Marian Tupy: Hello, and welcome to Human Progress Podcast. Today I’m speaking with Scott Lincicome. He’s my colleague at the Cato Institute. He’s the vice president at Cato and also a trade specialist. So with all the news about Donald Trump and tariffs unsettling the world, I thought I would talk to Scott about what’s going on. And of course, the first question I have for you, Scott, is why is trade important to human progress?
Scott Lincicome: Well, sure. I think it’s important in several levels. Most basically, trade helps us access goods and services from around the world at low prices, and thus improves our quality of life in terms of consumption. The old saying from Adam Smith is, everything really gets back to consumption. And that, trade is not the only part of this, but it certainly is a part of it. When we go to our grocery store and we go to the produce section, and especially in the wintertime here in the States, a lot of what is from, is imported. And we, over the last 30 or 40 years, thanks to international trade, are spoiled in terms of our access to fruits and vegetables and other things that we didn’t even know existed. Or if we did, we’d get it like once a year, like avocados or something. So trade at it’s kind of most basic level is just improves our quality of life and our living standards. It allows our wages to go farther and it makes things kind of more fun. The ability to have access to all these cool things is great.
Scott Lincicome: But it’s deeper than that too, because trade, I think is part of this special sauce for free markets. It’s certainly not the only part again, but it’s I think part of the great prosperity machine, is these individuals trading both goods, services, but also knowledge across borders. That boosts our society and boosts prosperity. It injects competition into markets. It allows for innovation, to either via competition or by importing it from smart people abroad. It is part of course, in your book Superabundance, Marian, trade is… You can see little pieces of it throughout. And it’s just part of this recipe, this kind of recipe for prosperity. I think we need to always remember that too. Just here in the States again, how we would never, we would think it’d be crazy to deny people, say here in North Carolina access to stuff and ideas. And people from South Carolina or Virginia. Well, that’s international trade too. Just because you put an international border, those principles don’t really change. And then I think the last really big part of the trade issue is in the geopolitical context.
Scott Lincicome: Trade allows for individuals to learn about other places. And in general, nations that trade together, go to war less. It certainly doesn’t war as we see in Russia and Ukraine, but it certainly, it tempers that. It tempers it in a from a cultural perspective, but it also tempers it because there are commercial interests. You don’t wanna kill your customers. And that again helps I think, make the place the world a little safer. And that’s of course a valuable thing too.
Marian Tupy: Now let’s assume that you don’t like foreigners. [laughter] Let’s assume they have, we have, they are nasty to us and they don’t treat us fairly and whatever else. Why can’t we make everything we need in America? It’s our country and we have 350 million people. Why not do it here?
Scott Lincicome: Well, this actually gets back to the first point about living standards. One of the things that trade does by giving us access to all of these wonderful things around the world, is it gives us time and it improves our quality of life. Because instead of making our own clothes and making our own shoes, growing our own food, we can outsource those things. And we can focus instead on higher value production. We can work in tech services or at think tanks or in advanced manufacturing, making planes and all of that. So that specialization is critically important for human living standards as well. We, by trading for lower value, more labor intensive things, we can move up the food chain and, we can have more time, we can have. There was a great study just out this week that found that, openness to international trade has given people in the developed world dozens of additional hours of leisure, because again, we don’t have to make everything ourselves. And we technically could, especially in a place like the United States, but we’d just be poorer doing so and we’d have people working in jobs that they aren’t as productive in working.
Scott Lincicome: They could be working in better jobs. Today, I’ll give you a good example. It pays about $12 an hour to work at a T-shirt manufacturing plant in South Carolina. It actually pays much more to go work at Amazon down the street or Costco. And so, why not just simply purchase T-shirts from a place like Guatemala, where a T-shirt manufacturing job is actually that’s a good high paying job. It just makes sense for us to trade for those things and not to force American workers into those low-wage jobs.
Marian Tupy: Yeah, I think that’s a crucial insight, is that yes, you could employ millions of American citizens picking potatoes or harvesting corn or whatever else, but you would have to pay them very, very high salaries in order, because Americans just don’t wanna do that. They are mentally set to do work which pays much more. And consequently the price of food, would also increase and therefore the entire cost of living would increase.
Scott Lincicome: Exactly. And trade is so much also about opportunity cost. Resources are finite. We only have a set amount of raw materials and workers and capital. And if you devote those resources to these lower value production t-shirts, picking crops, whatever, those resources can’t flow to higher value options. And this is kind of part of the unseen aspect of protectionism that we don’t think about. When we put tariffs on washing machines and get a washing machine plant in South Carolina, we’re like, yes, we made washing machines. But what we don’t see is that all of the resources that went to making that factory and having those workers work there, could have been deployed in more productive endeavors and we could have just simply bought washing machines from people making them abroad.
