PEP Debate: Irwin vs. Linciome, Smith vs. Bastiat

On May 2, Professor Doug Irwin, Co-Director of the Political Economy Project, squared off against Scott Lincicome, Director of Trade Policy Studies at the Cato Institute, before an audience of 50-plus students in a jam-packed Rocky 01. I had the unalloyed pleasure of being one such student. To maintain a semblance of journalistic integrity, I must report the truth: Considering both are avid advocates of free trade, they didn’t “square off” so much as engage in a spirited simulated conversation in which Prof. Irwin played the part of an Oren Cass-type protectionist. Prof. Irwin took his role seriously and, for the sake of the argument, played Devil’s advocate—although, perhaps Oren Cass isn’t quite the devil! 

Before diving into the fray, Prof. Irwin provided the audience with a recap of the current debate surrounding globalization and free trade. In order to recover from the Great Depression and World War II, the General Agreement on Tariffs (GAT) and, later on, the World Trade Organization (WTO) and, much more recently, the North American Free Trade Agreement (NAFTA) created a more peaceful, interconnected, and economically prosperous world. Domestic opposition was in the minority until Donald Trump’s rise to the presidency and subsequent withdrawal from the Trans-Pacific Partnership (TPP). The Biden administration, while starkly contrasted from the Trump regime on many notes, has emphasized industrial policy, referencing the COVID pandemic and the perceived failure of global supply chains. 

In short, free trade, from the right and left, has been on the defensive for about a decade. The policy debate revolves around open markets and free trade versus inward-facing industrial policy and protectionism. Prof. Irwin posited several possible real-life opponents to Lincicome’s defense of the former. “Who is his opponent?” you might ask. Paraphrasing, Prof. Irwin says it could be Bernie or Warren as well as Todd Tucker of the progressive Roosevelt Institute. Or, on the right, Robert Lighthizer, US Trade Representative under Donald Trump, Oren Cass, the executive director of American Compass, a (heterodox) conservative think tank, and other America First types. “Unfortunately, none of them are here today.” 

Luckily for them, Prof. Irwin appeared in their stead. Quoting J.S. Mill, Prof. Irwin steeled himself to advance arguments that he finds ill-founded and unconvincing: “He who knows only his own side of the case knows little of that.” As the rest of this account will show, Prof. Irwin is far from knowing only his side of the case—he knows a great deal about both sides.

Prof. Irwin’s opening salvo argued that, over the past three decades, globalization has let down industries, workers, and communities in non-coastal cities. Irwin described the neoliberal free-trade agreements of the 80s and 90s as benefitting Wall Street at the expense of Main Street, whereas the trade arrangements of the 50s and 60s were beneficial to a much wider swatch of the citizenry. Prof. Irwin quoted National Security Advisor to the Biden White House, Jake Sullivan, on “deep-trade liberalization” not delivering for the American people. 

Irwin also invoked the Russian invasion of Ukraine and Chinese saber-rattling as dispositive of the premise that economic integration into the global rules-based order prevents large-scale conflict. He went on to defend Trump’s tariffs on China as disengaging the U.S. from an authoritarian regime. Integrating opposition to free trade from the right and left, Prof. Irwin concluded it is “time to put America first” and “have a worker-centric economy.” In short, “free trade is not just damaging but downright dangerous.” And what a note for Professor Douglas Irwin of Against the Tide fame to end on!

Scott Lincicome set a playful tone for his response with a cheeky remark about nasty weather increasing attendance. Linciciome’s self-effacing quip was well taken and was well received, but I think the room would have been packed in clear skies and 70 degrees. Stepping up to the plate, Lincicome set about systematically annihilating the case presented by Prof. Irwin. 

First, Lincicome addressed the claim that American manufacturing is dead, reporting that manufacturing output had hit an all-time high in 2022. He noted that the U.S. is actually the second-largest manufacturer on the planet based on output per worker—R&D investment has also hit record highs. Instead of responding to concerns of distributional costs borne by towns in the heartland with statistics reporting an increase in total surplus and consumer welfare, Lincicome took the unconventional strategy of emphasizing distributional benefits, e.g., growing manufacturing cities in the South. Vis-à-vis the pandemic, Lincicome reminded the audience that it was multinational pharmaceutical corporations that invented (with government subsidies), produced, and distributed the vaccines that resolved the pandemic—at the very least they closed the authoritarian policy windows opened by people’s fear of the virus when vaccination was not a possibility. Moreover, half of everything we import are inputs that domestic manufacturers use to export goods to other countries (for those concerned about trade imbalances). 

The second assertion focused on trade being supposedly anti-worker and anti-community. Median wages have increased in real terms by 1% a year since 1990. Trade is a huge supporter of jobs growth. Specifically, goods traders constitute 50 to 60% of all new net jobs. On top of these jobs, imports support all of those jobs that use foreign-produced inputs. Millions more are dependent on foreign direct investment (FDI) within the U.S. In fact, we’re in a tight labor market: 750 thousand manufacturing jobs are waiting to be filled. While manufacturing jobs have decreased as a share of the overall economy in the US, this is true for all OECD countries: as economies grow wealthier, they structurally shift from agriculture to manufacturing and then to consumer and financial services, ubiquitously. The vast majority of industrial communities have adjusted to this shift and are flourishing.

