Micah Loewinger: This is On the Media's midweek podcast, I'm Micah Loewinger. This week on Tuesday, a major economic policy announcement from President Joe Biden.

President Joe Biden: More than 1,800 ironworkers and steelworkers in Pennsylvania and Ohio lost their jobs. I'm not going to let that happen again. That's why today I'm announcing new tariffs in key sectors of the economy that will ensure that our workers are not held back by unfair trade practices.

News clip: $18 billion in new tariffs on Chinese imports.

News clip: Like electrical vehicles, semiconductors, batteries, steel, and aluminum.

News clip:: The tariffs on electric vehicles go from 25% to 100%.

News clip: He's slapping a 25% tariff on steel and aluminum. He's also adding a 50% tariff on semiconductors in this.

News clip: The administration argues it will level the playing field and protect American businesses, specifically carmakers.

Micah Loewinger: These will build on the tariffs that Former President Donald Trump put on a slew of Chinese-made goods during his term, tariffs that Biden was pretty critical of in his last campaign.

President Joe Biden: President Trump may think he is being tough on China. All that he has delivered as a consequence of that is American farmers, manufacturers, and consumers losing and paying more.

Micah Loewinger: Trump, meanwhile, is on the campaign trail threatening to up the ante if he's reelected.

Former President Donald Trump: We will phase in a system of universal baseline tariffs on most foreign products. On top of this, higher tariffs will increase incrementally depending on how much individual foreign countries devalue their currency.

Micah Loewinger: This sudden love of raising tariffs is remarkable because it's a total reversal of a decades-long consensus in Washington in the other direction when both Republican and Democratic lawmakers agreed that lowering tariffs was the best thing for the economy. To understand how we got here, I spoke with Gordon Hanson, an economist and a co-director of the Reimagining the Economy Project at Harvard University's Kennedy School. He's done extensive research on the economic and political impacts of Trump's tariffs. Gordon, welcome to the show.

Gordon Hanson: Thanks for having me.

Micah Loewinger: Starting in 2013, you and a team of economists started publishing research on what you dubbed the China shock. Can you define that term?

Gordon Hanson: Sure. China joined the global economy in fits and starts beginning in the 1980s. In the 1990s, as its economy was moving away from decades of Maoist central planning to something that was more market-oriented, something pretty phenomenal happened. China underwent a period of about 20 years of economic growth, the likes of which we've never seen. We've seen economies grow fast. We've never seen an economy as big as China's grow that fast.

The other thing we hadn't seen was a country as big as China be as specialized as it was in a pretty narrow set of manufacturing products. This just upended global markets. If you were producing stuff that China needed to fund its global factories, so that would be iron ore, that would be copper, that would be all sorts of primary commodities that places like Australia and Canada and Brazil and South Africa and Indonesia were producing, it was boom times. This was just an unbelievable windfall. If you were producing the stuff that China was also producing, textiles and furniture and clothing and simple electronics, it was a nightmare scenario.

All of a sudden, the world market was flooded with goods that were the basis for your livelihood. In the US, regional economies tended to be pretty specialized in a handful of products. Martinsville, Virginia, for instance, had half of its working-age population employed in manufacturing that produced basically two things, textiles, mainly sweatshirts, and furniture. The growth of China overnight meant just complete upheaval in economies like Martinsville's and other places in the United States that had been dedicated to producing manufactured products.

Micah Loewinger: Then enter Donald Trump in 2017.

Donald Trump: I'll bring back our jobs from China, from Mexico, from Japan, from so many places. I'll bring back our jobs and I'll bring back our money.

Micah Loewinger: How did he aim to counteract the China shock?

Gordon Hanson: Part one of the China shock was the loss of manufacturing jobs. I think what most economists expected at the time is manufacturing declines, those workers are just going to redeploy and do something else. That doing something else never really happened, and those places found themselves mired in distress.

When Trump was campaigning on a message of America first and countering the era of hyper-globalization, it resonated in parts of the world that felt like they'd been punched in the gut by the global economy.

His prescription was China has flooded the market with US goods. Let's put taxes on Chinese imports, and that's going to save those regions that had been part of the US manufacturing base.

Micah Loewinger: Yes. He put tariffs on solar panels and washing machines, then steel and aluminum, and then a 25% tariff on all kinds of goods from China. How did China respond?

Gordon Hanson: China responded by putting tariffs on the goods that the US exports to China. The complicated thing here is that a lot of what the US exports to China are services and intellectual property and stuff that's very hard to tax at the border. We don't export a lot of physical goods to China outside of agriculture and minerals. What that meant was China was left with a pretty narrow set of options of what to hit with countervailing duties. That primarily fell on the agricultural goods that are produced in the American heartland.