Marian Tupy: And let’s just make it more concrete. By resources, you mean both people and money, in other words. Okay, let me ask you the question differently. When people say, for every job saved in the steel industry, which may pay $100,000 a year at max, we are spending a million dollars to keep that job in the country. So just explain the resources, because when you say resources, people can, it just sounds very abstract. What does it mean?
Scott Lincicome: So there’s resources both in the forced production, so manpower, capital, materials, all of that. So that’s on the production side. Those are resources that instead of building a washing machine factory, could have gone into a semiconductor factory, or could have gone into AI, a server farm or something, other things that are just simply higher value, more productive uses of those resources. The other way that resources get wasted though, is from the consumer side. So if you and I are forced to spend an extra hundred dollars on a washing machine, that’s money that we can’t spend elsewhere in the economy. It’s simply destroyed. So when economists look at washing machine jobs saved, we created about 1000 washing machine jobs from those tariffs I mentioned, but it cost us as American consumers, around $800,000 a year per job created. So that’s simply a loss of our financial resources that could have been deployed elsewhere, whether it’s spending on services or housing or whatever, it doesn’t matter. But it’s simply wasted on buying something that just is stamped with a made in America label.
Marian Tupy: There’s another argument, which used to be made on the left a lot, but now is made by right wingers as well. And that has to do with, look, Scott Lincicome. It’s not just about consumption. Americans don’t exist for the economy. Economy should exist for Americans and therefore, forget about consumption. At the same time, they are of course complaining about high cost of living. But anyway, let’s forget about consumption. American economy should work for Americans. It currently doesn’t, therefore change is necessary. So what do you make about this rather philosophical argument that consumption should take a second place to something else?
Scott Lincicome: Yeah, well.
Marian Tupy: National cohesion for example, or national pride or maybe security or whatever else.
Scott Lincicome: Sure. So, I think the first place to start on this production argument, is just simply to note the facts. The United States today is, in terms of manufacturing output, the second largest manufacturing nation on the planet. We make more today in the United States, then the next four countries on the list. So three, four, five, six combined. We are a large manufacturing nation. We just don’t need a lot of workers because our workers are very productive, probably the most productive manufacturing workers in the world in terms of output per worker. So we need to start with that. We can then, once we acknowledge that fact, I think a legitimate discussion on security and stuff. We could talk about, well, does the government need to maybe subsidize more defense production or does it need to, is government policy necessary where there are discrete market failures in the sector? But overall, in terms of making stuff, we still make a ton of stuff. Second is, American manufacturing today and production, is actually dependent very much on open trade. And it’s dependent on open trade in two big ways.
Scott Lincicome: First, most American manufacturers are consumers. Actually all manufacturers are consumers at some level. But I’m talking about more advanced manufacturing like automobiles and aerospace. Well, these folks need access to lower price raw materials and parts. And if you jack up the price of steel and you throw a bunch of tariffs on auto parts or whatever, you actually end up lowering production in these industries. So, steel we had a case study of this. So we imposed a bunch of tariffs on steel during the first Trump administration. Studies have shown that we saw a modest increase in steel output and employment, but we lost overall manufacturing output and employment by a much greater amount. So according to the United States International Trade Commission, we had about $500 million a year net loss in manufacturing output because of the steel tariffs.
Scott Lincicome: So that is a big problem in this idea that protectionism boosts manufacturing. Well actually, it can harm manufacturing and it often does. The second, and I should note one of my favorite stats, about half of everything imported in the United States today is actually a manufacturing input. So it’s stuff that our manufacturers use to make other stuff. A lot of that also, comes from their own companies abroad. So Airbus has a facility in South Carolina. Airbus imports from Airbus France. BMW, also in South Carolina, imports from BMW in Germany. If you shut down that ability for them to access their own parts and equipment abroad, you’re actually gonna reduce their output in the United States. You’re actually gonna reduce overall productive capacity in the United States. If you care about things for national defense or whatever, that’s actually gonna be a bad thing by kneecapping BMW and Airbus and Boeing and a lot of other companies as well.