The third claim addressed was that free trade undermines national security. Au contraire! Citing Friedman (harkening back to Adam Smith and Frederic Bastiat), Lincicome explained the well-documented phenomenon of economically integrated nations fighting less because, put simply, “you don’t want to murder your customers.” Or your producers, and traders, for that matter! Citing the Russian invasion, Lincicome points to the success of private market checks in the form of boycotts of Russian exports in addition to state sanctions. Obviously, if all countries were autarkic, the only way to check their behavior would be through military intervention. Lincicome also noted that the much-maligned neoliberal free trade agreements have helped 1 billion people escape absolute poverty since 1999. By helping other nations prosper, trade decreases the likelihood of conflict because those nations have much more to lose. Finally, while global supply chains have been slandered as a threat to resiliency, Lincicome made an argument I had never heard presented: openness to trade insulates a country from domestic supply shocks and, by increasing productive efficiency (making countries richer), free trade ensures more resources are available to cope with all shocks, whether domestic or foreign. Lincicome cited the baby-formula crisis as a case in point of the tragedy that befalls consumers and threatens national stability, if not security per se, when a heavily protected domestic industry experiences a supply shock: prices rise, and they rise dramatically and remain high. If only there were a way to shift supply outward… 

The fourth claim addressed was that we live in a globalist, free-trade fundamentalist paradise. As much as both Scott Lincicome and I would delight in this reality, it is pure fiction. If you don’t believe me, just take a look at the Harmonized Tariff Schedule. Lincicome enlightened the audience with a statistic I had never seen before: the U.S. is one of the less-integrated economies in the world, with imports accounting for only 11% of consumption. 

Lincicome concluded his talk by explaining that there is simply no viable alternative to free trade—that is, if we define viable to mean superior. Protectionism, Lincicome explained, imposes hundreds of thousands of dollars of costs on domestic manufacturers, consumers, and other workers. In a nod to Janos Kornai, Lincicome delved into the negative consequences of affording uncompetitive domestic firms with soft budget constraints through subsidies, tariffs, and other such trade policies: reducing market discipline breeds stagnation, a lack of innovation, increased rent-seeking and regulation capture instead of production and profit-seeking, i.e., generating real value for consumers. 

Lincicome then responded to pointed questions from Prof. Irwin. First up was the so-called “China Shock,” which Irwin described as hurting the heartland’s domestic manufacturers with cheap imports. Lincicome acknowledged forthrightly that there’s “no doubt that the late 90s and early 2000s China Shock destroyed approximately 2 million jobs over a long period of time. [But this was] a tiny fraction of all jobs lost in manufacturing over that time period.” What’s left out of this critique, Lincicome explained, is the consumers who have benefited tremendously from Chinese trade, gaining more than $260 of purchasing power every year for the rest of their lives. Lincicome went on to reiterate what proponents of free trade (such as myself) have emphasized since time immemorial: When you look at the entire economy, free and freer trade imply a net gain. A novel argument from Lincicome, and one that I should have realized a long time ago, is that the China Shock is misattributed to trade when it should be attributed to adjustment. That is, the same arguments made about Chinese imports disrupting the economy can, have, and will be made about innovation, creative destruction, and dynamic efficiency. “By focusing on trade, they miss the forest for the trees”: China’s liberalization drives competitiveness, which benefits all of us.

Irwin’s second question asked Lincicome to entertain the possibility that certain industries need government help, e.g., those associated with facilitating a “green transition” of the economy. Lincicome leveraged this question to debunk industrial policy at large. I’m grateful he took the opportunity to do so. His argument went like this: New industrial policy, like that to structurally “green” the economy, runs headlong into pre-existing policies that mute benefits from competing agencies, regulations, rules, etc. Industrial policy sounds great, but politicians make policy. 

As elucidated by public choice theory, actual policies differ substantially from the ideal due to rent-seeking and regulation capture. In short, strong domestic constituencies and their lobbyists render textbook policy interventions null and void. Worse still, industrial policy comes with a concomitant bureaucratic overhead. Lincicome closed by pointing to the U.S.’s abysmal track record at “picking winners” with industrial policy. I’d like to add that Chinese industrial policy led to such ridiculous overcapacity in steel manufacturing that, for a time, a pound of steel was cheaper than a pound of cabbage. (I no longer have the citation on-hand, but I read it in my Political Economy of China class last term, so I must be an expert on the subject and you must believe my statistics!) 

After Lincicome’s legendary defense of free trade and decisive rebuttals to challenges thereto, Prof. Irwin enumerated the concerns invoked by left- and right-wingers for trade and industrial policy. On the progressive front: climate change and green industry, equity, labor participation inclusion, stakeholder capitalism, and antitrust considerations. On the right-wing front: national security, China, loss of technology and productive capability, friend-shoring.

Lincicome then responded to questions from students in the audience (one of which was my own). With respect to China, Lincicome argued that improvements have nothing to do with trade but with tax and regulatory policy. The U.S. should unilaterally liberalize trade that is entirely unrelated to national security, especially with respect to industrial inputs. Specifically, Lincicome argued for the Trans-Pacific Partnership and more trade agreements with close allies. Lincicome also made the case for more immigration, to make the US more attractive to multinational corporations who offshore their businesses if they cannot find the labor and talent they need in the US. Responding to a question about climate change, Lincicome noted that environmental-review policy often retards the development of the very technologies that are meant to reduce CO2, e.g., solar arrays. Invoking the Kuznets Curve, Lincicome contended that the best thing to be done for the climate is to make the world rich as soon as possible. Finally, Lincicome responded to my question about South Korea’s industrial policy seeming to have been successful. Lincicome pointed to economic research that has been performed, presumably using differences-in-differences models, revealing periods of heavy industrial policy in Korea, Singapore, Taiwan, and Hong Kong witnessed slower economic growth. In short, a classic mistake of correlation for caus-ation.

I thank Prof. Irwin for simulating a fair and edifying debate between himself, a dyed-in-the-wool free trader, and Scott Lincicome, a modern-day Frederic Bastiat.