This is Free to Exchange, the show where free markets and free-thinking scholars meet.

I'm your host, Ben Powell.

On today's show, we're gonna talk about international trade.

How does it impact prosperity in the United States?

Does it destroy jobs?

Is the trade deficit a bad thing?

What if other countries don't play fair?

And that brings us to China.

On the second half of the show, we'll talk about China's economic transformation that has lifted more people out of extreme poverty than at any other time in human history and what it could mean for the United States.

My first guest is Dr.

Douglas Irwin.

Dr.

Irwin's the John Sloan Dickey Third Century Professor in Social Sciences in the Department of Economics at Dartmouth College.

He's an expert on international trade and the author of five books on international, including Free Trade Under Fire.

Doug, welcome to Texas Tech and to the show.

Thank you for having me.

Alright, well, let's get started.

Before we get into some of the thorny issues that have been circulating in the media lately about trade.

Just in a fundamental sense, what's the basic economics of international trade?

Well basically, our economy functions on exchange.

We, as consumers, we're looking for the best deal we can get in terms of the products we buy from other firms that are selling and competing to us.

And international trade is just the international extension of that exchange.

So, we're used to exchanging with local firms but we also exchange with firms located in other states.

And this is just a way of trading with firms in other countries as well.

So when people from Lubbock trade with people in Oklahoma City, that's no different than when people in Lubbock trade with people in Beijing.

Right, so I'm from New Hampshire which is a very small state.

And if we had an autarchic economy, that is, New Hampshire can just trade with people in New Hampshire, it'd be a very poor economy.

We wouldn't be able to avail ourselves of the best products in the world.

Because we can trade with the rest of the United States and Canada as well and Asia and Europe, we just have a much wider variety of goods and better services that we can consume.

Yeah, otherwise, good luck riding your cars on maple syrup.

Exactly, that's right, yes.

So, but let's talk about some of the fears surrounding this then.

So sure, people make themselves better when they trade across borders.

But if we look at the last election, especially across the so-called Rust Belt in the United States, lots of people worried about jobs.

- [Douglas] Mmm-hmm.

Most, actually, a lot of them who voted believe that international trade steals our jobs.

What's the truth to this?

Well, it's certainly true that some jobs are destroyed as a result of imports.

But I always stress that international trade is a two-way street.

We export a lot of products to the rest of the world.

And in exchange for those exports, we are allowed to import products from the rest of the world.

So, we can't lose the fact that it's a two-way street.

It's not just this one-way flow.

So, we create a lot of jobs for our exports, and those tend to be in agriculture and tends to be in high tech, skilled manufacturing and things of that sort.

But we do tend to lose jobs and import competing sectors where lower-skilled Americans work.

So, the textile industry, we import a lot of textiles.

But luckily, if there good conditions and we have a robust, thriving economy, those people can adjust and do something else in the economy, so it won't raise the overall unemployment rate but it will reshuffle where people are employed.

But when we look at the Rust Belt in particular, a lot of those jobs first of all went down to the South.

So, we haven't lost them to other countries.

They've been lost to other regions of the country.

So, we're still producing a lot of automobiles.

It's just in the South, not so much in Ohio and Michigan.

The textile industry used to be located in my state of New Hampshire and Massachusetts.

I'm from Haverhill, Massachusetts, the Shoe City.

Exactly, they didn't go overseas.

They went down to the South.

In addition, when we look at a lot of the job loss in manufacturing in particular, a lot of it is due to automation and technological change.

So, we can produce a lot of things much more efficiently than we did in the past.

It's not that we're importing a lot more.

It's the fact that we still produce them domestically but at much lower labor content.

So for example, the steel industry, in the early 1980s, it took 10 worker hours to produce a ton of steel.

Now it takes two worker hours to produce a ton of steel.

We're still producing a lot of steel, but we just don't need as many people in the steel industry because we're just much more efficient.

It's become more capital intensive.

So this is actually an important point that maybe a lot of people don't realize is it's kind of a myth of the decline of manufacturing in the United States.

It depends what you're measuring, right?

Absolutely.

So in terms of output, we're still producing a lot of manufactured products.

