Transcript: Trade Expert Doug Irwin’s Interview on The David Frum Show

And America under Trump has a lot fewer of those.

The Trump people have come back from their talks in Europe by saying, “Look, we’ve built this giant trading bloc of the United States plus the EU. Look how powerful we are.” The European Union now regards the United States and every European does. And I’m speaking to you from Canada, where this is true. Once America’s most intimate economic partner, people see the United States as a dangerous predator on world markets, one that you want to have less and less to do with in the years ahead because Americans can’t be trusted.

The deals that the United States signed become worthless, like the trade deals with Canada and Mexico that Donald Trump signed in his first term and disregarded in the second. No one wants to do business with a person who approaches business in a mood of relentless bad faith.

What Will Actually Happen

No, it won’t reverse the trade deficit. It won’t boost manufacturing, it won’t boost US exports, it won’t check American imports, and it won’t balance China. All of those things will not happen.

So here’s what will happen. First, we’re going to see slower economic growth. And that shows up in every economic model, because everything that Americans make that depends on inputs from the rest of the world, all of those things become less competitive because those inputs become more expensive and the goods become less competitive. And so you’re going to see a slowdown in growth.

You’re going to see a slowdown in business investment because the rules change all the time. Americans don’t know what to build, who to sell it to. They don’t know if they’ll have customers overseas for anything. And they don’t know whether foreigners will buy American goods because the foreigners will be retaliating. You’ll see a slowdown in business investment and a slowdown in growth.

You’re going to see the government having a much bigger role in economic life, picking winners and picking losers. One of the reasons that the United States moved away from tariffs as a way of funding the government back in the early 20th century was because it led to so much corruption, as different interests bought their way into protection and favors from the United States government. It creates privileged winners.

The Tax Burden Shift

And here’s one more thing it does, and this is maybe the most important of all. Once you see a tariff as a tax on those Americans least able to pay, it’s pretty hard to think of it as anything else. When the Trump people boast that they’re on their way to trillions of dollars of new revenue, understand that what they’re talking about is financing the tax cut for the rich that they passed just weeks ago in this one giant, big, boastful bill. And they’re going to offset a lot of those revenue losses that were given to the richest people in America by having a massive tax on the consumption of the poorest people in America.

A tariff is a tax on the poorest people because it falls most heavily on goods. Tariffs shift the burden of taxation onto goods. They tend to fall most heavily on the least expensive goods, and they impose the greatest costs on those Americans who spend more of their incomes on goods, less on services, less on saving. Those least able to pay, pay.

What we are seeing here is a massive redistribution of the fiscal burden of the United States, the tax burden of the United States from those best able to pay to those least able to pay. And the whole thing is being mystified and disguised by appealing to people’s envy and spite and ignorance and mistrust of foreigners.

The False Victory Narrative

Trump is fooling you, trying to make you angry at the outside world for things that are happening because he is choosing to do them to make taxes fall more heavily on the average person, less heavily on those best able to pay, destroying the world trading system, severing the United States from allies, and all of this is advertised as a win.

They advertise them as wins because they say, “Look, the United States is imposing all these tariffs on Americans and the other countries, the Japanese, the Europeans, they’re not doing the same to their own people. See, we win. Our tariff on them is higher than their tariff on us.”

But all that means is that the Trump administration is more willing to inflict pain on Americans than European and Japanese governments are willing to inflict pain on their people. Their governments are trying to protect their people from the consequences of American tariffs. The United States government is eagerly accepting the consequences of American tariffs for Americans.

And why not? Because once you understand that the whole purpose here of the Trump administration is to move the burden of taxes from themselves and their friends to those least able to pay and to mobilize ignorance and hatred of foreigners and prejudice and team spirit as ways to disguise the pocket picking that is really going on. Then you see why they call this a win. They win, you lose.

The Real Losers

And the “you” here is not just the ordinary person who needs to buy tomatoes or automobiles or any good that includes any foreign component, which is every good. The losers here are the American economy as a whole, which will grow more slowly. The losers here are Americans looking for security in the world because they will have fewer friends and allies. The losers here include future generations of Americans.

We’re discovering that as crushingly as Trump raises tariffs on those least able to pay, it’s still not enough to compensate for all his big tax cuts everywhere. So the deficits and the debt that future generations of Americans must pay continue to grow.

Why Markets Haven’t Crashed Yet

A question occurs. Given the harmfulness of tariffs to growth and to the whole economy, why are indicators of the economy doing pretty well? The stock market collapsed or sank on the first shock of Trump’s tariffs back in April. But now there are more and more tariffs and yet the stock market seems to be revived and holding its own, at least the US stock market.

Now the US dollar has dropped against other currencies. So if you’re measuring your stock market portfolio in euros or yen, you’re not as well off as you are if you just measure it in dollars. But still, the shock in dollars is not as big as you might expect. Why not a bigger shock?

I think one answer to that is that many investors are expecting the courts to strike down the Trump tariff program. In May of 2025, the United States Court of International Trade ruled that Trump had exceeded his authority by imposing all of these many different tariffs on his presidential say-so. And I think a lot of investors are betting that other courts, and ultimately the United States Supreme Court will agree with the US Court of International Trade that the tariffs exceed Trump’s authority.

But if those bets are wrong, if the courts do as they so often have done, appease Trump, accommodate Trump, go along with Trump, we’re going to be seeing a big shock and soon.