Micah Loewinger: When you were watching this trade war escalate beginning in 2017, as an economist, what was going through your mind?

Gordon Hanson: As a public citizen, I was concerned that the US was embarking on a set of wrong-handed economic policies. As an economist, I was fascinated because the US had spent the better part of five decades dismantling trade barriers, slowly moving towards an ever more globalized world. From one day to the next, basically, Trump had upended that situation and moved us towards much higher trade barriers, and that meant a reduction in international trade. We were just waiting for the data to come out so that we could begin to track what was the impact of Trump's trade protection.

Micah Loewinger: Yes, he did this all ostensibly to bring back manufacturing jobs to parts of the country that had lost them and had once been quite reliant on this kind of work. Did the trade war have that effect? Did it help American workers?

Gordon Hanson: It did not. We took a very close look at the data. This is work I did with Anna Beck, David Autor, and David Dorn, tracking all the goods that the US imports from all countries in the world at a highly disaggregated level. Then we matched those goods to where they were produced in the United States to say if the US now has increased tariffs on, say, sweatshirts, are the places that were producing sweatshirts now going to start producing them again?

We tracked this from 2018 when the tariffs really started to bite through 2019, and all the way out to 2022, which at the time was as far as we could push the data. What we found in terms of impacts on US manufacturing employment was a big nothing. There was really no change in employment in response to those tariffs.

Micah Loewinger: Do we have any good data on how these Trump and now Biden tariffs have impacted the price of goods?

Gordon Hanson: Here's the wild thing about the Trump tariffs. The first evidence we saw of their impacts was really shocking. It showed that tariffs led for a one-to-one increase in prices as those goods were entering the United States. That meant that a 25% tariff would mean that prices were 25% higher. We first documented that in looking at wholesale prices of goods. As those goods went from wholesalers to retailers, the retailers ate part of that margin. The price increases that were passed on to American consumers weren't the full 25%, but they were a pretty good chunk of it.

We haven't actually lived through this sort of experiment in a very long time because tariffs have been coming down, not going up, and so it was the first opportunity we've had in the better part of half a century to examine how do tariffs change prices for American consumers. Surprise, surprise, you raise prices on imported goods, you're raising prices for American households.

Micah Loewinger: It didn't exactly work, but politically, it's not clear that the trade war hurt Trump, and in fact, you found maybe it helped him?

Gordon Hanson: It did. We also tracked what was happening in the US electorally looking at the 2018 congressional elections, looking at the 2020 presidential elections. One thing to keep in mind is in the minds of the American public, they're not thinking of econometric analysis of how changes in import taxes filter through impacts on imports and production and employment and turn into changes in manufacturing jobs in one county or another. They're looking for a symbolic representation of somebody who's got their side.

Trump had a pretty strong message to say, which was, "For the last 40 or 50 years, American presidents have been lowering trade barriers, allowing cheap imports into the United States that has led to a reduction in manufacturing employment and I'm here to turn all of that around. I've got your back."

Former President Donald Trump: This November, if you want jobs, if you want opportunity, if you want safety, and if you want a president who defends the dreams of workers in Dayton and Akron and all across Ohio and America, then you need to get out and vote for Trump.

Gordon Hanson: That message resonated as far as we can tell. He didn't get a huge electoral bump out of this. The increase in the vote share for Trump that we estimated out of the tariffs that he put in place was about 0.7 percentage points. That's less than one percentage point. However, in a closely contested election that was decided by a few tens of thousands of votes, small impacts could have big national effects. We don't know that those tariffs were the deciding factor, but they did help tilt things in Trump's direction.

Micah Loewinger: In the conclusion of your paper, you write that "the net effect of import tariffs, retaliatory tariffs, and farm subsidies on employment in locations exposed to the trade war was at best a wash and it may have been mildly negative, but residents of tariff protected locations became less likely to identify as Democrats and more likely to vote for Trump." Why do you think that happened?

Gordon Hanson: Again, it was effective messaging. The workers in America's heartland in the Midwestern states that had been part of America's manufacturing base going back decades felt betrayed when, in the 1990s, President Clinton signed the North American Free Trade Agreement.

President Clinton: The United States must seek nothing less than a new trading system that benefits all nations through robust commerce, that protects our middle class and gives other nations a chance to grow, that lifts workers and the environment up without dragging people down.