That tends to, it went down during the Great Recession but it's come back up.

But in terms of employment, there's been this secular decline because we just don't need as many people in it.

It's really the same thing that happened in agriculture.

So, go back 200 years, 80 percent of the labor force was in agriculture.

A century ago, it was about 50 percent of the labor force was in agriculture.

We're producing more and more agricultural output every year, but as a share of the labor force, it's just smaller because each acre is producing now much more with fewer people.

Which freed up labor to do that manufacturing mid-century.

- [Douglas] Exactly.

And now, it's freeing up labor to do?

Services.

So we've really becoming from an agricultural economy to a very mixed economy.

Manufacturing never dominated the U.S.

economy.

It was only about a third of employment and a little bit more in terms of output around 1950 or so, but now we're transitioning to a service economy.

And I think there's another important point that you kind of mentioned in this too about the reshuffling of jobs, not just from productivity increases but from international trade.

That's actually kind of the foundation of how we benefit from international trade too, isn't it?

Yep, and it also reflects consumer choices.

When we choose where to spend our money, we're making choices about where the jobs are going to be in the future.

So a lot of it is, once again, it's not these external forces of trade forcing us to adjust in certain ways.

It's where consumers are spending and where they want people to be employed to provide goods and services that they want.

Now, one of things that you said a couple of minutes ago in your first part of your answer to this was that exports are the price that we pay for our imports.

It's a two-way street.

But people have heard about the trade deficit.

Are they all wrong about this?

The trade deficit means we're importing more than we're exporting, doesn't it?

It does, but once again, the size of exports is still very large, so we have to keep that in mind.

But we do have a trade deficit.

We import more than we export.

And what that reflects is the fact that when foreign consumers, well, let's start from the beginning.

When we import a foreign good, we're handing over our dollars to other countries.

They have a choice about what to do with those dollars.

If they spent their dollars back in the United States buying our goods, we'd have balanced trade.

What's happening though is they're spending about 75 to 80 cents for every dollar they earn on U.S.

goods.

That's our exports.

But they're taking about 15 cents and saying, "We'd rather buy a U.S.

asset."

And the question is, why are they doing that?

Why do they want to buy our stocks and our bonds and our, to some extent, land, although not very much?

It's really because the dollar is the central currency in the world.

We provide a safe haven for those asset holdings.

So it's their choice to buy U.S.

assets instead of goods that gives us this trade deficit.

That's not necessarily a bad thing because they're keeping our interest rates lower than they'd otherwise would be.

They're fostering investment in the United States.

And so, the dollar's come back to us.

It's just in the form of, not our goods being exported but our assets being sold.

So it's an accounting kind of definition, but overall trade of assets and goods and services must balance, right?

Right, so the balance of payments always balances at the end of the day.

It's just the composition can change sometimes.

It'd be kind of neat if it didn't, right?

If we could just send them dollars and they sent us stuff?

Right, so we print up pieces of paper that are sort of worthless, and they want them for some reason.

And so, they sell us, give us goods.

Unfortunately, OPEC is crass enough to demand payment for the oil they send us.

And China, in terms of the textiles too, they want something for what they're selling to us.

They won't just take worthless pieces of paper.

So, you bring up China just now then.

Let's go to there, something that's a concern among people.

I don't know how many times I've heard a politician say, "Well, I'm in favor of free trade, "but it must be fair trade, "and they're not playing fair."

What do you say to that type of argument?

Well, it's a complicated issue because China is sort of a mercantilist, not centrally-planned, but a Communist country where the state is very strong.

Obviously, they don't allow the free press or free Internet or things of that sort.

There's a robust private sector that's sending us electronics and clothing, things of that sort, private firms that are doing very well and internationally competitive.

And that's perfectly fine.

But there are state-owned banks that are really lending to other sectors.

And there it's not so fair.

And there's a question about what U.S.

policy should be in response to that, and there's a big debate about that.

But I think it's sort of an odd mixed economy, certainly not a pure market economy, but it's also not sort of what we'd think of as a centrally-planned economy of that sort.

So, it's a mixture of elements, I'd say.

Sure, and we're gonna talk more about China in the second half of the episode.

