral trade agreements versus regional or bilateral trade agreements. Up to that point the United States basically had always pursued multilateral trade agreements within the General Agreement on Tariff and Trade (GATT). It was only with the U.S.-Israel free trade agreement, the U.S.-Canada free trade agreement, NAFTA, and several agreements during the George W. Bush administration that we started adopting bilateral or regional trade agreements.

Nondiscriminatory trade is the economists' ideal because it is the most efficient solution. But as my book discusses, trade agreements are determined in the world of politics. One problem I think we face is that the Word Trade Organization (WTO) has become so inclusive of so many countries that it is now very difficult to get a consensus to move forward on any particular new trade agreement. Since the Uruguay Round, which created the WTO in 1995, we have had no major broad multilateral agreements. There's a great analogy that Mike Moore, the former director-general of the WTO, used. He said the WTO is like a car with one accelerator and 150 hand brakes. And that means any one of these 150, or now 160, member countries can raise the brake and stop the whole process. First of all, it makes negotiations very slow. Second of all, the demise of the Doha Round has demonstrated that it's really difficult to reach a multilateral consensus.

Going from the GATT to the WTO was a great thing because it brought developing countries into the trading system, but it also meant that now there's much less consensus about how to move forward. So countries that want to reduce trade barriers further have found it much easier to do so bilaterally or regionally. And I sort of think we have to accept it. It is bad for developing countries to be excluded from many of these agreements. But, at the same time, they often have policies that are very detrimental to their own trade interests and to their economies generally; I don't know that being outside the system has held them back very much.

EF: Endogenous growth theorists such as Gene Grossman and Elhanan Helpman place significant emphasis on the importance of trade to growth — in particular, how it fosters technological dissemination as well as mitigates redundancy in industrial research. What are your thoughts?      

Irwin: I think there's a big trade and growth story, but it's mainly for developing countries and not as much for richer countries. One of the interesting things you learn from studying U.S. economic history is that the United States has almost always been on the technological frontier. We have always been a rich country by world standards, as Peter Lindert and Jeffrey Williamson's recent book, Unequal Gains: American Growth and Inequality since 1700, has emphasized. One thing I usually note is that even though U.S. tariffs in the late 19th century were relatively high, we were a very open economy. We were open to capital flows, we were open to immigration, we were open to new ideas and the transfer of technology. A lot of the technology came through immigration of skilled migrants who brought with them specific knowledge about production methods and things of that sort. The stories that Grossman-Helpman and others have about the relationship between trade and growth are based on investments in research and development. In the case of the United States, it is likely that skilled migrants and capital inflows have been more important as a source of knowledge creation than research and development expenditures per se. But when you look at developing countries, their trade barriers are often holding them back from the technological frontier. That's where you get into the Sachs and Warner story about countries getting a growth dividend when they open up, largely because they are approaching the technological frontier and getting greater efficiency.

EF: The United States has often employed trade sanctions against countries with repressive regimes. What do you think have been the net effects of those policies? Have they achieved their intended results?

Irwin: There are two arguments here. One is that if we sanction regimes that we don't like, we will be able to change them. The other argument, which is the flip side of the first, really, is if we have free and open trade with these regimes, we will be able to change them. Obviously it can't be both ways, so the question is which way does it work. At one time, I was fairly optimistic that open trade with repressive regimes might help encourage political liberalization. I've become less optimistic about that, especially in really repressive regimes, such as Cuba.

There is this idea going back to Montesquieu that free trade leads to peace and to more liberal political system. I think there has been some evidence for this, not so much in terms of promoting peace, but in terms of domestic political change. Chile's economy flourished and that contributed in part to political change. Mexico was a one-party state that transitioned to a multiparty democracy. South Korea is another example in which trade and economic growth help lead to democratic political changes. Basically, the argument is that under such repressive regimes, economic prosperity leads to demands for political participation and the eventual transition to a democracy. There are the examples I just mentioned, but it seems like Cuba and China are very resistant to this. Their governments seem very intent on maintaining power and can largely lock down the Internet, or siphon off profits for themselves in the case of Cuba, and not really let the benefits of trade trickle down to the private sector. As a result, they're able to suppress demands for political participation. So I would say that the evidence on this issue is mixed.