The Bottom Line

Trump is plundering the country, counting on hatred of foreigners and mistrust of foreigners as the emotional disguise that will allow him to plunder the country and leaving everyone with a terrible bill in lower growth, fewer friends to be paid by this generation of Americans and the next. It’s a scandal, it’s a disgrace. But it’s the future.

Introducing Doug Irwin

And now my discussion with Douglas Irwin. Douglas Irwin is America’s leading historian of tariffs and trade. A professor at Dartmouth, he is the author of seven books on trade history, including the 2018 masterwork “Clashing Over Commerce,” a copy of which is visible just over Doug’s right shoulder.

“Clashing over Commerce” won the Manhattan Institute’s Hayek Award for the best book on economics and personal liberty. I devoted most of the summer of 2023 to “Clashing over Commerce” and was repaid every minute. It’s a history of the whole flow of trade and tariffs in the United States from the founding era to the present.

It’s a sad statement that we need the highest wisdom of the finest minds to refute the ignorance of fools and the deceits of the malicious. But there it is, and here we are. Doug Irwin, welcome to the David Frum Show.

The Constitutional Framework and Presidential Power

DOUG IRWIN: Thank you very much for having me. It’s a pleasure to be here.

DAVID FRUM: I’m going to begin with some basics, and then I want to cover some historical issues that I think will be of value to people who feel a lot of the stream of events takes too much for granted. I think for many of us of a certain age, tariffs, like banking, were the subject of the chapters of the history books we skipped over to get from the Civil War to the First World War. And that was all ancient history, but now it’s the future.

So take us from the beginning. What is a tariff? What does it do? Who pays it?

DOUG IRWIN: Well, a tariff is a tax on imported goods, and it’s something that the Constitution gives Congress the power to levy. In fact, there’s one reason why we have the Constitution in some sense is because of the difficulty we had with trade policy in the 1790s under the Articles of Confederation, 1780s, that is.

So it’s a tax on imports. It’s designed for one of three purposes I sort of emphasize in “Clashing Over Commerce”: revenue, restriction, and reciprocity. So it’s a tax. So it raises revenue restriction. You might want to use the tariff to keep out foreign goods. Notice there’s a conflict between those two. If you want the revenue, you want the imports to keep coming in, you just levy the tax on those imports. If you want to keep the imports out, you raise the tax high enough, there’s not going to be much revenue. But you give space to domestic producers by keeping out those imports.

And then the last one is reciprocity, which is sort of a bargaining. So throughout history, the United States has used tariffs to achieve all three of those objectives in various different ways. But that’s essentially what it is.

DAVID FRUM: You mentioned that the Constitution awards power over tariffs and trade to Congress. How is it that the President is announcing new whimsical tariffs? Announcing them every week, removing them every week, adjusting them every week, giving deadlines. How is the President doing something that Congress is supposed to do according to the Constitution? How did that happen?

DOUG IRWIN: Well, we’ll get into this when we get into the flow of the ebbs and flows of trade policy history. But in the 1930s, we shifted from a sort of Congress dominated system of the tariffs to the President. Congress started delegating powers over the tariff to the President. And that delegation has gone on since the 1930s. It’s gotten bigger and broader over time, largely, I think, because Congress sort of trusted the President to act in the national interest and was a force for opening markets and liberalizing trade.

But now, over time, the President has a lot of power over trade. And this president uses it very differently than previous presidents.

DAVID FRUM: So Congress sort of said, “Look, we know we have a drinking problem. Here’s the keys to the liquor cabinet. You’re a responsible, sober adult. We know you will not foolishly and promiscuously swig the Curacao. So over to you.” And then it turns out they handed it over to a man who’s only swigging the Curacao, but mixing it with grain alcohol to make an extra potent punch.

DOUG IRWIN: You said about it better than I could. Yes.

Historical Myths About Tariffs and Industrial Growth

DAVID FRUM: And then we’re all splashing around. All right, so let me, I want to go ask you some historical questions, because as there are people who are shameless enough or ignorant enough to defend what President Trump is doing in the trade realm. So let’s try to meet ignorance and malice with some knowledge.

Let me start with a couple of basic arguments that you often hear. You hear them from the President, you hear them from the people who influenced the president. As you point out in your book, the period from the Civil War to the Great Depression is a period of mostly high tariffs. There’s a little interruption along the way, but mostly very high tariffs, from the Civil War to the Great Depression. And during that period, America rose to industrial greatness.

So people will argue, “Well, look, these two things happened at the same time. We had a lot of tariffs and we rose to industrial greatness. It must be that the tariffs caused the rise to industrial greatness.” You hear that a lot. What’s wrong with it?

DOUG IRWIN: Well, it’s a classic case of correlation not being causation. So, yes, the two went hand in hand, but there are a lot of other things going on between the Civil War and the Great Depression. We had massive immigration, we had massive capital accumulation, and we’ll get into some of the causes of those.

But also this idea that the tariffs were causing that industrial growth. We also have the period before the Civil War. That’s a period in which 20 or 30 years before the Civil War tariffs were going down, but the US industrialized at exactly the same rate then as we did after the Civil War. So it’s not like the post Civil War period was this tremendous industrial boom. It was but we were also booming before the Civil War when the tariffs were low. US Manufacturing was growing quite rapidly before the Civil War with those lower tariffs as well.

So right there there’s sort of a bit of a problem with that idea that the tariffs were causing the growth. But so many things are happening after the Civil War. I mean, one of the things that economic historians point to is that we had important banking legislation that really increased the return to saving. And so we had a massive savings and investment boom. And of course, that was going somewhere. It was going into building railroads in terms of building manufacturing industries and what have you. We had tremendous Western expansion.

