Ep59 “Why Tariffs Are Not The Ultimate Trade Weapon” with Dani Rodrik

Key Concepts

• Tariffs: Taxes imposed on imported goods.
• Globalization: The increasing interconnectedness and interdependence of countries through trade, investment, and cultural exchange.
• Hyper-globalization: An extreme form of globalization characterized by very low tariffs and a focus on removing non-tariff barriers to trade.
• Trade Deficit: The amount by which a country's imports exceed its exports.
• Infant Industries: New industries in a country that need protection from foreign competition to grow.
• Industrial Policy: Government policies aimed at promoting specific industries or sectors of the economy.
• Market Failures: Situations where the market does not allocate resources efficiently, such as externalities or market power.
• Resilience: The ability of a country or economy to withstand shocks and disruptions, such as supply chain disruptions.
• Bretton Woods System: The post-World War II international monetary system that aimed to promote international trade and stability.

The Economic Logic of Tariffs

• The conventional economic wisdom is that tariffs are generally a bad idea because trade between two parties should make both better off.
• However, tariffs can be considered if trade makes a third party worse off.
• Globalization has benefited many developing countries by allowing them to export goods at cheap prices to developed countries.
• However, some workers in developed countries, particularly those in low-skilled manufacturing jobs, have been negatively impacted by globalization due to competition from cheaper imports.
• Politicians are often elected by voters, and if a large fraction of voters are discontent with the economic situation, it can lead to political instability.

The Role of Government and Job Satisfaction

• A simple solution to the negative impacts of globalization would be for the government to tax those who benefit from it and redistribute the wealth to those who are negatively impacted.
• However, simply receiving subsidies may not be enough compensation for job loss, as jobs provide a deeper meaning and sense of purpose.
• Tariffs may not solve the problem of job satisfaction, as the jobs that are being protected may not be viewed as attractive or fulfilling.
• Politicians may impose tariffs to provide short-term political satisfaction to a group of voters who feel ignored, even if it does not solve the underlying problem in the long run.

Historical Perspective on Tariffs

• Historically, many countries have developed behind tariff walls, including the United States and Britain.
• However, tariffs are not always causally implicated in development, as many developing countries have used tariffs without achieving growth.
• The key difference between successful and unsuccessful use of tariffs is whether they are part of a coherent strategy of domestic economic policies.
• Tariffs should be used to promote innovation and economic growth, not simply to shield the domestic economy from foreign competition.
• Tariffs should be part of a suite of policies that include industrial policies, tax policies, investment in skills, infrastructure, and R&D.

Reasons for the Resurgence of Tariffs

• By the 1990s, tariffs were very low in the US and other industrial countries.
• Several factors have contributed to the resurgence of tariffs, including:
  • Disappointment with the broad-based prosperity of the era of free trade.
  • Increasing worries about industrialization and trade imbalances.
  • The rise of China as a geopolitical rival.
  • COVID-19 and the need for resilience in supply chains.
  • The green transition and the prioritization of local suppliers.

The Impact of Hyper-globalization

• Hyper-globalization has led to an increase in the gap between the rich and the poor.
• It is important to consider the counterfactual of what would have happened without hyper-globalization.
• China's economic success was not solely due to free trade, but also to active trade policies, industrial policies, and government intervention.
• Mexico's experience with free trade under NAFTA resulted in zero productivity growth since its implementation.
• Before the era of hyper-globalization, governments would engage in temporary acts of protectionism to buy political support for the broader open regime.
• With the advent of the WTO and hyper-globalization, voluntary export restraints were made illegal, and governments told workers who lost their jobs to "grin and bear it."

Alternative Policy Measures

• Manufacturing is not likely to return to the US in large numbers, so tariffs are not the most effective way to create jobs or fix the trade balance.
• The US is increasingly a service economy, and policies should focus on creating better jobs in labor-absorbing domestic service sectors.
• This requires using technology and organizational innovation to create better-paying jobs in industries like long-term care, food preparation, and warehouse services.
• Jobs provide people with meaning, recognition, and a sense of social contribution.
• Job loss has significant social externalities, including increased crime rates, drug addiction, and mortality.
• The choice is not between Trumpism and going back to the hyper-globalization of the 1990s and 2000s, but rather creating a smarter globalization that works better for all.
• The Bretton Woods system provides an example of a better balance between the prerogatives of national governments and the demands of international markets.

Conclusion

The discussion highlights the complexities surrounding tariffs and globalization. While conventional economic wisdom often views tariffs negatively, the podcast explores scenarios where they might be considered, particularly in addressing the negative impacts of globalization on certain segments of the population. The conversation emphasizes the need for a nuanced approach that considers the political and social ramifications of trade policies, as well as the importance of investing in workers and creating better jobs in the service sector. The podcast advocates for a "smarter globalization" that balances the benefits of international trade with the needs of domestic economies and workers.