EF: What are your thoughts on the paper by David Autor, David Dorn, and Gordon Hanson arguing that rising Chinese import competition has had significant effects on U.S. manufacturing?

Irwin: I think it's an important contribution because it shows us some of the real difficulties in terms of labor market adjustments to big shocks. The finding that people drop out of the labor force, retire early, or go on disability and don't necessarily move on to other jobs is an important finding. While I think economists will debate the number of workers who have been displaced because their estimate is based on cross-sectional evidence, which is not the ideal way to do it, we can be pretty confident that the number is big. That said, here's my take on it. First, the China shock was a one-time shock. That is, you had big growth not just in trade but in a shift of people from agriculture into industry in China, at the same time as the working-age population was growing. That's not going to repeat itself. The rural to urban transition has slowed dramatically, and the working-age population in China is now actually in decline.

It also was not an aggregate demand shock. Even though they identify significant harm to certain communities in the 1990s and 2000s, those were periods of declining unemployment in the United States. So it really draws attention to the problem with geographically concentrated production and the difficulties of getting workers to move to different locations or to different industries. In this regard, I would differentiate between the 1990s and the 2000s. Autor, Dorn, and Hanson suggest the China shock was occurring throughout this whole period, but at the end of the 1990s we had an unemployment rate below 4 percent with significant wage growth at the lower end of the wage distribution. There's actually some evidence that workers in textile mills in the South who were displaced were getting higher-paying jobs elsewhere. The 2000s is a different period, the economy was far less robust than in the 1990s, and the 2008 financial crisis just compounded the problems for displaced workers. Also in the 2000s you had huge macroeconomic imbalances in China. We had a pretty sizeable current account deficit during the 2000s, while China had a current account surplus of 10 percent of GDP. It's highly unusual for a large developing country to have a massive trade surplus like that, which raises the issue of currency manipulation and so forth. I don't think that we are going to see something like that again, in terms of trade imbalances, and if we begin to go in that direction, there should be enough warning signs and policy will be different.

In short, the China shock was a big one-off event that happened under unusual circumstances and is unlikely to be repeated. We have learned a lot from it, but going forward I don't think it changes the consensus that there are still large benefits to trade. We have always known that certain communities or certain types of workers are going to be hurt by trade. This just happened to be a pretty big example. More recent research has also provided some context or some nuance to what they found. For instance, work by Rob Feenstra and others has tried to pin down the benefits to consumers from lower prices, particularly workers at the lower end of the income spectrum. In addition, some of the China shock was due to China's unilateral reductions of tariff on inputs, which made its final goods producers much more efficient. That's not due to a change in U.S. policy — that's just China becoming more open and more efficient, which ultimately is something we want to see.


WEB EXCLUSIVE

EF: Do you think a program that would compensate workers who are, on net, made worse off by trade could be feasibly implemented? Of course, there are some policies that aim to do this now, such as retraining programs. But one could imagine others that may be more directly focused, such as straightforward transfers or wage subsidies.

Irwin: The only one I can think that's really good is the Earned Income Tax Credit (EITC), which in a way operates as a negative income tax. Your eligibility doesn't depend on which industry you were in, and it doesn't depend on why you were displaced. It is neutral with respect to those things. It provides incentive to be employed, which is very important because a lot of trade adjustment assistance has been in the form of extended unemployment compensation. The problem with that is you have to remain out of work to continue to receive those benefits. So that often impedes efficient adjustment because workers might choose to not take a lower-paying job and thereby delay re-entry into the workforce, which is often a bad idea because your skills deteriorate during that period and you can become less employable in many instances. Moreover, there seems to be pretty broad-based political support for the EITC.

Worker retraining actually seems to subtract value, unfortunately. I have a chapter in Free Trade under Fire on this. In 2012 Mathematica Policy Research looked at people who went through trade adjustment job retraining programs and those who didn't. Those who didn't fared better than those who did. There are a couple reasons for this. First, you are going to stay out of the labor force longer as you're getting trained. Second, the retraining isn't necessarily going to help you get the skills you need in the new sectors where you're going to get employed. Economists have long said, well, yes, trade leads to these dislocation costs but you just have to compensate those adversely affected. It has almost become a throwaway line. First of all, the problem doesn't go away because people don't want to be compensated; they want their jobs. Second of all, the compensation schemes that we've come up with don't really work well. They don't benefit the workers, and they don't benefit the taxpayer. So the EITC seems to be our best option. You might consider offering education credits where people could choose what they wanted to do but not government-directed retraining programs.