Scott Lincicome: And that’s one of the reasons why, with all the tariff mayhem we’ve been having recently, the stocks that are hardest hit are some of our biggest manufacturers, particularly in the auto industry, but also big integrated companies like Boeing. So the second big issue of course, is that our manufacturers also need access to overseas markets and overseas consumers. About 95% of all of the world’s consumers live outside the United States. And so, if you deny American companies the ability to access those markets, or if you make them globally uncompetitive by raising their input costs, well then, you’re for pleading, you’re actually harming the manufacturing sector.
Scott Lincicome: So if you remember those things, as well as things like access to foreign capital, we have tons of FDI, those things that come with an economy. You realize that openness and production are not mutually exclusive. And in fact, they’re very complementary. With the former boosting the latter.
Marian Tupy: Yeah, I think the key here is, that there is a logical contradiction in what the conservative case against free trade is right now, which is on the one hand, complaining about excessive consumption and looking at the base things in life and at the same time, being freaked out about high cost of living. They’re trying to bring down the cost of living, but at the same time they want to make the production cost much higher. So that doesn’t work. But I also want to make a point about this whole business with national security and trade, because I think that there is a misunderstanding here. The criticism is that if we don’t have steel mills in the United States and China is producing a lot of steel, maybe even subsidizing steel production, then at some point, we will be dependent on building our aircraft carriers and our tanks on Chinese steel. But that’s not really how it works. There are plenty of other countries which are producing steel, many of which are our best friends.
Scott Lincicome: Right. And so this gets to, so I wrote a paper a few years ago on national security and trade, and that’s exactly right. First, again, start with the facts. The United States has the fourth largest steel industry in the entire world. When President Trump was considering steel tariffs during his first term, his own Secretary of Defense said, that the Defense Department needed a mere 3% of total U.S steel production. So this is not a crisis. But that being said, if you look at the top suppliers of steel to the United States, ’cause we do import a good amount of steel, it’s Canada, it’s Europe, it’s Japan. Countries like Russia and China are down, out of the top 10. So the idea that all interdependence is a security risk, I think is wrong. And in fact, when you talk about a country like China that has billion and a half people at a massive manufacturing footprint, it makes a ton of sense for us to pool our resources with our allies and to, instead of slapping tariffs on their stuff, enter into trade agreements, enter into defense agreements. We have these defense procurement agreements, innovation agreements that allow us to, instead of fighting independently or trying to counterbalance China independently, we can actually work together, trading more with each other and boosting overall productive capacity for the defense industrial base.
Scott Lincicome: People don’t know the U.S Defense industrial base actually includes Canada right now. That’s how close an ally Canada is. So to slap tariffs on stuff from Canada, leaving all that supply chain integration out of this. Just doesn’t make a lot of sense. And then it’s even more baffling when you do it, as they say, they’re doing it on national security grounds. Again, it just doesn’t hold water.
Marian Tupy: Well, I’m glad you took us there because of course, the tariffs that make the biggest news are the tariffs against our friends, our closest friends. Canada, Europe, I believe is on table.
Scott Lincicome: Yeah, just this morning.
Marian Tupy: So maybe this is a good place for you to tell us about what’s been happening since Donald Trump took over the presidency. Where are we currently?
Scott Lincicome: Yeah, you can see the bags under my eyes. It’s been a busy few weeks. So shortly after President Trump was inaugurated, he issued several executive orders. Invoking a national emergency with respect to fentanyl coming from three countries, China, Mexico, Canada. And by invoking that national emergency, he unlocked tariff or trade powers under the International Emergency Economic Powers Act. Now, nerds like me will say that that law is actually not meant to impose tariffs, but it’s very broad and sweeping. It’s a cautionary tale about congressional delegations of power. But that’s the issue for another podcast. And with that, the President has since then imposed tariffs now at 20% on all Chinese goods. And those are on top of his 25% tariffs from his first term that were on half of Chinese goods, as well as 25% tariffs on imports from Canada and Mexico. Some of those Canadian and Mexican imports have now been exempted for a month, although compliance there is really unclear for a lot of products. And so that’s one set. The other thing that he has already done, is imposed additional tariffs on steel and aluminum. So he jacked up tariff rates from 10% to 25% for aluminum, and he kept the 25% steel tariffs, but he closed all of the exemptions that had been there before.
