International trade during and after the pandemic: My long-read Q&A with Douglas Irwin

Does the COVID-19 pandemic demonstrate an over-reliance on international trade for medical supplies? How have the policies and rhetoric of the Trump administration changed the landscape of international trade? Will America and the world turn away from free trade in the wake of coronavirus? Douglas Irwin joined the Political Economy podcast to discuss.

Douglas is the John French Professor of Economics at Dartmouth College. He is the author of both “Clashing over Commerce: A History of U.S. Trade Policy” and “Free Trade Under Fire” — the fifth edition of which released this past spring.

What follows is a lightly edited transcript of our conversation, including brief portions that were cut from the original podcast. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Pethokoukis: Are protectionists
wrong when they say that we’ve been too dependent on trade for medical supplies
and that the pandemic shows the importance of bringing some of that production
home?

Irwin: I think so, because first
of all, when you think about our dependence on masks and other things like
that, when times are normal, it’s not a problem at all. It’s efficient. We get
things at a very low cost. Our problem, though, is that we didn’t really plan
for an event like this as we should have. If we had anticipated that there
would be such events, what you want to do is not have domestic production of
masks necessarily, but you want to have a domestic stockpile. We find ourselves
with massive shortages. We had a strategic petroleum reserve at one point. We
should have had a strategic reserve for medical equipment and medical things
that we would need in such a time as a pandemic.

We don’t want to have idle
capacity just waiting for a pandemic. We want to have this stuff already in
hand. Remember, too, that countries want to export this stuff. This is a great
opportunity for countries to ramp up their production and sell to other
countries. The problem has not been so much other countries denying us their
production. It’s every country around the world trying to ramp up as fast as
they can. If we throw up trade barriers, that will actually reduce investment,
because it will limit the size of the market for your exports of ventilators or
personal protective equipment — and it will really muck up the whole world
system.

You mentioned the protective gear,
and then there’s the medicine. Does a nation really want to be dependent — for
health or national security reasons — on any other country for some key items? Because
as we’ve seen, if it comes down to it, countries are going to make sure they’re
well stockpiled first before they begin trading with somebody else.

Well, we get a lot of our
pharmaceuticals actually from the European Union, Canada, and other countries
that are friendly and allies. I think there would be a question about
dependence on China. That would be an empirical issue depending on which
particular drug or pharmaceutical product you’re thinking of. I know the Congressional
Research Service and others have looked into this product by product. I think
to the extent that there’s a lot of two-way trade with our allies, that
shouldn’t be a problem in future pandemics.

Via Twenty20

It’s certainly worth revisiting
these things and looking them over, but the question is what the policy
response should be. I don’t think tariffs would be the right answer. Certainly,
incentives for domestic producers to have some onshore capacity might be
worthwhile. But the question is, what form do those incentives take? And will
other countries respond in kind and we sort of get every country for themselves?
There’s always a danger of overreaction — you don’t want to lose the benefits
of trade. But you also have to be cautious and think about whether we are
overly dependent on countries that may not be friendly to us.

Has the pandemic caused you to question
or change your priors on trade policy in any way or inspired different kinds of
thinking?

Probably yes and no, I guess. One
thing is that I think we have a very different administration, as you know, in
power at the moment — the Trump administration, which has done a lot over the
past three years to alienate a lot of our allies. I think that has poisoned the
international environment, where we could have had more cooperation in terms of
personal protective gear and medical equipment, working with allies in Europe,
Canada, Mexico, and elsewhere.

I guess it’s an illustration of
the fact that when you poison trade relationships or foreign policy
relationships in one dimension, it has spill over benefits or costs in other
areas. I think that in this environment, it’s been very difficult to get
international cooperation to keep a free flow of trade in these products.

I guess the lesson is that we can
bully other countries when we have a discrete objective that we want to
achieve. The Reagan administration was not just a set of laissez-faire
ideological free traders. They were very tough on Japan in certain cases and
even on the European Union in terms of agricultural subsidies. It’s not as
though that we don’t want to press other countries to address their unfair
trade practices. But when there’s unnecessary bullying, it can come back to
haunt you. It can come back to bite you.

I think one of the lessons of the
pandemic is that we’ve had some of these problems with regard to trade
precisely because the Trump administration has not been viewed as a fair player
or an ally that other countries can work with. Now, I guess on the other side,
I think once again, the overdependence issue with China comes up. And if we
don’t have a good relationship with them for some very good reasons, would we be
first in their priority list to get exports of their masks?