Gordon Hanson: This is parts of the United States that had been reliably Democratic, and they saw a Democratic president lowering barriers on cheap imports from the rest of the world that was going to cost them their jobs. That created a sense of skepticism and a distrust of Washington, that Washington was not in favor of the US manufacturing heartland. Between Clinton signing the North American Free Trade Agreement and Donald Trump coming into power, the China shock happened.

First, NAFTA was a symbolic betrayal of American workers. Then the China trade shock was an actual economic storm that really upended the regions that had been manufacturing centers for much of the last 60 or 70 years. They were waiting for somebody to come and say, "We're on your side," and Trump provided that message.

Micah Loewinger: As you mentioned, there was this major push for globalization in free trade in the '90s, and Democratic presidents, Bill Clinton and then later Barack Obama, both helped engineer initiatives to lower barriers to trade with other countries. This is the part I don't totally understand. Was it that Democrats didn't adequately communicate the downsides of free trade, that it could potentially really hurt American workers, or is it that they earnestly believed that opening up trade with more countries like China and Mexico would deliver prosperity for American workers?

Gordon Hanson: To understand how we got to the point that Democratic presidents were advocating for free trade, important to go back to where the push for globalization came from. Coming out of World War II, the world was a mess, and we created a set of institutions that would help countries trade with each other and help create global prosperity. For decades, the community of trading nations was pretty much high-income countries. It was the US, it was Europe, it was Canada, it was Japan.

When those countries traded with each other, it tended to be like for like. The US sending pickup trucks to the rest of the world and importing small sedans from Japan or luxury sedans from Germany. We had a sense that globalization wasn't going to be that disruptive. In the 1980s and 1990s, as President Clinton was now beginning to sign new free trade agreements, and it wasn't just Democratic presidents-- The North American Free Trade Agreement, though it was signed by Clinton, it was first conceived of by President Bush. We were now envisaging expanding trade with low-income countries, countries we hadn't traded with substantially before.

Then China comes onto the scene. We now have not just low-income countries, but really big low-income countries. I think we made the mistake of forecasting forward based on our experience of trading with countries that were like the US in terms of average income levels and saying, "Continued globalization just isn't going to be that disruptive for the American economy." We were wrong. We didn't have mechanisms in place that would help workers adjust to the very real changes in the global marketplace that occurred as countries like China came onto the scene and began expanding their exports in rapid course

Micah Loewinger: Back in 2020, when asked by journalist Lulu Garcia-Navarro whether he would keep Trump's tariffs on China, Joe Biden said this.

President Joe Biden: No. Hey, look, [chuckles] who said Trump's idea is a good one? Who said Trump's idea is a good one?

Lulu Garcia-Navarro: Some feel that.

President Joe Biden: Some. Two or three people. Manufacturing's gone in recession, agriculture lost billions of dollars that taxpayers had to pay. We're going after China in the wrong way.

Micah Loewinger: Basically, Biden had largely kept Trump's tariffs in place, and now he's announced a major increase on $18 billion of Chinese goods to be implemented over the next two years. What happened?

Gordon Hanson: Two things happened. One was, I think upon winning a very close election, Joe Biden realized that Donald Trump's tariffs were popular in swing states and getting rid of those tariffs would have been political suicide. I think the political side of the shop won an argument with the economic side of the shop, which said that it just makes much more sense for us to keep those Trump tariffs in place.

The other thing that happened was they looked around and said, "What can we do to bring manufacturing jobs back? What can we do to help restore good jobs to places that had been eviscerated by global competition?" Since then, they came up with first the CHIPS Act, then the Inflation Reduction Act. This was after Build Back better and an infrastructure bill that was trying to engineer recovery from COVID. In the absence of ways to help the former manufacturing belt recover, getting rid of Trump tarrifs would have seemed just like pouring salt on the wounds of American workers.

Micah Loewinger: The Biden administration is focused on bringing two specific types of manufacturing jobs to the US through bills and subsidies, green energy technology like electric vehicles and solar panels, and semiconductors. In late April, Biden announced that billions of dollars will be directed towards building up semiconductor manufacturing in the United States. Do you think his plan could work?

Gordon Hanson: I think the jury is very much out. It's important to take a step back and say, "What are we trying to accomplish here?" I think the Biden administration is trying to do two things. One is it's trying to avoid reliance on Taiwan as a source for all of our semiconductors or most of our semiconductors because of its proximity to China and concern about military instability in the region. That makes perfect sense. The other thing the Biden administration is trying to do is bring manufacturing back to the US. Now, in trying to hit two targets with one policy instrument, I think we've set ourselves up for a rocky path.