Scott Lincicome: Now, this is a huge change in terms of steel and aluminum trade because, around half of all steel and aluminum imports were coming in duty free. They were exempt from these national security tariffs that Trump had imposed the first time around. That was a series of agreements and other issue with companies basically going to the administration and saying, “We can’t get the steel and aluminum we need here.” So they got an exclusion. Well, Trump has now shut all of those down. So now we have blanket tariffs on steel and aluminum. Talk about not great for your manufacturing sector and including, of course, from our closest allies. There is, at this point, I don’t think any country is exempt. Even in the Five Eyes intelligence system, the UK and Canada, and Australia, they’re all in there too. And those, so that’s where we stand on the tariffs. There may be more coming in about three more weeks. The President has promised reciprocal tariffs. So if India has a 20% tariff on American motorcycles, we’re gonna put a 20% tariff on Indian motorcycles. So there’s a lot there.
Scott Lincicome: Markets of course, are not thrilled with any of this. Not only the tariffs, but I think it’s a huge issue is the uncertainty of all of it. Because, economic policy is not supposed to be done via a switch in the Oval Office. And that’s effectively what we have with tariff policy right now. The President is turning on tariffs and then turning them off. Sometimes in the same day, like yesterday, we were gonna have 50% tariffs on Canadian steel and aluminum, and then it went away. And as any investor, as any lawyer will tell you, the thing that companies hate more than taxes is uncertainty, because they can’t simply predict what’s gonna happen next. And without that predictability and consistency in the market, they can’t hire, they can’t invest. So they basically freeze up, they sit on their hands. And studies show that, spikes in policy uncertainty and trade policy uncertainty actually depress investment quite substantially. And I think that’s really probably the bigger problem we have right now than the tariffs themselves.
Marian Tupy: It seems to me like what the administration is doing, it’s shooting itself in the foot. Because on the one hand, what they said, and I believe that they actually want to do this, is to massively increase American growth rate for a variety of reasons, including because if your economy grows at a very fast click, then you are able to pay down the debt and so forth. So they want to increase economic growth, but the uncertainty is actually pushing down the growth.
Scott Lincicome: Right.
Marian Tupy: I think it’s important to mention in this context is that, one of the leading interpretations of one of the leading candidates for explaining why it took the United States so long to get out of the Great Depression, between 1929 and really 1939, outbreak of the Second World War, was precisely the policy uncertainty. The FDR administration came in promising that they are going to try all sorts of things, and they’ve been doing so much that actually. Well, there was a massive uncertainty in the economy and people. And people reacted to it.
Scott Lincicome: Yeah. And, I don’t think people know. That, tariffs are not banned in our trade agreements and at the World Trade Organization. And in fact, the World Trade Organization, one of the fundamental principles of the global trading system, is tariffs. In fact, policymakers spent decades, what we call channeling and binding. So they channeled all of their trade restrictions into tariffs, and they bound them at predictable levels. Sometimes low levels, but not necessarily. You were allowed to have politically sensitive high tariffs. So why did they channel and bind? It wasn’t just because they were trying to implement some sort of globalist agenda or whatever. It was simply to provide security and predictability in the trading environment. So you can keep tariffs in place, but if you know the rate is 10%, you can adjust anyway. And if you know the rate is gonna be 10% in a few years because it’s been bound at that level, you can make your investments. So right now we have taken that whole binding aspect of it. We have the tariffs, but there’s no binding. They can go up, they can go down, they can go away, they can stay.
Scott Lincicome: They might be applied on the things you need in a few months. And that is just tremendously problematic for a pro-growth agenda, like you said. Because yes, you can get some flashy announcements of people are gonna build a factory here and there, but the macroeconomic environment is just unstable. And overall you’re gonna have producers and consumers holding back. Or the other thing they’re gonna do, which is also a mess, is they’re gonna stockpile. So they’re gonna look, maybe they’re gonna be tariffs. And you can see like people in the construction industry right now, because they’re worried about Canadian lumber tariffs and steel and other things. So they’re just filling warehouses with construction materials. Now, look, this is good for people selling those materials in the short term. But what happens if they don’t need all those materials? You have just wasted resources sitting in a warehouse somewhere. What happens…
Marian Tupy: Again, just to make it clear about what resources means. It takes a lot of money to keep stuff that you don’t need.
Scott Lincicome: Exactly. Having a warehouse full of stuff you don’t actually need is a huge cost, it’s a cost in terms of money. You got to rent the warehouse, you got to buy the stuff. And that’s capital that you can’t deploy by hiring more workers or boosting output, whatever. But it’s also just a waste of time and other resources. Because people, instead of focusing on their business, they’re focusing on these emergency game plan scenarios, finding warehouse space, all these types of things that you want in a productive economy, people not to be focusing on. And oh, by the way, they’re all also lobbying in Washington. So trade policy lobbying has skyrocketed. Trade lawyers are making fortunes. They’re building beach houses in Delaware, all because of all of this tariff uncertainty. And so that is, look, I know some of those folks, good for them, but it’s bad for the real economy. And like you said, I think it really directly contradicts so much of the rhetoric coming out of this administration. And a lot of the rhetoric Chris, you and I really like. Eliminating inefficiency and waste, eliminating the government’s role in the economy. On the trade front, it seems they’ve forgotten all of that, and they’re doing basically the exact opposite.