A lot of the employment in manufacturing was through by immigrants coming from Italy and elsewhere in Europe, not by native born Americans. So between the capital accumulation, the massive immigration, the openness to capital flows and the transfer of technology from the UK, sorting out and trying to parse out exactly the contribution of the tariff to all that is very difficult.

And what people have found, including some recent work by some other economic historians, is that US productivity growth was not particularly strong after the Civil War. We saw a lot of expansion in the service sector, transportation improvements with the railroads and what have you. But it’s not as though manufacturing was some sort of great productivity buster or experienced some big sort of boom. And once again, the tariffs may have inhibited things as much as helped them because a lot of our imports were intermediate goods.

DAVID FRUM: Yeah. Well, I want if I can supplement that with three points that the Robert Lighthizers and President Trump when he’s trying to repeat what Robert Lighthizer says…

DOUG IRWIN: Actually it’s Robert Lighthizer.

DAVID FRUM: Robert Lighthizer, thank you. I beg your pardon. Thank you very much. Robert Lighthizer. Three things they miss: the first is that the world in the era after the Civil War is becoming generally more protectionist. And so the United States was the largest area of free trade that was available anywhere on the planet.

And you could that, you know, it was a bigger free trade zone than Germany. I mean, Germany had high tariffs. France had high tariffs. Britain remained a free trade country in the 19th century, but you could trade freely inside the United States over one of the largest trade spaces that existed in the world at that time.

And the second thing I think that people don’t give enough count to is, you know, those other things you skipped over in the history book, along with the tariffs and banking, all of the protest movements and this agrarian discontent that the tariffs were taxing the countryside in order to advantage the industrial areas and especially the owners of industry. And people at the time noticed, and there was huge political instability as a result, that you had all of these protest movements now with all these picturesque names, but that the country was heading.

And it was a period of extraordinary labor violence, violence of other kinds. The tariff was the mother, in many ways of those civil dissensions that then became much more peaceful in the years when the United States moved to a freer trade system where the proceeds of growth were shared much more fairly than they were shared during the high tariff period.

DOUG IRWIN: Absolutely. And you use that term, “mother.” The phrase at the time was “the tariff is the mother of the trust.” So the tariff was not used to build up small businesses and increase employment. Is really not designed, but certainly helped out big business and insulated them from foreign companies, led to higher prices. And that led to a progressive movement that really complained about that high level of taxation that helped the urban elites and hurt the rural poor.

The Smoot-Hawley Myth

DAVID FRUM: I want to now move to a slightly later period. This is a period that I think Americans of today know more about or hear more about. And that is the Great Depression and the famous Smoot Hawley tariff. One of the things that again, the apologist for high tariffs will say is, “Well, Smoot Hawley didn’t cause the Great Depression. The Great Depression had already begun when Smoot Hawley was imposed. And anyway, trade was already collapsing anyway. So you can’t blame Smoot Hawley for it.”

So sorry, Wall Street Journal editorial page, which is always teaching people about Smoot Hawley. The Smoot Hawley Tariff, which you’ve written two books about, was not the culprit and something else was to blame. What do you say to that error?

DOUG IRWIN: Well, it’s certainly right. I think that Smoot Hawley did not cause the Great Depression. Milton Friedman wrote and Anna Schwartz wrote a book on the monetary history of the United States and sort of conclusively showed that as a monetary policy phenomena, very deflationary policies pursued by the Fed, sort of under the gold standard.

But that doesn’t mean that it didn’t have any impact whatsoever on the economy. It did contract trade. It did lead to foreign retaliation against US exports. So it’s not exactly a boon to the US economy. It led to this downward spiral of world trade because other countries mimicked the US not just in retaliating against us, but also in raising their own trade barriers.

So the trade to GDP ratio of the world shrank. US exporters, both manufacturers and farmers, were locked out of foreign markets. A lot of discrimination. And Canada, one of our largest trading partners, really hit back at the US with retaliatory tariffs that hurt, once again, US agriculture and other industries.

So it was not a good thing for the United States. And the question for economic historians has been how much did it contribute to the Depression, not whether it was a major cause or provide some boost.

The Tariff Theory of the Great Depression

DAVID FRUM: Well, I’m going to launch a theory of my own about how tariffs were to blame for the Great Depression. And tell me if you think this is too fanciful, because I do think the tariffs caused it, but not the Smoot-Hawley tariff of 1930. It was the tariffs of the early 1920s.

And we hear less about them because, frankly, the Republicans of the Wall Street Journal who want to condemn Smoot-Hawley also want to save the memory of the Republican presidents of the 1920s, Harding and Coolidge. And so they don’t want to remember the tariffs that those guys were responsible for.

But here’s the story I would tell about where the Great Depression came from. So the world emerges from the First World War with massive debts. Both the debts to pay for the war and then the debts to pay for the reparations that Germany owed to make up for the damage Germany did to Belgium, to France, and to other countries.

So this enormous amount of debt, almost all of it owed to the United States, either directly or indirectly, the countries that had been ravaged by the war, Germany, Belgium and France, and the countries that were left deeply indebted by the war, like Great Britain, the only way they could service those debts was by massive exports to the country to whom they owed the money, the United States.

That was what happened after World War II. So successfully that all the countries that had been left impoverished by the war exported to get the dollars to pay for the things they needed from the United States. Not only food, but capital goods.

