Trade Historian Douglas Irwin on Trump's Unprecedented Tariff Shock
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The biggest story of 2025 so far, certainly from the point of view of the economy, is Donald Trump's use of tariffs to try to remake the global trading and financial system. The president has imposed the highest U.S. tariffs in a century, and the world is trying to adjust

to this Trump tariff shock. Our guest today on Potomac Watch is a man well-placed to talk about the Trump tariffs, whether there are any comparable experiments like this in U.S. history, and whether or not they will succeed in bringing back American manufacturing, as President Trump says he wants. Our guest is Doug Irwin, a professor of economics at Dartmouth College and

He's the author of several books, notably related to us today, Clashing Over Commerce, A History of U.S. Trade Policy.

Welcome, Professor Irwin. Thank you for taking the time for being here. As it happens, I was just rereading your chapter on Smoot-Hawley in 1930, which seems to have a certain relevance today. And it was great to be reminded of that inglorious history. So welcome. You recently told my colleague, Tankuvar Dharajan, that Trump's tariffs are actually

They have no comparable comparison in history, that they are unique. Explain that. Yeah. I mean, first of all, the U.S. has had a history going back to the 19th century of having pretty high tariffs on imports. Right. But they were sort of built in from the beginning to some extent. And most tariff acts were incremental changes. So you take a 35% tariff and you bump out to 38%.

or the Democrats would come in and they'd bump it down a little bit. But the level is pretty consistent over time. Since World War II, U.S. tariff levels have come down dramatically as a result of trade negotiations and other factors.

And so we've been, since the 1950s, had a really low average tariff. Now it's down to about 2.4%. That's what it was last year on total imports. And to take a 2% tariff and go up to 20%, 25%, or over 125% on the case of China, overnight...

is just remarkable. You know, all those tariff reductions, they were phased in over time. Right. Gradually reduced. But to have non-phased in rises of that extent from a low base is just, we haven't seen that in U.S. history. So it's a difference of magnitude.

I mean, now we have a base tariff on everybody of 10%. So that's roughly four and a half times what it was at 2.4% average tariff already. And then you have the big increase. I think even with these recent exemptions or the 90-day pause,

people are saying that the average tariff rate is the U.S. is now something like 24 percent, close to that maybe. What does that mean economically? What kind of an impact does that have on an economy? Well, a couple of things I'll point out here. First of all, what also makes this tariff shock enormous and really unprecedented is about two-thirds of U.S. imports came in duty-free

last year, either because we have free trade agreements with those countries, US, Canada, Mexico, Australia, Peru, and a few others, but also because even in the historical tariff code, things that were not produced here in the United States, we didn't put tariffs on them. So bananas, your morning coffee, we're not going to grow coffee here in the United States. We're not going to grow bananas. So going back a century, those had been put on the duty-free list.

And now, as you mentioned, the 10% are across the board. The other tariffs are going to be higher. Once again, they cover all imports. So this distinction between duty-free and dutiable, that's out the window. Everything's subject to a tariff now, regardless of whether there's any hope of us producing it here or not. The other big change from history is that we're a much more open economy than we were in the past.

So, even going back to the Smoot-Hawley days, imports were only about 5% of GDP. Duty bill imports were only about 2% of GDP. So, those tariffs were affecting a pretty small share of the economy. Now, imports are pervasive. They're intermediate goods. They're components. They are the lifeblood of the economy, not just for us consumers as households, but businesses.

They've counted on those sources of supply. So once again, to go from very low tariffs up to 10%, 15%, 20%, 25% tariffs, that's just an enormous shock to the system. And the disruptions, which we see playing out now every day, are just going to be enormous. In terms of the impact of GDP, is it just too early and too difficult to calculate? Well-

There are a number of modeling scenarios out there, a number of economists, that's what they do. They try to make these projections. So whether it's the Tax Foundation or the Yale Budget Lab, they're all coming up basically with the same numbers. Now, once again, Trump's tariffs are a bit of a moving target because they're sort of coming off again. But for sort of a base case of 10% across the board, 60% or 100% on China, we're talking about shaving like 0.3%, 0.4%, 0.5% off of the U.S. GDP. Right.

That means a lower rate of growth. So it'll accumulate to that over time. So it doesn't immediately mean it's negative, we're going to a recession, but we're lowering that margin of the economy remaining its head above the water to stay out of a recession.

by reducing the future prospects of the U.S. economy. And of course, there are all kinds of dislocations and dysfunctions that are introduced. If you happen to be a small manufacturer, say, and you have a component from China that you can't source in the United States, or there are very few competitors, maybe in some cases there aren't any, then what do you do? You have to absorb that tariff on that good, which now would be 145%.

on that component. And that, in turn, makes you, particularly if you sell into the global market, uncompetitive with competing companies elsewhere. And that may not feed into GDP right away, but if they have to lay off people, if they have to maybe go out of business, or if they have to raise prices, all of that flows through the economy. Absolutely. And where we see this particularly in an egregious way is with the steel tariffs.

because steel is pervasive in U.S. industrial products. We're world-class in so many of these things. And so, like, for John Deere, for Caterpillar, they're buying a lot of steel. You know, you and I don't go out on weekends and buy a bar of steel at lower Home Depot, but it's embedded in a lot of products. And we hamper Caterpillar's ability to compete against Komatsu when their input costs are going up

very high rates. Because once again, foreign producers, they don't have to pay those tariffs on their inputs. They're competitive in third markets. They can even sell more into the US because of that. So it's really handicapping our own firms. All right. We're going to take a break. And when we come back, we'll talk further with Professor Doug Irwin about the history of free trade when we come back.