Scott Lincicome: And unfortunately, I’m worried that that will counteract what is a good agenda. Regulatory reform, tax reform. These are the types of things we want in an economy. So that free people can do great things and do what free economies do. But if trillions of dollars in annual trade are locked up because we just don’t know how the President’s gonna feel that day, that’s a problem.
Marian Tupy: Now, let’s say all of this true. Let’s say that we are wasting a lot of money, a lot of resources. Let’s say that we are actually depressing our growth rate. Let’s say that it’s true, that there will be a lot of lobbying and therefore a lot of corruption in D.C as we are buying or at least renting politicians in order to get an exemption from a tariff. Or alternatively, we are renting politicians to impose a tariff on somebody we don’t like. Let’s say that’s all true. But what about fairness, Scott Lincicome, what about fairness? Is it fair, that the Indians are placing 20% tariff on us and we are only placing 5%? This is what’s behind the whole reciprocal tariff. And I have to tell you, when I heard about reciprocal tariff, the lizard brain said to me, absolutely yes. Why should the Indians put 20% tariff on us when we are not putting a tariff on them? Let’s make it even, let’s make it fair. What’s wrong with that argument?
Scott Lincicome: Well, it is seductive. And quite frankly, a lot of the global trading system is based on this notion of reciprocity. But it runs into reality, it runs into a few problems. The first, is the economics. Matching India’s tariffs will make us poorer. So, taxing imports means consumers in the United States are worse off. So if the Indians don’t immediately cave and lower their tariff, which let’s face it, that’s not a great success rate in doing that overall, using tariffs to get liberalization abroad. We will be poorer. So going back to the example of food, the Mexicans have certain tariffs on food. We get a lot of tariff, we get a lot of food from Mexico. Does it actually make economic sense to impoverish our citizens in the way that Mexico impoverishes theirs? No, it doesn’t. So that’s the first issue. The second issue of course, is that most of us don’t work in manufacturing, export industry. So, there’s kind of a collectivist logic to a lot of this. That the government is going to punish some citizens in order to benefit others. It’s our producers, it’s our exporters.
Scott Lincicome: Even though most of us as individuals, work in services and have no connection to these industries. And we won’t benefit personally from any sort of expanded market access into the Indian market. Maybe the manufacturing sector might, maybe a few businesses might, but as individuals, the vast majority of us won’t actually see any gains. From there, the other issue is America first. So if you match other countries tariffs, you’re effectively letting them set your trade policy. So why on earth, and I’ll give you examples, ’cause this can get very absurd. We buy a lot of coffee from Colombia. We do not make coffee. I’m a little bit in Hawaii, but that’s about it. Well, Colombia has about a 10% tariff on coffee beans from America. We don’t send them any coffee beans. Should we really let the Colombian government dictate our tariff policy in applying a 10% tariff on Colombian coffee? That’s not very America First. It’s America second. And so, in some sense reciprocal tariff policy is us following other countries. And my view is, we should set tariffs and any other taxes, any other policy, based on what’s good for America, what’s good for the nation as a whole, what’s good for us as individuals, not what another country does based on some kind of rote calculus for, tit for tat.
Scott Lincicome: And then finally, I just have to note, I’ll put my trade lawyer hat on for a second and say, practically this is a mess. Because you’re talking about thousands and thousands of different products from hundred, 200 different countries. You’re talking about trying to quantify not just tariff barriers, but non-tariff barriers, subsidies, value added taxes, you name it. Meanwhile, we have our own subsidies, we have our own tax regime. So trying to actually administer this system, would be incredibly difficult and would require a lot more government officials. So again, going back to how we’re contradicting ourselves, you would need thousands of new customs officials and tons of new paperwork and all this, to try to figure out how to navigate this new system. While supply chains of course would re-route to try to avoid it altogether anyway. So it just doesn’t make a lot of sense once you turn off your lizard brain.
Marian Tupy: Yeah, I think that one of the things which is really underappreciated, is of course the tariffs war, what’s likely to happen? So we are going to impose a 10% tax on country X, the country X retaliates, maybe they buy less of our agricultural produce, which puts then our agricultural sector in hardship. And we will have to then compensate that agricultural sector from the taxpayer. So we are basically paying at least twice, once in increased price of agricultural foods, but then also in higher taxes which need to be given to our farmers in order to compensate them for the lack of trade. So it is horrible mess.