EF: How do you explain the repeal of the Corn Laws — essentially tariffs and restrictions on imported food and grain — in Great Britain in 1846? There were some eloquent advocates in favor of repeal, such as Richard Cobden and John Bright. But it clearly didn't seem to be in the interest of Prime Minister Robert Peel, who resigned shortly afterward.

Irwin: You can have the broad explanation about why Britain was moving in this direction and the narrow explanation of what changed Peel's mind. I have a paper on what changed Peel's mind. What's interesting is that a lot of people thought that Peel basically just gave into the battering ram of economic opinion, with David Ricardo, J.R. McCulloch, and all the classical economists saying this is a really bad thing for the economy. Another explanation has been, well, it was just a reaction to the Irish potato famine — Peel had no choice but to do it. There's certainly something to that. The famine was a very important factor in the timing of repeal.

But what I discovered while looking at Peel's letters and diaries is that mainstream economic opinion actually delayed his conversion to freer trade. A lot of economists at the time had this Malthusian view that repeal really wouldn't help workers because workers' wages were tied to the price of food, and if you lowered the price of food, you would lower wages as well. But what Peel did was cut tariffs a few years earlier, in 1842, as sort of an experiment, and he saw that living standards rose and wages didn't fall. That gave him the confidence to say this is actually going to help out workers. So it's a bit ironic that economists at the time may have contributed to the Corn Laws staying on the books longer than they otherwise might have because they were using the wrong arguments or arguments that were not persuasive to politicians.

EF: A few historians of thought have recently questioned the importance and the originality of Adam Smith. How important do you think Adam Smith was to the development of the discipline, including our understanding of trade?

Irwin: When I was researching my book Against the Tide: An Intellectual History of Free Trade, I got some research funding to go to London, where I basically parked myself in the Goldsmiths Library at the University of London. In this beautiful room, I sat for two weeks and read almost every work on trade published prior to Smith's Wealth of Nations. Most of it is in pamphlet form, say 15 to 50 pages, and at least half of them are anonymous, although sometimes we know the author later on. That experience really elevated my opinion of Smith.

There had been a lot of offhand theorizing and speculating and assertions made about trade without much evidence or analytical thinking. In contrast, Smith was a systematic thinker and had a general equilibrium model in his head that he lays out clearly but without the modern trappings. There are snippets of insights in those earlier pamphlets but nothing that approaches systematic reasoning. So I think The Wealth of Nations is just a tremendous intellectual achievement. Yes, you can find precursors for some arguments he made, but no one put it together the way he did.


EF: I know you have just finished a massive book, but I was wondering what you are working on currently.

Irwin: I'm really excited about my next project, which is looking at the political economy of trade policy reform in developing countries. Arguably the biggest change in the world economy over the past 30 or 40 years is the increased participation of developing countries and their unilateral decisions to open up and become part of the world trading system. The biggest, of course, was China, which wasn't because of the WTO or external pressure. Rather, in 1978-1979 Deng Xiaoping decided to open up the economy. It was a unilateral decision — and that has been the story for a lot of developing countries.

There has been a lot of work looking at what happens when you go from a closed to an open economy. Sachs and Warner had a famous Brookings paper in 1995 that was improved upon by Wacziarg and Welch. And there are many others now using synthetic control methods to sort of simulate what would happen to a country if it hadn't opened up. Basically all of these papers identify pretty big effects to GDP, to investment, and obviously to trade. There is heterogeneity, of course; not everyone is going to get a big boost from it, but, on balance, a pretty significant positive impact. So the question I want to address is what was behind the decision of those countries to open up or not. What I'm doing is looking at various countries in terms of their political decisionmaking process, starting with Taiwan in the late 1950s, which was really the first developing country to open up, then Korea, then Indonesia, then Chile, and so forth. New Zealand enacts big trade reform in 1984, and there are a lot of countries in the late 1980s and early 1990s. My initial read is that it's not so much that these countries' policymakers, backed by some economist, are thinking about the comparative advantage gains from trade or things of that sort. What they're finding is that they have these import substitution policies and overvalued exchange rates, which have stifled their exports, and now their exports can't pay for their imports. And it's not that they want to keep out imports. They desperately want to import things like food and fuel and especially capital goods. But they don't have the exports to pay for them. So they need to do something to stimulate exports. That requires a devaluation, usually a big devaluation, and reducing tariffs, which through the Lerner Symmetry Theorem acts as a brake on exports.