Once again, I think it just draws
the relationship between trade policy and foreign policy. It’s very difficult
to have good trade relations with countries that you don’t get along with in
terms of foreign policy and vice versa.

What happens when one country
develops a vaccine? How does that get distributed? Does the one country make
sure that they have all the doses they need before they allow a company to sell
it to other nations? Do we know how that will proceed?

We have no idea how that will
proceed. Of course, it depends on which country comes up with that. That’s one
reason why there may be what economists call an externality, a public good
aspect to pharmaceutical production. I have a colleague at Dartmouth, Chris
Snyder, who’s worked on various schemes to: A) incentivize the rapid
development of pharmaceuticals; and B) to provide public financing for the
dissemination of those things.

Gilead Sciences Inc pharmaceutical company is seen after they announced a Phase 3 Trial of the investigational antiviral drug Remdesivir in patients with severe coronavirus disease (COVID-19), during the outbreak of the coronavirus disease (COVID-19), in Oceanside, California, U.S., April 29, 2020. REUTERS/Mike Blake

Now, of course, there’s an
international dimension. If Germany or China comes up with a vaccine first, how
do we get access to it? Once again, here’s the point about international trade
cooperation and international cooperation more generally: If we have been
belligerent with these countries in the past, it’s going to compound the
difficulties of getting access to that vaccine.

I mentioned your priors. I’ve
certainly seen polls showing that trade had actually become more popular with
Americans leading up to the pandemic. Do you think that’s going to change at
all because of this pandemic and people will be more inward seeking — more “raise
the drawbridge”? Perhaps people are going to become more protectionists, and then
maybe we’ll see that more reflected in politics.

We’ve certainly seen leaders
around the world talk about how this has increased the risks of trade, the
vulnerability of trade, and over dependence on foreign suppliers — it’s not
just a US phenomenon. European leaders, Asian leaders, African and Latin American
leaders as well. I do worry a bit that there might be this overreaction in
thinking that what’s happening with the pandemic applies more generally, and
therefore countries have to have more domestic sourcing of all sorts of things.

I do think that private firms may be rethinking how extended they will be and how dependent they will be on certain suppliers overseas. Former Treasury Secretary Larry Summers has said that we’d be moving from a “just-in-time” system of inventories to a “just-in-case” system. Firms are going to be more diversified. That’s the private sector responding to these things. As for the public sector, what the government does, whether they should be forcing this — well, I think the private sector might have better judgement of where they do their sourcing in terms of non-essential items, electronics and what have you. They can assess what the risks are.

I do worry a little bit about governments
turning inward. Whenever more risk or more fear is perceived in the
international environment, there’s a natural tendency to move inward. We
luckily didn’t see that happen too much after the financial crisis in 2009. We
may not see it this time, but there have been indications that we might. I
think we’ll have to see about that, but it is something I would be concerned
about.

Well, the people who are extremely
concerned about the interdependence between the US and China seem to think that
the pandemic proves their point. I’ve been skeptical that we would be
persistent in this “trade cold war,” but maybe the pandemic has made it a lot
more likely that politicians will try to disentangle these economies.

Yeah. Once again, there are two
approaches: One is what our government is going to be doing, and another is what
private firms are going to be doing. I think private firms are increasingly
harassed and worried about the environment in China. I think naturally there’d
be a diversion of supply chains away from China because of Chinese economic
behavior. Then the question is, is that going to be facilitated by governments?
I think that regardless of what happens in the upcoming election, the
relationship, both economic and political with China, is proving to be very
difficult and a fraught one.

I think that will also encourage
the private sector to think twice about doubling down on investments in China
and think about elsewhere in Southeast Asia. I do think that this friction
between the US and China is not going away anytime soon and has fairly deep
roots that go back. It’s not just the Trump administration. I think the Biden
administration also will be very skeptical about trade with China. I think this
is the new normal in a sense.

Biden has released part of his economic plan, which includes a big sort of “Buy American” program. So now Democratic economics also are getting a more protectionist tilt. Why? Is this just because politicians think “Buy America” programs are popular with voters?

Yeah. I mean, once again, if we go
back to before the 2016 election, it was the Democratic Party that would be
more in favor of sourcing domestically or using unionized domestic production
through these Buy America programs. Republicans tended to oppose that, but
under President Trump, as you’ve just suggested, the Republican Party (or at
least the leadership) has moved in a more nationalist direction.