But from a U.S.

consumer standpoint, should I care if the Chinese government subsidizes Chinese manufacturers to send me stuff?

So, as a consumer, obviously we want the best product at the lowest price.

So that would be one approach, to say, look, if they're foolish enough to subsidize these industries and produce the goods that don't make a profit but the state will step in and subsidize them, we benefit from that in terms of lower prices.

There's another view that obviously is expressed too in terms of what you were just suggesting about what people think of as being fair trade.

And obviously a lot of Americans think that if one foreign government's putting their fingers on the scale for their domestic firms, we've got a problem with that.

So that's an eternal debate we've had throughout our history in the United States.

Yeah, I think it matters what we think the point of trade is, right?

Like an unfair 50-yard dash, if we're trying to figure out who runs faster, we want that to be fair.

But if we care about just how quickly they get water down the 50 yards to someone who needs it, well, I don't know if I really care if it's fair, do you?

Right, so once again, there's always that debate.

And obviously, domestic firms that face those subsidized exports or what have you, they're gonna complain.

But often, the problem with putting in trade barriers or trying to attack that is those imports are used as inputs into the production process of other domestic firms.

And then if you interfere with that trade, you handicap those downstream firms.

You make them less competitive, and then you're actually hurting ourselves rather than addressing the underlying problem.

I think that's a great point that approximately half of all of our imports are intermediate goods or raw materials for other manufacturers.

Exactly, so the steel industry's always complaining about foreign competition and things of that sort.

But if we block steel imports, that makes our auto producers less competitive because steel's obviously a big component to their costs.

And if we make the U.S.

a high-priced island for steel, that hurts our ability to produce automobiles here compared to foreign competitors who get that steel at world prices.

So in the last couple minutes here maybe, if we could turn to a different aspect of trade, particularly since we talked about trade with China or a Communist country, or we could think about Cuba too.

What are kind of the moral or other benefits that might be associated with, should we engage in countries that are less free than us or more totalitarian?

By trading with them, is that a good thing or a bad thing in other ways?

Well, I've always thought that commerce and free exchange can really set into motion political forces for freedom.

So I think we see that a bit with NAFTA.

When we signed NAFTA originally, Mexico was a one-party state.

The government was very powerful.

Now it's a multi-party democracy.

It's become a much wealthier country, demands for a cleaner environment, all the things we want, freer society.

And I would hope that if we sort of ended the embargo with Cuba and allowed people to get exposure to new ideas and new goods, they would also see the benefits of freedom.

So I think there is this link between trade and freedom which is sometimes underrated.

Yeah, I think so too.

Well, thank you so much for joining us today.

You're welcome, thank you.

Up next, China's economic success, is it real?

How has it happened?

What will it mean for the United States?

We'll be right back.

- [Narrator] Free to Exchange is a joint project of Texas Tech's Free Market Institute and Texas Tech Public Media.

More information is available at fmi.ttu.edu.

Welcome back.

Joining me now is Dr.

James Dorn.

Dr.

Dorn is Vice President for Monetary Studies and Senior Fellow at the Cato Institute.

He has authored or edited 10 books, including China in the New Millennium.

Jim, welcome to the show.

Thank you.

Happy to have you here to talk about China today.

As you heard on the first half of the show, we were talking about free trade and how a lot of people are worried about China today, at the end.

Let's start by just kind of putting this in context of where China as kind of an economic powerhouse has come from.

Because if we go back 40 years, it's nothing at all like today.

That's exactly right.

The reforms in China started around 1978 under Deng Xiaoping.

Deng Xiaoping was severely penalized during the Cultural Revolution.

And of course, Mao, during that period of time and going back to the late 1950s, early 60s, he started out, Mao Zedong with the Great Leap Forward which basically, they wanted to catch up with the West in terms of steel production and other production.

People had to produce steel in backyards.

He collectivized agriculture.

Economically, it ended up really being kind of a great leap backwards, right?

Absolutely.

And, actually working in their backyard making steel from your bedposts and so forth is not very productive.

Sounds like capital consumption.

Right, and they took people off the farms and they collectivized.

And as a result, they had major famine for three or four years and millions of people, tens of millions of people starved to death.