Semiconductors are incredibly hard to produce. They're also incredibly hard to design. What gets lost in our discussions about semiconductors is the US is by far and away the leading designer of semiconductors in the world. Taiwan has figured out to be by far and away the largest producer of semiconductors in the world, and that's a partnership that's worked pretty well for several decades. We now want to diversify away from Taiwan, but making sure all that diversification happens in the United States where we have a very limited track record of producing advanced semiconductors seems like a tough objective to accomplish.

What's likely to happen? We're going to spend a lot of money building some factories, we're likely to get expanded chip production here. We aren't going to get a ton of jobs. You got to realize that semiconductors is among the most capital-intensive manufacturing sectors in the world, which means that you can expand production a lot without expanding employment a lot.

Micah Loewinger: You're not convinced that semiconductor manufacturing is going to help places hurt by the China shock?

Gordon Hanson: I'm pretty sure that expanded semiconductor employment is going to do almost nothing for places that were hurt by the China shock. Where is semiconductor manufacturing capacity going in? It's going into Austin. It's going into Columbus, Ohio. It's going into Upstate New York, it's going into Boise, Idaho, into Phoenix. These are places that have already established supplies of skilled labor. These are places that are doing pretty well.

Semiconductors like to go where there are electrical engineers, semiconductors want to be in places that are already tech hubs of one kind or another. The places that lost employment as a result of the China shock were places that were producing sweatshirts, furniture, simple electronic goods, not the most advanced manufacturing goods.

Micah Loewinger: Former President Donald Trump is once again campaigning on what he calls an America first economic policy.

Former President Donald Trump: My agenda will tax China to build up America. In addition, as a matter of both economic and national security, I will implement a bold series of reforms to completely eliminate the dependence on China in all critical areas. We will revoke China's most favored nation trade status and adopt a four-year plan to phase out all Chinese imports of essential goods, everything from electronics to steel to pharmaceuticals.

Micah Loewinger: Gordon, what exactly is he saying here?

Gordon Hanson: He's putting forward a policy agenda that would take the better part of a decade to complete, but I think what he's really saying is he wants the United States to decouple from China economically.

Micah Loewinger: Our economies are pretty interrelated, right? What would that mean?

Gordon Hanson: They're incredibly intertwined. Unbundling those supply chains would be an incredible amount of work. What is the likely result of Trump trying to get in the way of US-China commerce is products that are more costly for American consumers and intermediate inputs that are more costly for American firms.

Micah Loewinger: In an interview this past February with Fox, Maria Bartiromo asked Trump if a 60% tariff on Chinese goods was in the cards to which he responded--

Former President Donald Trump: I would say maybe it's going to be more than that.

Micah Loewinger: How realistic is any of this?

Gordon Hanson: American presidents have a fair amount of leeway to enact temporary changes in trade policy. Those are usually justified because during moments where we have a security crisis or we can say that a country is just dramatically subsidizing exports in a particular sector. Ultimately though, presidents have to back that up. What Trump could do is something he has threatened to do, which is to eliminate China's status as a most favored trade member for the United States.

That wouldn't take tarrisfs to 60%. It would take them back to where they were after the famous Smoot-Hawley tariffs of the 1930s. That would be tariffs that are average in the 35% range. US tariffs on imports from China already average 25%. I would say it's realistic for him to raise tariffs on China by another 10 percentage points. Getting to 60% and keeping them there, it's hard for that to happen without an act of Congress, and Congress acting is something we haven't seen a lot of these days.

Micah Loewinger: Yet there's a new trade paradigm in Washington where both parties seem to agree or be building off of Trump's America first agenda during his presidency, and Bidenomics, regardless of how our current president spins it, is a version of Trump's approach to trade. You took issue with the focus on tariffs. Are there other aspects of this new consensus that you think aren't right?

Gordon Hanson: To answer that question, let's go back to the China shock and let's say, what could we have done right to help regions adjust to this new environment in which they found themselves competing with very cheap goods from China? What we could have done is as soon as factories started to close, we could have provided more generous unemployment insurance to workers to help tide them over as they figured out what they were going to do next. We then could have provided much more generous funding for career and technical education in local community colleges, local public universities that help workers transition from the jobs they were doing before to a new set of jobs.

In places that have seen dramatic job loss, you see the absence of those two things happening, people finding themselves in financial distress and unable to afford the cost of retraining themselves and falling housing prices, meaning the value of people's collateral is disintegrating and they're unable to finance the launching of new businesses. What we should be focused on in ways in which we can make sure that investments in human capital and investments in new business enterprises happen without necessarily dictating to communities and regions what exactly those new activities should be.