And after the First World War, to service the debts the United States did, instead of letting them export, was to impose in the early 1920s, a pair of deadly tariffs coming out of the Great Depression of 1919, 1920. The world is hit by the war, it’s hit by the flu epidemic, it’s hit by the 1920 depression. They need to export. The United States lays on these massive tariffs.

Belgium, Germany, France, Britain, the others cannot export to the United States. But they still need the dollars. So what do they do? They borrow them. They borrow them on a breathtaking scale. So to the First World War debt, we add the whole new 1920s reconstruction debt, all of it forced by the inability to export to the United States. They had to get dollars. You either sell or you borrow. They borrowed instead.

And it was that pile up of debt that was the necessary, not the direct cause of the Great Depression, but it was the precondition that when the Great Depression started, when the recession started in 1929-30, that it was the match that was thrown on that giant pyre of pre-existing debt and that was the origin of the Great Depression.

Smoot-Hawley made it worse. But if you are not interested in saving the reputation of Calvin Coolidge and Herbert and Warren Harding, you can face up to the fact that the Fordney-McCumber tariffs of the 1920s should be as famous as Smoot-Hawley and I think they’re the culprit.

And so while not the Smoot-Hawley tariff was to blame, tariffs in general were the cause. And the people of the period after the Second World War knew that. And that’s why basically when you’re rebuilding from World War II, Americans went to the big book on the library that said “what do we do in the 1910s and 1920s, let’s do the opposite and see if it works better.” And it did.

The United States switched to a free trade policy, allowed the ravaged countries to export to the United States and the result was the extraordinary expansion of growth. What do you think of that? Fanciful theory?

DOUG IRWIN: No, actually there’s a lot to that. In particular identifying the Fordney-McCumber tariff of 1922 as being a big culprit for the instability in the 1920s, which of course fed into the 1930s.

So you’re right, this is a period, this is an opportunity for the U.S. coming out of World War I. We could have taken a different stance in terms of isolationism, protectionism, immigration policy. Instead, what the Republican Party did is revert to where we had been in the late 19th century.

I mean even William McKinley, who President Trump often refers to, he as late as 1901 wanted to shift the Republicans and shift the country onto a different track in terms of trade policy. We could have done that after World War I, and we did not. We reverted to form, we raised tariffs.

And you’re absolutely right, it made a bad situation worse. It compounded all the problems that Europe was facing. You’re absolutely right. They had to earn dollars to pay back their debts during World War I. We made that more difficult. In the 1920s was maybe a roaring 20s for the US in part, but for most of Western Europe, it was not a good decade. They were trying to recover and we sort of squelched that effort.

And of course, when we have the monetary shocks of the late 1920s, early 1930s, we’re already in a bad situation and just compounds the disaster.

The Real Meaning of “Roaring Twenties”

DAVID FRUM: Can I put in a little historical footnote here? Everyone uses the phrase “Roaring Twenties” as if it was coined as a compliment. And that’s not true. That’s another mistake.

So the phrase “roaring twenties,” which referred to the big stock market booms, 1920s is a formation when you sail from Britain to Australia. As you round the lower left hand corner of Australia, you pick up, you’re at the 40th parallel of the Earth’s geography and there are huge and very fast winds there.

And so sailors in the sailing ship days refer to this area underneath Australia as the “roaring 40s,” that you went zoom shooting along the southern shore of Australia from the lower left hand corner around the port where Melbourne and Sydney were.

So the roaring 40s were also incredibly dangerous. They roared because the winds literally roared. And so when the stock market began to be whipped around by all the crazy tariffs and economic policies of the 1920s, nervous people, not as a compliment, called it the “roaring twenties” in reference to this danger to sailing ships of the roaring 40s underneath Australia.

And then, you know, we now think of it as, oh, it just meant good times for everybody. It was. The 20s were not a good time for American farmers at a time when half the country lived on agriculture. And they were not a good time for American export industries, which found European markets lost them.

Certain industries benefited. There was the new technology of the automobile, the new technology of the radio. But just I think there’s just like a lot of myth making here that a period that was unstable and ended in disaster, it gets remembered too fondly because people have forgotten about the sailing ship, which is where it got its name from.

DOUG IRWIN: Right. I agree, it’s a very misleading metaphor for the US economy in the 1920s, because as you point out, so appropriately, the farm sector, which is a third to half of the US economy, did very poorly during that decade, they had a lot of debts coming out of World War I. They had overexpanded, they lost markets.

And Smoot-Hawley tariff in some sense was some very poorly designed attempt to help out farmers. Of course it wouldn’t have been able to do that, and it didn’t do that. But the economy was not doing so well for a lot of Americans in the 1920s.

The China Shock

DAVID FRUM: All right, let me pick up with a third historical episode, and that’s one closer to the present. So the Chinese Communists come out of the disasters of Mao Zedong’s rule and decide to reform their economy. At first they do it cautiously and slowly, first confined to the farm sector, then they move to industry.

But by the 1990s, they’re allowing private property, private management in industry as well as farming. And they’re beginning to become an export power. And they become very much a rapid export power after the year 2000. And goods pour out of China to the rest of the world.

And a paper published in the early 2000s and tens looked at the areas that were exposed to Chinese imports in the early 2000s. David Autor, I believe, is the name of the principal author of the paper. I believe there are others, and wrote a paper called “the China Shock.”