Scott Lincicome: No, and I should note. Because there’s a common retort to all this, that oh, well, if Canada retaliates, isn’t that also bad for them? And it’s some sort of, aha moment. So you clearly this, you’re only worried about things, our tariffs or something like that. That comes around a lot. The reality is that foreign governments retaliate not because they want to, not because they want to slap tariffs on stuff. They retaliate for, because they have to. They are first, domestic politics. You can’t be seen as weak in the face of a foreign attack of sorts on your economy. So when Donald Trump says he’s gonna make Canada the 51st state and he slaps a bunch of tariffs on Canadian steel or whatever, what can a person like Justin Trudeau do? If you look, there’s just wide consensus, Liberals, Conservatives, all 80% in Canada, support these types of retaliatory actions. Even though they understand that this is gonna be costly for their own economy. So the domestic politics. The second is strategy. So game theory kind of tells us that, if you don’t respond with your own tariffs, you’re really going to encourage more bad behavior or more tariffs by the United States or another party.
Scott Lincicome: So the Europeans have said this repeatedly. The Europeans have said, “Look, we don’t wanna retaliate.” And the European Commission is somewhat insulated from that political issue, but they’ve said as a strategic issue, if we don’t retaliate, Donald Trump’s just gonna come back and do more of this. So we’re gonna pick politically sensitive areas. It’s typically agriculture or other things like Whiskey, because Mitch McConnell was from Kentucky, and they’re going to eat the pain because they feel they have, it’s a strategic imperative. So that happens a lot. Doesn’t happen always, but it’s enough that it causes additional economic hardship, it causes lower economic growth. As you noted, we get taxpayer bailouts for certain politically connected industries and for what? We’re still fighting the first Chinese trade war. China did not magically reform it’s economic and trade policies because we put a bunch of tariffs on stuff. American farmers have basically, it seems like permanently lost market share for crops like soybeans and the rest ’cause the Brazilians have stepped in our shoes. And yet the tariffs in the United States still persist.
Scott Lincicome: And not just on security stuff, we have tariffs on baby blankets, on tiki torches, on all these types of things. And now we’re adding even more tariffs on smartphones and laptops and other things as well. From a strategic perspective, so far, it’s just not bearing a lot of fruit.
Marian Tupy: China is looming very large in this conversation. And there is a lot of talk about the millions and millions of jobs that have been lost in the United States because of China. So I wanna talk just very briefly about that, because it is my understanding that most of the jobs that have been lost, especially in the manufacturing sector in the United States, have been lost to automatization.
Scott Lincicome: Yeah.
Marian Tupy: First of all, is it true? And then why is automatization a good thing? So let’s assume that is true and let’s assume that we are going to go on in the United States, basically handing over more and more work to robots. Should we be against that? Tucker Carlson very famously in his conversation with Ben Shapiro, said that he would be against, what is it? Autonomous vehicles.
Scott Lincicome: Right.
Marian Tupy: If they took jobs away from, say truck drivers. So is it true about jobs lost to China? And if not, what about automatization? Why is it a good thing?
Scott Lincicome: Right. So it is true, although economists differ on the exact number, that increased trade with China starting in around 1999 caused around a million, maybe manufacturing jobs to be lost. Again, people can differ on the exact number, but there was certainly some job loss in manufacturing associated with increased Chinese import competition. But, there’s two big caveats. First, those studies only looked at the jobs loss. They didn’t look at the jobs gained. Jobs gained from lower input prices in manufacturing, jobs gained in services, jobs gained from exports to China. When you include those issues, the net effect overall is basically a wash. Maybe even we came out a little ahead. So that’s a really important thing we have to remember. The second point though is that, those million manufacturing jobs were just a fraction of the total manufacturing jobs that have been lost over the last several decades. Most of the jobs lost over the last several decades in manufacturing were due to productivity. So not just robots, but computers, improved business practices, all this type of stuff. So in general, I think what you can say is that trade is one of many causes of jobs lost in the sector, although it has all these great benefits too, including jobs in other places.