The reason why Taiwan and Korea initially moved in a more open direction is that the United States was cutting back their foreign aid. They had huge trade deficits that were financed by U.S. foreign assistance. By the late 1950s the United States was saying we're in the postwar period now, you're not being threatened militarily, and so you're on your own. The countries realized, well, we can't cut our imports and our exports are virtually nothing. We've got to do something about this, and that's why they shifted their policy. It's fascinating to see the pressure that U.S. aid withdrawal puts on foreign officials to rethink their policies. Also, sometimes it's the International Monetary Fund (IMF) providing advice but not necessarily a club over their heads. And often there are policymakers groping for a solution who have been influenced by an economist. When you get that sort of link, you sometimes can bring about these significant changes in trade policy. So in the case of Taiwan it was Sho-Chieh Tsiang, who was then an economist at the IMF and who later taught at Rochester and Cornell. The chief economic minister asked for a memo on what they should do. Tsiang went there and said devalue and open up. That's what they did, and the results were astounding.


WEB EXCLUSIVE

EF: Which economists have influenced you the most?

Irwin: When I was starting my career there was international economics and there was economic history, and the fields didn't really intersect. I remember when I was first on  the job market, all the trade people thought I was an economic historian and all the economic historians thought I was a trade person because there wasn't much overlap between the two. What Barry Eichengreen showed is that there was great gain to be had from fusing the two fields together. He and Jeffrey Williamson largely legitimized the enterprise that I was interested in doing, and so I give them a lot of credit for paving the way for the rest of us. But now I think economic history has generally become more integrated into mainstream economics, in part because we can look at big shocks in the past and learn something about them that is relevant for today. I think most economists are much more open to evidence from history than they were 20 or 30 years ago.

I was also very fortunate to study at Columbia University in the mid-1980s when it was a powerhouse in international economics. So on trade there was Jagdish Bhagwati, Ronald Findlay, Robert Feenstra, and then on open economy macro there was Guillermo Calvo, Robert Mundell, Maurice Obstfeld. So to have seminars and to be interacting with these people was just an amazing education. In many graduate programs you get a one-semester course on trade, and people are just trying to cram so much information into just a few weeks. At Columbia there were three semesters on trade. So you had trade theory with Ronald Findlay, trade policy with Jagdish Bhagwati, a seminar on topics in trade and development with Findlay, or empirical methods with Rob Feenstra. Of those people, I'd say Jagdish Bhagwati and Ronald Findlay particularly influenced my view on international trade and how to think about it. As I have moved on to work on trade policy in developing countries, I have found the work of Anne Krueger, Max Corden, and Ian Little to be very useful. And the contributions of previous generations of international economists, such as Jacob Viner, Gottfried Haberler, and James Meade, are inspiring as well.


Douglas Irwin

Present Position

John French Professor of Economics, Dartmouth College (at Dartmouth since 1997)

Previous Positions

University of Chicago Graduate School of Business (1991-1997); Board of Governors of the Federal Reserve System (1988-1991)

Education

Ph.D. (1988), Columbia University; B.A. (1984), University of New Hampshire 

Selected Publications

Clashing over Commerce: A History of U.S. Trade Policy (University of Chicago Press, 2017); Trade Policy Disaster: Lessons from the 1930s (MIT Press, 2012); Peddling Protectionism: Smoot-Hawley and the Great Depression (Princeton University Press, 2011); The Genesis of the GATT, with Petros C. Mavroidis and Alan O. Sykes (Cambridge University Press, 2008); Free Trade under Fire (Princeton University Press, 2002); Against the Tide: An Intellectual History of Free Trade (Princeton University Press, 1996)

Contact Us

Aaron Steelman
Publications Director