And this was because of Mao's policies.

And then he followed that with the Cultural Revolution from 1966 to 1976 where it was against the law to own private property.

It was against the law to operate new markets.

It's the very bedrock of a market economy, against the law to have private property.

That's right.

There was no freedom to exchange.

Everything was politicized.

Schools were closed.

People had to go out.

Intellectuals were killed.

They were sent to the countryside to work.

And it was a disastrous experiment.

Then Deng Xiaoping, when Mao died in 1976, Deng Xiaoping eventually came to be the leader, the Paramount Leader, as they called him.

And he instituted a shift from ideology to economic development as a primary goal of the Party.

And he started to allow reforms at local levels.

So it was kind of a bottom-up approach to marketization of the economy.

And when experiments were successful at the local level, the leaders, of course, like any good politicians, would take credit for it and then sanction those reforms.

And eventually, they established markets to such an extent, and not free trade, but liberalization of trade because in 1978 they had a couple trading monopoly firms, no foreign trade at all, virtually.

It was a very autarchic system.

Today, they're the largest trading country in the world.

And about 300 to 400 million people or maybe more actually went from poverty level income to above poverty level.

In sheer numbers, the greatest reduction in poverty in human history, right?

Yeah, and actually, it's interesting.

China has more billionaires now than in the United States.

Yet, China has virtually no freedom of the press.

So while they have freer markets in goods and services, they don't have a free market for ideas.

In fact, they're shutting down the websites of so-called independent or free market liberal think tanks.

They just shut down a website recently.

Mao Yushi was the head of that Institutes called the Unirule Institute.

And he had won the Milton Friedman Award for Advancing Liberty back in 2012.

He was at the Cato Institute for that.

So, they shut down his personal website.

He's not allowed to publish his books in China.

The Institute cannot operate effectively without their own website.

And they also have closed down these what they call VPNs, the virtual private networks, so people can't get around the firewalls.

So while China's made great progress on the economic front, in terms of a personal freedom in a free market for ideas, they are a few steps ahead of North Korea.

So the political, the Communist Party is maintaining no political freedom or freedoms of speech while it's granting these economic freedoms.

But it's creating a tension then because just the people that you mentioned and think tanks being created.

If they had never had any economic freedom in the first place, probably wouldn't have been trying to exercise that voice either, right?

That's right.

About 300 million people in China or more have cell phones today.

This was not the case even back when you go back to Tiananmen Square which was in 1989, May and June 1989.

If people had cell phones at that time and could take pictures and get around the firewall, everybody would know what was going on.

So while I'm depressed to a certain extent that Xi Jinping is consolidating power.

This is the current leader.

Yes, the current leader is consolidating power and cracking down on any kind of dissent.

On the other hand, I'm fairly optimistic in the Information Age, that younger people who have cell phones, have an education, they're traveled abroad, will not stand for something like a huge crackdown.

And it would be a disastrous thing for China itself because it would interrupt the trade that they have as the world's largest trading country.

So, they're trying to consolidate power now because this big meeting's coming up in the fall, probably in November.

It's the 19th Congress for the Chinese Communist Party.

And they're gonna have leadership changes although Xi Jinping will get his second term.

But some of the top leaders will be changed.

And Xi Jinping when he came in in 2012, 2013 actually, one of his goals was to have economic liberalization.

But he hasn't moved forward with that at all.

He's basically been cracking down on so-called corruption.

That's basically to consolidate his power.

Hmm, so in thinking about China overall, maybe bringing this back to economic freedoms to tie it back with trade a little bit too, they've made great progress from being an extraordinarily-repressed anti-market economy and have made great liberalization.

But they're far, far from a free market economy.

What aspects of their economic freedoms are still most lacking and might distort trade with the United States?

If you look at manufacturing prices, retail prices, and commodity prices, farm prices, they're very market-oriented.

They've gone from virtually zero percent of market pricing to 98 percent in those areas.

But in the financial area, their financial markets still show the legacy of central planning.

There are virtually no private banks in China.

All the banks are large state-owned banks.

And I often say that the state-owned banks, the SOBs, lend to the SOEs, the state-owned enterprises.