So let’s talk. Can we talk about the China Shock? We are invited to believe that Americans are worse off today than they were 30 years ago because of trade. You and I were there. It doesn’t seem true if you were there and remember what it was like. But tell us about the China Shock and what lessons should we really learn?

DOUG IRWIN: Well, first of all, your characterization of the paper is absolutely right. They’re looking at relative differences across different regions of the country, not looking at whether overall employment’s going up or overall employment’s going down, which is often how it’s interpreted.

But you’re right. So the China shock, there are two phases to it. The 1990s, then the 2000, 2008 period in particular, is when there’s a big ramp up in US imports from China. In some sense, they’re absolutely right. If we’re importing more of certain labor intensive goods, we’d expect those industries located in the United States to do relatively poorly. They’re facing a lot more competition.

And we saw that with apparel. Apparel employment goes way down. Of course, apparel employment is relatively low wage employment, employment located in the south. But I think one of the things they highlighted was that it’s the regional concentration of those impacts of Chinese imports that proved particularly important.

But once again, that’s missing the overall picture for what’s happening to the overall economy during the 2000s. Coming out of the recession of 2000, 2001, the unemployment rate is going down. During this period of the China shock, we have many industries expanding employment.

So this is not exactly a period of the whole economy’s being ravaged by China. It’s very much. There are certain particular sectors in certain parts of the country that are not doing well, but the country overall was doing reasonably well.

In fact, it’s only in retrospect that we sort of identify the China shock. At the time, a lot of firms were not filing anti-dumping complaints against Chinese imports. A lot of labor groups were not really upset about what China was doing. So it’s only in retrospect we see, aha. That maybe Chinese imports played a bigger role during that period than we thought.

One thing that’s missing too, in a lot of the studies here is the important role of the exchange rate. The US had urged China in the aftermath of the Asian financial crisis, late 1990s, not to depreciate or devalue its currency. So they did that because the U.S. requested that, and they kept it fixed. Arguably, this is a time when the renminbi should have been appreciating rather than remaining fixed. And I think that that had a bigger role to play in terms of how we think about that period than sometimes suggested.

The Real Story Behind Trade Deficits

DAVID FRUM: Yeah, this gets one of my biggest, maybe my single biggest, grievance or complaint about how trade policy is misrepresented to people who don’t study it closely.

So the story that we’re invited to believe, and it’s a story that goes back to writers about trade going back to Roman times, is that literally Roman times? What happens is you have a lot of extravagance in the imperial capital, blame, especially the women. And they want foreign fripperies and foreign luxuries. And because they want all these foreign fripperies and foreign luxuries, they import too much. And because they import too much, capital leaves the country and you get poor.

But the story is always told that the driver is trade. And this is ultimately a moral story of overconsumption. And in the modern terms, and say, look, we have all these big deficits and most people don’t know. Not only does Trump, but his vice president Vance, who reads books, often either accidentally or willfully mixes up the trade deficit, the fiscal deficit.

The fiscal deficit is how much does the government tax? How much does the government spend? Trade is how much merchandise does the United States bring into the country? How much merchandise does it sell out?

The trade deficit often overlooks the fact that, you know, when the United States sells insurance abroad, that’s an export. When foreign students come to the United States to study in American universities, that’s also an export. That’s a way of earning money on international markets. You’re earning, it’s confusing because you’re earning it on your own soil. But in fact, you are selling to foreigners. They just come to you tourism in the same way they come to you to consume the benefit, but it’s one a benefit you are selling to foreigners.

So if exports are good, those are also exports. Although trade deficits don’t always properly account for them because people often focus on the merchandise trade deficit, not the whole balance of goods and services.

But they always want to tell this moral story of you over consume and therefore you get capital flows, when the truth, and this is my grievance, is the story is really the other way around. Oftentimes that the United States borrows a lot. And because it borrows a lot, partly for good reasons, it’s the most attractive place in the world to invest. So capital flows in, in order to invest in American industry, which is good, but also governments, especially the present one, do not tax as much as they want to spend.

And so again, it has to suck in capital to fund the government. And when capital flows in while you tell us what happens next?

The Economics of Trade Deficits and Capital Flows

DOUG IRWIN: Well, when capital comes in, we have a capital account surplus where foreign residents are buying US assets. They’re buying US assets rather than buying US goods. So we’ll have a current account deficit, that is, we’ll have a deficit on our trade goods and services.

Although, as you point out correctly, we have a surplus. We’re a net exporter of services. It’s not enough to counteract the goods deficit, but we’ll have a deficit on trading goods that is the mirror image of that capital inflow to the US because once again, the US rate of return on assets is very high. We’re a very safe country to invest, and foreign residents want to invest in the US.

So my grievance here, and this is one that goes way back in US history, is that we either have trade surplus or trade deficits. And what’s interesting is in the 1960s, there’s so many people in the US complaining about the US trade surplus. Because once again, if you take that mirror image, what that means is capital is flowing, leaving the US. US multinationals are making investments in Europe and elsewhere, and people were complaining. “Why aren’t multinationals investing in the US? Why are we investing in other countries?”

So my view has always been it doesn’t matter whether you run a trade surplus or trade deficit. People are going to complain either that foreigners are buying up too much of our assets or we’re not investing enough at home and we’re buying assets abroad. But set that aside – we blame trade on other countries. We’re not to blame at all.

