Tuesday, December 19, 2017

Interview with Douglas Irwin: Lessons from History about US Trade

Aaron Steelman has an "Interview" with Douglas Irwin in the Econ Focus journal published by the Federal Reserve Bank of Richmond (2017, Third Quarter, pp. 20-25).

On the genesis of his most recent book, " a comprehensive, more than 800-page history of U.S. trade policy, Clashing over Commerce":
"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. ... 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."

On tariffs as the main source of government revenue in early US history: 
"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. ... 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 into 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."
Why tariffs were not a cause of the Civil War:
"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."
Did tariffs help growth in the 19th century US economy?
"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. ... A lot of the industrialization occurred prior to the Civil War, between 1840 and 1860 when we had low and declining tariffs. ... 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 nontraded 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." 
Did Smoot-Hawley contribute in a major way to the Great Depression?
"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." 
Why history suggests that Trump may have little effect on trade rules: 
"When Donald Trump was elected, given his extreme rhetoric on trade, many people expected big changes in trade policy. ... 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 [Reciprocal Trade Agreements Act], 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 the North American Free Trade Agreement (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."