Democratic U.S. presidential candidate and former Vice President Joe Biden speaks about the third part of his four-part economic recovery plan to revive the coronavirus-battered U.S. economy during a campaign event in New Castle, Delaware, U.S., July 21, 2020. REUTERS/Kevin Lamarque

I think two things are going on
with Biden. First of all, they may be trying to outdo Trump in terms of the
economic nationalism and the Buy American policies, which the Trump
administration has sort of talked about but really hasn’t implemented as much.
Then you have the traditional Democratic constituencies that have been pushing
for this anyway.

Are Buy American programs a good
idea? What has the research found on their effectiveness?

Well, first of all, they raise the
price of things because obviously the reason you would be importing is because
you’re getting an equally higher — if not better — quality product at a lower
price. You do two things. First of all, you raise the cost of doing investments
and purchasing things. Second of all, you create opportunities for rent seekers
— for domestic firms that want to get these special privileges or preferences
where government procurement or even private firms have to “Buy American.”

One concrete example — or actually
it’s not a concrete example, it’s a steel example — when they were rebuilding
the Bay Bridge in San Francisco, there were Buy American rules that raised the
cost of that by, I think, tens if not hundreds of millions of dollars. It was a
multibillion-dollar project. You could have imported the steel at much lower
price, but the rules were that you had to use domestic steel.

If the domestic price is five, 10,
or 20 dollars a ton more, that adds a lot to big construction projects. It puts
state and local governments, to the extent they’re doing these construction
projects, in a big hole. And they’re already facing financial distress.

It seems that, at the heart of
these ideas, people on both sides just think we’re going to reverse
globalization and bring manufacturing back to the United States. But even if we
can bring manufacturing back, I’m skeptical that this would also mean a lot
more jobs.

Oh, that’s right. I mean, we might
bring some manufacturing production back, but we’re not going to bring many
manufacturing jobs back. That’s because manufacturing today is so capital
intensive, so technology intensive. It’s fairly easy to ramp up production
without adding a lot of jobs. One of my favorite statistics is that in 1980, or
at least in the 1980s, it took about 10 worker hours to produce a ton of steel.
Now, it takes about one worker hour to produce a ton of steel.

We’ve lost jobs, not because of
globalization and not because of imports, but because of competitive pressures
that have forced firms to become more efficient and to increase their output
without adding on a lot of jobs.

What do you make of USMCA — the
US-Mexican-Canada trade agreement which just went into effect? Did it change a
lot from NAFTA?

Not fundamentally. It basically
kept NAFTA intact. It added on some new provisions that actually were in the
Trans-Pacific Partnership that would update things. NAFTA was a pre-internet
agreement. There are some provisions regarding data flows and e-commerce and
things of that sort, so the updates were sort of taken from the TPP. A big step
backwards is in the auto sector where they tightened rules of origin and have a
minimum wage requirement in terms of certain parts of domestic production.

Overall, it’s better than no
NAFTA. I think it could have been a cleaner update of NAFTA, but for all the
heavy criticisms that President Trump levied against NAFTA as the worst trade
agreement ever, USMCA basically keeps it intact with this slight update.

Then there’s the “phase one” trade
deal with China. A lot of people think this will be the beginning of a
disentangling of our economies, but to me it looks like it does the opposite.
It’s increasing economic interdependence between the countries, because China
is buying more and it’s making itself a better environment for US investment.

Yeah. There really is a confusion
about what exactly it is we want from China. There are different camps and
different entities arguing for different things, but you’re right: It’s sort of
a very odd agreement in this sense. The phase one is just dealing with US sales
of agricultural products, largely to China. China agreed to make some
commitments on that, which they will not be able to keep because of the
pandemic and because the amounts were maybe not realistic in terms of what the
markets could handle. It was trying to provide some compensation for the
retaliation that had taken place prior to that as a result of what the Trump
administration had done, but the agreement does not do anything on the
structural issues.

U.S. President Donald Trump shakes hands with Chinese Vice Premier Liu He during a signing ceremony for “phase one” of the U.S.-China trade agreement in the East Room of the White House in Washington, U.S., January 15, 2020. REUTERS/Kevin Lamarque

If your concern was, “China
doesn’t buy enough from us,” it may be as a step in the direction, even though
it probably won’t take us very far. If your worry was that China is just
fundamentally an unfair trader and they have a different economic system, well,
it does nothing to address that. That was the phase two project that they have
yet to really negotiate and undertake. It doesn’t change whether we think
China’s an unfair trader. It just is a purchasing agreement, really, that the
US government negotiated on the behalf of farmers, who they’ve also had to bail
out to the tune of tens of billions of dollars because of the retaliation in
Europe and China and elsewhere.

