The Impact of Tariffs on the US Economy: Insights from Economist Douglas Irwin

The Debate Over Tariffs and Free Trade

Tariffs and trade policy continue to be hotly debated topics in American politics and economics. To gain insight into these complex issues, economist Douglas Irwin of Dartmouth College recently sat down for an interview to discuss his work on trade policy and the impacts of tariffs on the US economy.

Irwin is the author of several books on trade, including "Trade Policy Disaster: Lessons from the 1930s" and "Free Trade Under Fire," now in its fifth edition. His expertise provides valuable perspective on both historical and current debates surrounding tariffs and free trade.

Trump's Tariff Policies and Their Economic Impact

One of the key topics discussed was the tariff policies implemented by former President Donald Trump during his first term. Irwin noted that Trump imposed significant tariffs on steel imports as well as on about half of imports from China, with rates ranging from 7% to 25%.

According to analysis from the Tax Policy Foundation, these Trump-era tariffs ended up costing American consumers and businesses about $80 billion per year in increased costs. While this represents a relatively small percentage of the overall US economy, Irwin pointed out that the Congressional Budget Office estimated the tariffs would reduce US GDP by about 2% over time.

Irwin explained that while consumers may not directly purchase raw materials like steel, the increased costs from tariffs get passed down through industries that use those materials, ultimately raising prices on consumer goods. He gave the example of state and local governments having to pay more for steel to repair bridges, which impacts taxpayers.

The Politics of Protectionism

The interview explored why protectionist trade policies remain politically popular despite their economic drawbacks. Irwin noted that certain industries and regions that benefit from tariffs, like the steel industry in Rust Belt states, tend to lobby heavily for protectionist measures.

He also pointed out that the negative impacts of tariffs are often diffuse and hard for the public to directly connect to trade policy. Meanwhile, politicians can point to specific factories or jobs "saved" by tariffs, even if there are broader economic losses.

Irwin emphasized that once protectionist policies are put in place, they become very difficult to remove due to entrenched interests. He gave the example of subsidies for mohair goat wool that were implemented during the Korean War but persisted for decades after they were no longer needed.

Historical Perspectives on Trade Policy

To provide historical context, Irwin discussed the infamous Smoot-Hawley tariffs of the 1930s, which exacerbated the Great Depression. He explained that these tariffs were unnecessary and counterproductive, leading to retaliation from other countries that harmed US exports.

Irwin traced how US trade policy evolved after World War II, with America emerging as a global economic power and pushing for more open trade. However, he noted that even during this period, free trade agreements mainly applied to Western allies, not the Soviet bloc or developing countries.

Recent Shifts in the Trade Debate

The conversation explored how the trade debate has shifted in recent years, especially since the 2008 financial crisis and the rise of China as an economic power. Irwin observed that concerns about national security and economic competition with China have made many politicians and voters more skeptical of free trade.

He also discussed how disruptions during the COVID-19 pandemic led to calls for reshoring supply chains. However, Irwin argued that having diverse, global supply chains actually provides more resilience and flexibility than relying solely on domestic production.

Evaluating Trade Policy

When asked how to best evaluate trade policies, Irwin emphasized the importance of having clear objectives. He criticized the Trump administration for having too many competing goals for its trade policies, making it difficult to achieve any of them effectively.

Irwin stressed that policymakers need to carefully weigh costs and benefits before implementing new trade barriers, given how difficult they are to remove once in place. He advocated for more targeted, strategic use of trade policy tools rather than broad tariffs.

The Future of Free Trade

Looking to the future, Irwin expressed concern that geopolitical tensions and national security fears are pushing countries to turn inward economically. He noted that even many younger people who benefit from global trade through products like smartphones seem more skeptical of free trade policies.

However, Irwin still believes most economists support open trade in principle. He suggested that highlighting the corruption and favoritism inherent in protectionist policies may be more effective in swaying public opinion than purely economic arguments.

Key Takeaways on Tariffs and Trade

Some key points from Irwin's insights on tariffs and trade policy:

• Tariffs often have hidden costs that get passed on to consumers and taxpayers
• Protectionist policies are politically popular but economically harmful in aggregate
• Trade barriers are easy to impose but very difficult to remove once in place
• Having diverse global supply chains provides more economic resilience than relying only on domestic production
• Geopolitical tensions and national security concerns are leading to more skepticism of free trade
• Policymakers should have clear objectives and carefully weigh costs/benefits before imposing new trade barriers

While the debate over tariffs and free trade is likely to continue, Irwin's historical perspective and economic analysis provide valuable context for evaluating trade policies. As the global economy evolves, finding the right balance between openness and protecting domestic interests will remain a key challenge for policymakers.

Article created from: https://www.youtube.com/watch?v=f_LG5BNssZc