Scott Lincicome: Now, on the automation and on the productivity point. Look, losing a job is painful. Whether it’s trade or robots or changing consumer tastes, it’s never not painful. But, it is an essential part of economic progress and of improved living standards that we make this more stuff in less time. That’s how wages, the secret sauce of increased wages over time is productivity. And by doing that, we can not only have higher wages, but we have more leisure time and the rest. So in general, we want those robots, we want to outsource rudimentary routine manual labor, unsafe labor and the rest, to machines because that allows us to make more stuff and for those of us still in the industry, have higher wages. The other thing of course, is that this, we can’t think in terms of the lump of labor fallacy. So the lump of labor fallacy is, there’s a set number of jobs in a set number of industries. And so if you have robots in one industry, let’s say trucking, those workers, those truck drivers, they just, that’s it. That’s the end of the road, nothing changes.
Scott Lincicome: In reality, that’s of course not the case. So in episode after episode over time, including with respect to computerization. But you can go back to telephone operators in the 1920s, that was actually a huge labor market shock, particularly for young women. We’ve had these big shocks in the past. And what’s happened? The people who were in those industries, they didn’t just sit on their hands, they moved into other industries. And the key there for government policy isn’t to stop the disruption from happening. We would be worse off if we still had to pick up a rotary dial phone and have some, woman in some place, connecting us like you see in the old movies. She’d have a job, but we would be as a society, we would be worse off. Instead, the better thing is to let that disruption happen, to let that improvement happen. But for government to effectively make it easy for people to adjust. Because we have all of these different policies in place, labor policy, occupational licensing, housing policy, regulatory policy, that makes it harder for American workers that are hit by disruption, whether it’s from trade or technology or anything else, to then move on. And that’s what we need to be focusing on, is making it easier for those disrupted. ‘Cause disruption is gonna come.
Scott Lincicome: If it’s not robot trucks or whatever, it’s gonna be from AI or something else. It’s always going to come. It’s also gonna come just from new products. The iPhone destroyed a bunch of camera making jobs. This is always going to happen. The key for government is to make sure that we’re not locking people in place, physically or, geographically or in terms of their jobs, and to help people adjust. And we know how to kind of do that generally. But unfortunately there are a lot of interest groups that benefit from policies that restrict that adjustment, restrict that dynamism. And it includes in things like education as well. There’s just so much stasis in these areas that make it really hard for people to do what they need to do when these disruptions happen.
Marian Tupy: Yeah, I think one of the best concrete examples is that back in 1900, 40% of Americans were working in agriculture. Today only 1% does, they feed all of the United States and we have a lot of agricultural produce for export as well. But that doesn’t mean that 39% of Americans have no jobs. They moved into other things. So as you say, the key is, for us to make sure that people can make that move from one job to another. And for that reason, I think it is silly for us to focus on what people are doing in Beijing or in Delhi. We should be looking at Washington. And is Washington actually putting barriers in the place. Like for example, lot of licensing. If a woman wants to braid hair, she has to get a degree and spend a lot of money doing that. So that’s very silly.
Scott Lincicome: Yeah. And I would say, Washington and state capitals too. ‘Cause a lot of this stuff is state level regulation, especially when you look at licensing or criminal justice policy. Where those are the types of things that make it really, really hard for people to just get on with their lives. In general, people want to move on. They want to improve their lives, improve them, their families and all this. And government shouldn’t be standing in the way of that. And a lot of times it is.
Marian Tupy: Okay, now I’ll need to let you go soon to combat your protectionist enemies, but I want to broach one last subject. And that has to do. There’s a lot of discussion about Donald Trump playing some sort of four dimensional chess, that there’s a broader attempt here to restructure the American economy. I’m very suspicious when I hear a politician saying that we are going to somehow restructure the entire economy. Because politicians don’t have the kind of knowledge necessary in order to restructure an entire economy. But one of the arguments I’m hearing is that, the tariff system is a part of a concerted effort having to do with increased tariffs, reduce government spending and reduce taxes. The idea here is, and I heard it from a very smart, interesting man, David Freeberg from the All In podcast. Who says that one theory, he doesn’t necessarily say that this is his theory, but he says, that one of the theories he hears, is that basically this is a determined effort by the administration to make imports more expensive, which will then lead to onshoring of businesses. It will unleash domestic capitals through the cuts in income tax. And therefore this will lead to some sort of a more consumption oriented model, whereby we depart from taxing incomes to taxing consumption. So it’s part of a whole. And what do you think of that?