So the fact that we have large fiscal deficits, actually that is related to our trade deficit. If we want to reduce the trade deficit, reducing the US fiscal deficit would be one thing we could do to address that problem. But going back to Thomas Jefferson, one of the first reports he issued as Secretary of State complaining about all the policies of other countries that affect US trade without looking at what are we doing with respect to trade. Always it’s easier to blame the other guy than ourselves.

Bob Bartley’s Simple Solution

DAVID FRUM: I work for a while for Bob Bartley at the Wall Street Journal. And although I complained a little bit earlier about the Journal and its valorization of Harding and Coolidge, nonetheless they have been heroes of the fight for free trade and against Trump too. They’ve been very outspoken, so kudos to them for that.

But somebody once asked Bob Bartley, “What should the United States do about the trade deficit?” And he said, very simple. “I have a very direct plan that will completely address the problem. I think we should stop collecting the statistics.”

DOUG IRWIN: Yes.

DAVID FRUM: And we then go on to explain, you know, who has the biggest trade deficit of any place on Earth? Manhattan Island. Everything flows in and the United States. Manhattan. It doesn’t send ball bearings out, it doesn’t send steel plate. But somehow Manhattan island manages to keep on making a living because it is exporting, it is making things that the world wants. Intellectual products, insurance, advertising, all kinds of non-tangible goods.

And in return the planet sends it, you know, fruits and vegetables and fancy sofas and subway cars and everything that is consumed on Manhattan Island. But the real point here is when, as Trump does, you incur unprecedented peacetime borrowing ever, you are guaranteeing that that is going to be equalized by the collapse of American exports into the world.

DOUG IRWIN: Absolutely. I was going to say what is true in Manhattan is true in my little town here of Hanover, New Hampshire. We don’t produce cars, we don’t produce carpeting, we don’t produce just about any of the goods we consume here. We have a reasonable standard of living because we export educational services here at Dartmouth. And so, once again, that trade enables us to consume a lot more because we specialize in one activity and export as a result of that.

I just want to say something about the Wall Street Journal, too, in addition to not collecting the statistics. And I said it’s absolutely right. If we didn’t collect economic statistics, we would still know if there’s inflation, we’d see it every day. We’d still know if the economy is doing well or not. GDP growth, we’d feel it in terms of our own jobs and income. If we had a trade deficit or surplus, I don’t think we’d know. It’s only because we have the statistics that we.

But my favorite one line from the Wall Street Journal editorial page, also about the trade deficit, is the line, “The best way to think about the trade deficit is not to think about it.” And I think that’s absolutely right. There are other things we should be focusing on getting our house in order, and then the trade deficit will solve itself.

The Nostalgia Problem in Trade Policy

DAVID FRUM: Well, a lot of the argument about trade is also, it seems to me, driven by nostalgia. And you hear that especially from President Trump because he is so very old. And I’m getting older, too, so I’m not immune to this. But those of us of a certain age grew up at a time when the important industries in America were steel, rubber, automobiles, everything to do with that complex of things.

And the United States produces less of those items, which are basically 1920s technologies improved in the 1950s and 60s. And to the extent that it produces them, it uses fewer and fewer people to produce them. And so you have the spectacle of we’re running the whole economy with an idea of, well, how do we get people working again in steel mills, or in President Trump’s case, how do we get them back into the mines? How do we drive them back into the coal mines?

This statistic is probably now even more extreme than when I began watching it in the first Trump years. But back in the late 2010s, President Trump was always talking about coal miners. And I did a quick calculation that if you totaled up the entire coal mining sector, not just the miners, but like the bookkeepers, everybody, everybody who works for everything to do with any coal mining company, you got to in the early late 2010s, a number of about 50,000 people, which is fewer than the number of people who are licensed by a state to teach yoga. Not yoga instructors, those who have gone to the trouble of getting a yoga instructor license. There’s a lot of people.

So if I said “Well, I have an idea. Why don’t we completely mess up the US and world economy, make everything more expensive for everybody, and also subject ourselves to a lot of pollution and environmental degradation and climate change to protect the yoga instructors from competition.” That seems like a stupid or bizarre or off-base idea, but because people have this memory of when coal mining was an enormous industry, hundreds of thousands, at one point, millions of people mined coal in the same way with steel.

President Trump has allowed US Steel, which is now the second biggest steel company in the United States, not the biggest, to be acquired by a Japanese company. But he made US Steel pay for this, and the Japanese company paid for this by all kinds of direct presidential supervision of their decisions, including whether or not the company will stay based in Pittsburgh. And this is all battening on the impression that many of us had. “Isn’t steel like a really big employer in the United States? Didn’t it used to be until quite recently?”

The idea, you know, almost no one anymore makes a living making steel. There’s still a lot of steel made, but the United States is still making a lot of steel, but with very, very, very few people. So if your concern is employment, these are not the industries that employ people. But few of us understand what are the industries that employ people. And so we’re vulnerable to these impressions.

The Transformation of Steel Production

DOUG IRWIN: Absolutely. And you’re right, picking steel is such a fascinating case to look at. In the 1980s, it took 10 worker hours to produce a ton of steel. Now we’re actually producing just as much steel now as we did back then. But now it takes one worker hour to produce a ton of steel.

So if you go back and look at those old black and white pictures of steel mills in the 50s and 60s, you’ll see a lot of men coming in in the morning and leaving at night. Now no one’s coming in and out because it’s all mechanized, it’s all technology. You don’t have physical labor doing it.

And in particular, the type of labor employed in steel mills has changed. So before it was high school dropouts or high school graduates. Now it’s you have an advanced degree at Carnegie Mellon and you’re an engineer and you’re monitoring all the dials and making sure the equipment works well and looking at the software that’s moving all the equipment. So there’s been that skill upgrading.