I’m sure you hear a lot about
intellectual property theft and technology theft. Do we have a good sense of
how much of that has gone on, continues to go on, and whether it’s actually
been detrimental to the United States?

I think it’s been detrimental to
some firms who make big investments in technology and find it leaks out very
quickly. I guess there would be a difference one should make between US firms
that invest in China, knowing full well that the technology is going to leak
out, versus those who are cyber-hacked operating here in the US or elsewhere,
and find their computer systems and their technology really just literally
stolen.

In some sense, a company like
Boeing has to do some production of aircraft in China because they want to sell
to Chinese airliners, and the Chinese government implicitly sort of twists
their arm to set up plants and transfer technology. I think we could have a
debate about whether that’s a good thing or not, but certainly I don’t think
that anyone would really justify the cyber theft. That happens both at the
state level and the private level in China, unfortunately.

Did we make a mistake 20 years
ago, by normalizing trade with China? Could we have done anything differently
to have a better situation today?

Well, I think you have to go back in time and think of where we were in the 1990s, when we were considering normalizing trade relations with China. Here I’d refer you to an excellent paper just published by Scott Lincicome at the Cato Institute on precisely this issue. At the time, remember, China was moving in a liberalizing direction. Their accession to the WTO pushed them in that direction and made them open up their market and reduce their tariffs. It didn’t quite discipline the state-owned enterprises as much as we might, in hindsight, have requested.

But really, the big change
happened not as a result of normalization — which did make China richer,
reduced poverty, and made them better consumers for our products — but the
change happened when President Xi Jinping took power around 2013, and he really
moved in a different status direction. I think the origin of our problem with
China is not sort of 1999 or 2000, when they joined the WTO, but it’s really
President Xi Jinping.

Now China’s a bigger power and we
have these issues because they’ve really doubled down on their state-led
development model in some sense. That was something that really wasn’t
anticipated 20 years ago. I think it’s sort of unhelpful to be a Monday morning
quarterback saying, “We should have known what was going to happen 20
years later,” when China was moving in exactly the right direction that we
wanted them to, when we allowed them to join the WTO.

Trucks transport shipping containers at Qianwan container terminal of Qingdao port in Qingdao, Shandong province, China November 20, 2019. Picture taken November 20, 2019. REUTERS/Stringer

To finish up: Trade growth was
already slowing before the pandemic, and there was also talk on both sides about
protecting domestic industry. So after we’ve bounced back from the pandemic,
does globalization continue to slow down, or do we start to reembrace free
trade at some point?

Well, I’m usually an optimist, but
on this point I’m not so much an optimist as a pessimist. There’s been a
confluence of things that have gone on in the world economy over the past
decade, which I think is pushing us towards less globalization. The high watermark
really was around 2008, just before the financial crisis. Since then, what
we’ve seen is less liberalization around the world. We’ve seen sort of a
retreat, or at least no growth, in global value chains and outsourcing and
things of that sort. Then when you have the pandemic on top of this, it sort of
reinforces this momentum towards rethinking the globalization that we’ve had in
the past.

The globalization of the past has
really helped out the entire world economy. It’s created these huge middle
classes around the world. It’s reduced world poverty. But the forces moving us
towards a more integrated economy, I think, are really weak at the moment.

Now, to the extent that that these
are being driven by market phenomenon — i.e. these are just private firms reacting
to the environment they see — I don’t see a problem with that. But if states
were to give new momentum to the de-globalization trend, I think that would be
problematic, because I think one of the lessons of history is once you go down
that road, it’s very difficult for governments to turn around and try to
stimulate the world economy by reducing trade barriers.

You get vested interests
domestically in all sorts of countries that have a stake in those sorts of
policies, and it’s very difficult to undo that damage. I guess the risk is that
if the US says, “Hey, we want to subsidize domestic manufacturing and move
away from the world economy,” well, other countries will follow that lead
and say, “The rules that we’ve negotiated in the past aren’t so important,
and we’ll do exactly the same thing.” Then that sort of compounds the
problem, and it creates this vacuum where if there’s not US leadership, it’s
hard to turn things around and move in a more open market direction.

My guest today has been Douglas
Irwin. Doug, thanks for coming on the podcast.

You’re most welcome.

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