Scott Lincicome: I find I’m extremely skeptical. I’ll put it that way. I think the first thing you have to start with is simply the administration’s words and actions. And the fact is that for all the good that that DOGE is doing in terms of government inefficiency, there really isn’t a concerted effort in Washington right now to really cut spending in the long term. There nips and cuts here and there are just not going to be what is affecting the trajectory of our spending which is entitlements. And to a lesser extent defense. But mainly it’s going to be Social Security, Medicare, that need reform. And those are not being touched. So while on the spending side, I just don’t see a lot of real effort in the Congress to do what’s needed. The Freedom Caucus may had a major victory by shaving, a tiny bit off the spending baseline. Seeing radical cuts in here seems unlikely. The second issue is the math. Because we don’t, because the imports are a small part of our consumption. Believe it or not, it’s only about $4 trillion. It’s just not a huge part of our consumption. There’s always…
Marian Tupy: How big is the consumption? Consumption is about 25 trillion or?
Scott Lincicome: 25 trillion. So we’re 4 trillion of 25 trillion. So it’s just not, it’s a small part. So that’s two problems. One, it shows you that tariffs really aren’t a broad-based consumption tax. They are not a VAT. They are attacks on a narrow band of our consumption. ‘Cause people don’t get this. We think everything we consume is made in China. But in reality, most of what we consume are things like our mortgage, they’re services and things that are here in the United States. So because of that narrow tax base, not only does it kind of rule out that consumption tax idea, but there’s only so much revenue you can get from tariffs. Because if you raise tariffs too high, you don’t get any imports and you don’t get any revenue. So economists at the Tax foundation and several academics have looked at this and there’s really just not a ton of revenue, that you can generate from. You’re looking at maybe $400 billion a year maybe. And that’s generous. Others have said maybe 200 billion. ‘Cause, any more than that and imports start shrinking. So to completely eliminate the income tax, you would need far more revenue than that.
Scott Lincicome: You would need a tariff of something like 60%. You would need to replace 4 trillion a year or so, excuse me, 2.5 trillion a year. And you can’t do it. So you get a small reduction in income tax maybe. Even though I don’t think Republicans are even looking at that. They’re looking just to maintain tax rates, not cut them. And with all of the other issues that tariffs bring up, the two other big issues are, one, we already talked about. Tariffs are gonna actually harm a lot of manufacturing.
Scott Lincicome: Another stat I love to throw around is, about 80% of all manufacturing workers in the United States, work at firms that import and export. So these are trading firms. So most of our jobs are at companies that are somehow connected to the global economy. Tariffs are gonna actually harm a lot of those folks. The other big issue though, is that tariffs tend to cause the dollar to appreciate. And that’s going to actually undermine some of these grand strategy things I’ve heard about weakening dependence on the dollar and all this kind of stuff. Well, if the dollars increases in value, you actually might see more foreigners trying to hold those dollars. That’s gonna put pressure on our trade balance, but it’s also gonna make it harder for our exporters.
Scott Lincicome: ‘Cause typically a stronger dollar correlates with lower exports. So put it all together. And I just don’t see a lot of grand strategy here. And that leaves aside, all the gossipy stuff we read in Politico about what’s actually going on behind the scenes. But you’d need a far more coherent action to put this in place than what we’re seeing so far. And at the end of the day, Occam’s Razor applies to a lot of this stuff. The simplest answer is that President Trump likes tariffs. He likes using them as negotiating tools. He likes how it makes CEOs and government officials run to him seeking favor. He thinks they’re raised some revenue, he thinks they can push for, be used to push foreign governments around. And I think that’s far more likely the answer than some sort of grand strategy.
Marian Tupy: There’s another conspiracy theory flying around Washington, which is that the administration is deliberately trying to cause a recession in order to bring down interest rates and thereby lower our payment on debt, which is currently over $800 billion a year. Now, needless to say, causing a recession with all the unexpected and unforeseen consequences that that could have is a very, very risky enterprise to be undertaken by the administration, not to mention that it is quite immoral.
Scott Lincicome: Yeah, I find that also to be highly implausible. Because first of all, these are politicians. And while Donald Trump doesn’t have to run for re-election, a lot of other people do. And deliberately causing a recession is not a recipe for future political success. The other issue is, as you said, what that might unleash is so unknowable. I can’t imagine that government officials would intentionally go down that road. And in fact, if it ever were to come out, that this was an intentional recession, I think the damage it would do to the US economy long term is immense. Because if you have, if you’re an investor, if you’re a consumer, and you know that the president could just cause a recession with the, a stroke of a few pens, I think that would really make the United States a far less attractive place to do business. And in the long, term be quite terrible for our economy.
Marian Tupy: Well, I hope you’re all right. And I want to thank you from the bottom of my heart for the time that you have taken. And good luck. Thank you.
Scott Lincicome: Thanks.