And it's a very close-knit type of situation.

So, they don't have the same problem that the United States has with a plug-up of the monetary mechanism, getting banks to lend and so forth.

They just, they have administrative, they have quotas, credit quotas.

So, they had a huge stimulus program in 2008 because of the financial crisis.

But their growth is weakening now substantially and they're very concerned about that.

And their markets are what they call socialist markets.

They're not free markets.

And the leadership wants market socialism or what they say, socialism with Chinese characteristics, which means kind of a mix between the market and the plan.

So the financial sector's still very much planned.

The rest of the economy, the private sector, the non-state sector has been the dynamic sector in China.

And it's joint ventures with Western firms.

And as a result, that sector is growing tremendously.

But the older state-owned sector, and some of the very big firms are state-owned firms in the northeast where they had the old steel mills and all that kind of stuff, the Rust Belt we'd call it here, that's still heavily under state ownership.

And they have a lot of excess capacity.

They want to change the structure of their economy.

The problem is, if you go back to the individual versus the state, they want top-down type planning.

They've allowed the market to emerge but it's still, we've got a one-party state, and the market is heavily politicized.

So they have vested interests over there too.

The vested interests want to keep export-led growth.

They want subsidization.

They want to have a situation in which the people in Beijing have the levers of power over the economy, and they still have five-year plans.

So, how does that affect us here in the United States with China being such a big trading partner with us?

Well, I think China has benefited us because we have a lot, our range of choices is much greater than it would be without China producing.

China is a supply platform for the global economy.

And Western firms go over there, and they ship things over there, and they reassemble them and iPhones or whatever.

And then they ship them back to the United States and sell them.

So, the U.S.

consumer has benefited hands-down by having China deliver these goods.

We've lost jobs in the United States.

Just to clear it, even with the Chinese government distorting the market and subsidizing things?

Well, U.S.

consumers aren't gonna buy goods unless they want to.

They're free to choose as Milton Friedman might say.

- [Ben] Free to exchange.

Yes, and the people in China that produce are producing to sell it on the market.

As I said, many products sell at market prices.

There is subsidization obviously, especially in steel and things like this.

And the government has not allowed a lot of Western firms to come in to compete in what we call kind of the commanding heights of the economy: communications, finance, banking, insurance, things like that.

That's opening slowly.

The currency is not fully convertible, but it's a very porous-type system.

A lot of capital is leaving China.

One way people get capital out of China is they spend a lot of money on their kids' education, sending them to top U.S.

schools, paying full price.

And we welcome that, actually, so.

We certainly do here at Texas Tech.

And it's good too.

Exchange is a two-way street, obviously.

So if they go back and they have a Western education, they've lived in a free society, they can go back and demand the same type of things.

And as you pointed out before, the fact that they have more economic freedom now has led them to demand more personal freedom.

So let's, like the last 30 seconds here, end on, given the exchange of ideas, of students coming back and forth, of greater trade, this tension between political and civil freedom, economic freedoms, care to take a guess of where we're heading in the future?

I think it's gonna be a little dicey in the near future because Xi Jinping, like his predecessors except for Deng Xiaoping, has a charismatic personality.

He's what we call a big leader.

And he's cracking down right now on personal freedoms.

There's no question about it.

Economic liberalization has slowed down.

After the big meeting in the fall when the leadership change takes place, hopefully they'll start liberalizing again on the economy and opening up.

But that's a hard call in China.

And as I say, I'm optimistic long-run because they don't want to kill the golden goose.

I mean, they have benefited tremendously, and Hong Kong is sort of the intermediary.

So Hong Kong's mantra is, "Small government, big market."

And I'd like to see that transfer over to China.

So would I. Thanks for joining us today.

I don't know why people seem to lose common sense when we start talking about international trade.

Trade is just trade.

It's two people exchanging things where they both expect to be better off.

Just because it crosses some line that politicians drew on maps doesn't change that fact, even if it's a country like China.

China and the United States don't trade.

Individuals in the United States and individuals in China trade with each other because they both expect to be better off.

And in the long run, I also think this tends to promote peace between nations as well.

See you next time.