Micah Loewinger: Our listeners are already hearing a lot of technical economic terms coming up in the campaign. Trump, for instance, likes to talk about things like trade deficits and currency devaluation.

Former President Donald Trump: Joe Biden has run up record trade deficits, also known as losses. China's killing us. They're devaluing their currency to a level that you wouldn't believe. It makes it impossible for our companies to compete.

Micah Loewinger: Biden is talking about things like intellectual property protection.

President Biden: China is stealing intellectual property. China is conditioning being able to do business in China based on whether or not you have 51% Chinese ownership.

Micah Loewinger: What do you think news consumers and voters need to know about these terms in order to understand the campaign rhetoric and make an informed decision?

Gordon Hanson: I think you should just take it back to basics in terms of the major problems facing the American economy. One of those problems has been the absence of good jobs for workers without a college education. Now, in the last few years, we've seen job growth at the bottom end of the pay scale, which we haven't seen in decades, and that's been great. That actually started under President Trump and it's continued under President Biden, but that wage growth for lower wage workers is coming after decades of wage stagnation.

If you're talking to me about trade deficits, you aren't talking to me about good jobs. I would avoid fancy arguments that are taking us towards esoteric policy tools and away from the primary challenge that we face, which is higher incomes for American workers who didn't go to college.

Micah Loewinger: I feel like you've a bone to pick with trade deficits. Do you want to just explain why you think there's too much focus on trade deficits?

Gordon Hanson: What is a trade deficit? A trade deficit is when we buy more from other people than they buy from us. Full stop. It means our imports are greater than our exports. Now, it might make sense to say the reason that's happening is because the people we're trading with are not letting our goods in and we're letting their goods in. As attractive as that reasoning sounds is wrong. Trade deficits aren't about trade barriers. They aren't about tariffs. Trade deficits are about your savings and investment being different from my savings and investment.

The US doesn't save very much, and it invests a lot more than it saves. As a consequence, we need to borrow from the rest of the world in order to do so. That borrowing takes the form of a trade deficit. That trade deficit becomes this big attractive target that people like Donald Trump can come along and say, "I'm going to solve it with tariffs." Lo and behold, what has happened to US trade deficits since Trump tariffs went into effect in 2018? They've gotten bigger.

Micah Loewinger: This time is going to be different, Gordon.

[laughter]

Gordon Hanson: I'll take the other side of that.

Micah Loewinger: You were part of a team of economists who helped define and dub this term, the China shock. It's a term that's now widely used to describe China's impact on US manufacturing. How do you feel about the impact of your research now that we live in this very anti-Chinese political moment? Of course, defining the China shock was important scholarship, but today, do you think it's taken up too much in our current conversation?

Gordon Hanson: We're academics, we didn't cause the China shock, [chuckles] we just documented it. In documenting it, we wanted to highlight the fact that we as economists had not been fully honest about what we call the distributional consequences of globalization. That's a fancy term to mean that when we trade more with the rest of the world, when we're more integrated into the global economy, there are going to be winners and losers. We were too sanguine about the consequences of expanded globalization in the 1990s, and we did not take care to prepare for the very real losses that Americans suffered as a consequence of continued increases in global commerce. That's on us.

We feel that the message of our research is we need to be better prepared to help deal with the fact that globalization and other major changes in the economy creates winners as well as losers. If we're not prepared to help folks who've lost from those big changes adjust to new economic realities, we're going to face an environment of severe political and social disruption, which is what we're living through right now.

Micah Loewinger: What do you think the press could be doing better to help Americans understand what's at stake economically in this election?

Gordon Hanson: Here's the thing that doesn't get discussed enough, which has come up in several of your questions and in a lot of our discussion, which is that it looks like Donald Trump and Joe Biden agree about lots of current US trade policy. Now, Donald Trump is saying much more aggressive things about what he hopes to do in the future than Joe Biden is saying.

What we're seeing is this surprising convergence in terms of what we should be doing about trade. Donald Trump put tariffs in place. Joe Biden did not change them materially. Both are talking about the need to support American manufacturing. Both are talking about the need to take on China. Both are doing this unilaterally without broad-based alliances that we've relied on in the past.

Micah Loewinger: Gordon, thank you very much.

Gordon Hanson: My pleasure, Micah. This has been really enjoyable for me.

 

Micah Loewinger: Gordon Hanson is an economist and the co-director of the Reimagining the Economy project at Harvard University's Kennedy School. Thanks so much for listening to the midweek podcast. Be sure to check out this week's big show out on Friday. I'm Micah Loewinger.

 

 

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