Certain towns like Pittsburgh have moved away from steel and done very well with higher education, health care, they’ve pivoted themselves. But if you’re in a smaller town that had a steel mill that shuts down. There’s very few other opportunities unless you move out of town. So that’s the divide we’re sort of facing. Technology’s changing. We’re still producing a lot of stuff, but we’re just not using people to produce it anymore. And it’s the services around those industries that are providing the value added in some sense.

The Copper Tariff Paradox

DAVID FRUM: Yeah. Well, I want to hit one last bugaboo of mine before I say thank you to you. So one of the things the United States has recently done, or the Trump administration has recently done, is put a giant tariff on copper. Now, copper is an indispensable ingredient to the electronic age. Tiny amounts of copper show up in lots and lots of devices. But there are now so many devices that although the individual amounts of copper are very small, the collective amount of copper used is very large.

And so Secretary of Commerce Lutnick was on TV saying, “We need – but what if there’s a war? What if there’s a war? We need to make our own copper. The United States only produces half of the copper it consumes and we’re vulnerable in war.”

So you go and look it up. Well, where does the United States import copper from? First, Chile, second, Canada. Third, Peru. That’s 90% of US copper imports. So I don’t know if the United States is planning to go to war with Chile. I mean, if the United States does, then there will be a copper problem. But assuming it does not go to war with Chile or Canada or Peru, then what’s the problem?

To which I think the answer is, “Well, Chinese submarines may intercept the flow of copper from Chile to the United States and we will lose the war because we can’t get crucial Chilean or Peruvian or Canadian copper through the sea lanes.” So that’s interesting. That’s an interesting problem. How did we cope with this during World War II? I wonder if we were self sufficient in copper in World War II.

And that’s no. It turns out in World War II, 1942, 43, 44. I posted a link to this from – it was old OSS data that’s now on the CIA website. And I found it and posted a link to it. The United States imported almost exactly the same amount of its copper during World War II as it did today. And the answer was, “Well, why didn’t the Japanese submarines cut the sea lanes?” And the answer is, because the United States controlled the sea.

And the problem that you need to solve for is not having copper mines inside the territorial confines, because I guarantee you can’t have everything. You can’t have molybdenum, you can’t have nickel. That’s not going to, you know, you can’t make every mineral that is found somewhere in the earth’s crust. Within this little piece of the earth’s crust, a lot of it will have to travel by sea. You have to control the sea.

And because the United States controlled the sea during World War II, it was not a problem to import copper. And if the United States controls the sea in the next conflict, it will not be a problem. And if the United States doesn’t control the sea, it will have many problems, of which copper will be the least.

And then the last commercial, the way you control the sea is by having ships. You know what ships are made of? Steel. And guess what? The United States is tariffing and making more expensive steel imports. So we’re not going to be able to get those either. So that we are shrinking the future United States Navy in order to pay off President Trump’s political debts to the steel workers of Pennsylvania, or his fantasies about what those industries used to be.

DOUG IRWIN: Yes, I mean, copper is a fascinating case, too. I mean, if we’re really concerned about the supply of copper, we should be stockpiling it. We shouldn’t be draining America first. I mean, if we impose a tariff, what that’s saying is, we’re not going to take advantage of foreign sources of supply now when there’s not a war, we’re going to start mining ourselves and depleting our own reserves.

Presumably, we want to keep that in the ground for a future time when we need it. And we should be using a lot of foreign copper right now. We should be stockpiling it, not depleting what we have of our own scarce reserves. But you’re right, it’s just a boneheaded policy.

The Corruption of Trade Policy

DAVID FRUM: Well, the copper policy, I assume, is not totally boneheaded, because I assume the real thing that is going on is somebody who owns a copper mine inside the United States bought a lot of Trump meme coins. And in return for buying a lot of Trump meme coins, the Trump administration is making sure that the owner of this copper mine won’t have to face Chilean price competition.

And then they invoke all this world, this misremembered history of World War II, to justify what is essentially a payoff, I assume, to someone who’s been generous to the Trump team.

DOUG IRWIN: Well, that points to another problem that you pointed out, too, with Trump tariff policy is the openness to corruption. I mean, here we’re having, if we’re really just helping out a few copper miners in the US or copper firms, we’re not thinking about strategically what is best in the national interest. We’re saying trade policy’s up for highest bidder. Whoever buys meme coin or what have you, you have a say in US trade policy.

And what you didn’t mention in highlighting those three suppliers of copper, Canada, Chile and Peru, we have free trade agreements with all of them. They’re allies, they’ve been reliable partners and suppliers. And to impose a major tariff on something they’re supplying to us at this juncture is just ripping up our foreign relations as well as our economic relationship with those countries.

The Cascading Effects of Tariffs

DAVID FRUM: Well, when you talk about also this industrial, this flow of corruption, one of the points you so powerfully make in the early sections of “Clashing Over Commerce” is once you start tariffing things, you create these perverse incentives through the whole economy. Because you put a tariff in the olden days on wool, well suddenly American coats are more expensive than other people’s coats. So you have to put a tariff on coat and you have this house that Jack built problem.

And that every time you put a tariff on something, you render all those who use that something non competitive with their foreign competitors. And so tariffs then tend to ramify until the whole economy is completely uncompetitive with the rest of the world.

DOUG IRWIN: Yeah, and we see that today with steel by raising the price of those inputs. Now you and I don’t go out to Home Depot or Lowe’s every weekend, buy a bar of steel, but Ford and GM and Caterpillar and John Deere, they buy a lot of steel and we’re raising their costs, costs that their foreign competitors don’t have to pay and making them less competitive in the US market and in the export markets around the world. So how do you help them out? Do you intervene with more tariffs or do you just sort of rethink the policy? I wish we’d do a rethink.

Alienating Allies and Harming Consumers

DAVID FRUM: Yeah, well, you don’t have to. I don’t think there’s a lot of thinking that explains this policy. There’s a lot of feeling, there’s a lot of manipulation. There are people who benefit and they know exactly what they’re doing. And then there are others who just are caught up in obsolete ideas and prejudices. And then there are just a lot of interest groups, including ideological interest groups that are flowing a lot of money into this space to get people to do things that are really self harming.

You mentioned earlier that Canada and Chile and Peru are allies with whom the United States has free trade agreements. Well, those free trade agreements have been ripped up. And in many ways, I’m speaking to you from Canada right now. I don’t know that Canadians right now think of the United States as an ally. I don’t know what Chilean public opinion is looking like, but I would suspect not that favorable either.

And that the United States is being pushed into a path that is going to be very costly, aside from the cost that consumers are going to feel when they go to the supermarket next week and pay the new 17% tariff on Mexican tomatoes that is there again because some Trump supporter grows tomatoes and doesn’t want to face Mexican price competition.

DOUG IRWIN: Yeah, there you go. Florida has distorted US trade policy quite a bit between the winter vegetables. Florida tomato producers, Florida sugar producers account for a lot of US sugar policy. So all’s not well in Florida in some sense.

DAVID FRUM: And Trump just imposed a tariff on Brazil so that they wouldn’t punish their president who tried to make a coup d’état. I believe Brazil is the largest supplier of orange juice to the United States. So get ready to pay more for that tariffs if we would just, we need another word. Maybe because people don’t know what it means, if we could call it an import tax or just “you pay more,” you pay more.

And some privileged few get a respite from having to face price competition because you are forced to pay more.

Reagan’s Legacy on Free Trade

DOUG IRWIN: I’ve been reading a lot of Ronald Reagan’s speeches on trade this summer, and the eloquence and the force with which he embraced free trade is just really inspiring. And he said we shouldn’t call it protectionism, we should call it destructionism because it really is destructive. And it’s not just economically destructive, as you point out with respect to Canada. We alienate friends and lose potential allies with this trade policy in the mere hope of trying to bring back a few jobs in this sector or that sector without looking at domestic consumer impacts, without looking at the impact on other countries. So it’s very shortsighted.

DAVID FRUM: Well, and as I said, the people, not everyone is short. So the people who are raising tariffs on the people who buy tomatoes, buy orange juice, buy knives and forks, buy their things at Home Depot, are doing it in part to finance the giant tax cut that the president just passed in his big fiscal bill. They are not short sighted. They are very clear sighted that what is going on here in great part is simply moving the burden of paying for government from those most able to pay through those to those least able to pay.

And the people who are doing that are doing it very deliberately and very clear sightedly. I don’t know how clear sighted President Trump is exactly on this issue. He may be blinded by his own ignorance, but he’s noticing too that this is in his interest and he’s been, he will be among those who benefit from this re calibration, this repositioning of American cost of American government from those who can, who can most afford to pay to those who can least afford to pay.

The Regressive Nature of Tariffs

DOUG IRWIN: Yes. I mean there have been a lot of studies done by economists about how regressive tariffs are because as you sort of point out or implicit in your comment was lower income groups spend more of their income, a greater share of their income on traded goods at Home Depot, at Kohl’s, buying apparel or what have you. They’re the ones who are going to bear the price, pay the tax.

As we open the discussion, what is a tariff? It is a tax and it does raise domestic prices of those goods that are affected by the tax. And it happens to be a very regressive tax. Tax cuts will be aggressive as well in a different way, but these are going to be hit. The tariffs will hit lower income households more than higher income households, to be sure.

Learning from History

DAVID FRUM: You mentioned Ronald Reagan and I think one of the reasons Reagan was so impassioned on the subject was because of course, he had lived through the Depression. He remembered what tariffs had done to a generation of Americans. I hope we don’t have to learn that lesson in our time through the same hard teaching as Ronald Reagan’s generation had to learn it.

Doug Irwin, thank you so much for joining the David Frum Show. It was such a pleasure to have you. I learned so much from you. Every time I read you, every time I speak to you, I’m so grateful.

DOUG IRWIN: Well, thank you very much for having me and the feeling is mutual. I learned so much from your writing. So thank you.

DAVID FRUM: Thank you so much. Bye bye.

Thank you so much to Douglas Irwin for joining me today on the David Frum Show. Thanks to all of you for watching. I hope you will share subscribe like this program on every platform you use. Whether you watch or whether you listen, we depend on you, our listeners and viewers to help the program grow. If you want to support the work of the David Frum show and all of my colleagues at the Atlantic, the best way to do that is by subscribing to the Atlantic. And I thank you.

For those who have already done that, I want to thank my friends at the Picton Gazette for allowing me the hospitality of this office here in Picton, Ontario. And I want to thank my wife, Danielle Frum, who created the studio that you see all around you. The flowers, the photograph, the banner, that’s all her work. And I thank her. And I thank you for joining and look forward to seeing you again here next week.

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