Welcome back. I'm here on Potomac Watch, Paul G. Goh, our daily opinion podcast for The Wall Street Journal with Professor Douglas Irwin from Dartmouth College. I want to take you through a couple of the justifications that the administration and its supporters are using for tariffs. One is that we've let our manufacturing industries be hollowed out and move to China, move to Vietnam, move elsewhere. And if we impose these high tariff walls, that that manufacturing will come back. And of course, President Harreld's

brings people into the White House and says, this fellow, this CEO is going to invest 200 million bucks. This one's going to be $5 billion, whatever. Do you think that, number one, we have hollowed out our manufacturing? And two, can we bring it back? And do we want to? Well, it is a concern in the defense industry. So as Adam Smith said, defense is more important than opulence. So the extent that we've sort of let our defense industries wither,

Particularly when drones are so important and the batteries for drones and the semiconductors, that's something we should be concerned about. But for a lot of other manufacturing, first of all, it's a little bit of a myth that we've been de-industrialized completely. The share of employment in manufacturing has gone down a lot, but we're still producing a lot of manufacturing output. It tends to be at the higher end. And then the question is, do we want to reshore clothing and apparel and shoes? And I think Dave Chappelle, the comedian, put it best. He said, I want to wear Nikes. I don't want to make them.

So we don't have to necessarily get these from China, but there are a lot of other sources of supply. That was one of the geniuses of NAFTA in some sense. We have a country to our south, a lot of unskilled labor. We have a vested stake in making that country flourish so that people don't come here for jobs. We want them to do well. And so they do certain tasks and we specialize in higher value added manufactured goods that we can sell to them.

So we don't want to, you know, reshore everything. The question is, what is possible to produce here at relatively efficient rates? Well, does that justify that what you would call strategic tariffs or strategic trade decisions for, say, semiconductors or

for shipbuilding. We don't have any ship, much less shipbuilding capacity in this country anymore. I think if we were wise, we'd call on our allies in Japan and South Korea, which do make a lot of ships. I think China has 10 times the shipbuilding capacity of those three, U.S., Japan, and South Korea combined. So if we did get into a war with China, you know, we might need a lot of ships. Do we need, say, a capacity like that? And could we use tariffs to

to help with that. Well, we should really get rid of the Jones Act if we want to help out American shipping. I've given at the office about 150 times on the written editorials on that. Keep banging the drum, because at some point, the message will get through. I mean, Milton Friedman always said that, you know, you never know when ideas will gain traction, but you have to keep restating them, because it is such a hindrance to the shipbuilding, shipping industry, our relations of, you know, just supplying Hawaii and the Gulf Coast,

moving things. It's such a, obviously, dysfunctional and harmful policy. But you're absolutely right. We need alliances. We shouldn't be, and we can't produce everything ourselves. But if South Korea can do things, if Western Europe can do things, and we cooperate and we have good relations, then we don't have to worry about on-shoring everything, because we'll be in a stronger, more secure position with those allies. I mean, do we need to make semiconductors here in the United States? There's certainly a case for diversifying away from two

hotspots in the world, Taiwan, South Korea, which are incredibly vulnerable. Now, we are exceptional in terms of the design of semiconductors. But the question is, do we want to subsidize it here or do we just want to encourage other countries to sort of start up semiconductor production themselves? That's sort of a debate I think we have to have. And where we come down and whether the chips actually work, it remains to be seen. It seems like the costs are awfully high and the delays are interminable.

terms of actually reshoring these things. But there are other places to produce these things besides the US. All right. Another argument that the administration uses, of course, is the president's favorite, is the trade deficit. He views trade deficit surplus as a zero-sum game. I think you and I would agree that trade deficit is best ignored. You should focus on other kinds of measurements of economic strength. But there's an argument

made by people who say, look, if you have a trade deficit year after year, I think ours is currently about three and a half percent of GDP, that that is simply unsustainable over time.

What do you think of that argument, that you just simply can't run them year after year after year? Well, I remember the 1980s, and people were making exactly the same argument then. And so it was 40 years later, and we've had these trade deficits. And as the cover of The Economist said last October, the U.S. economy is the envy of the world. So we've done quite well. Australia's had about a century of trade deficits. So...

And once again, countries that are sort of floundering, not doing so well. Germany, there's a book called Kaput by Wolfgang K. Hitchin about Germans just not doing well. They've run trade surpluses. So it's not something to be envied. And I have my shelf behind me, Adam Smith's Wealth of Nations.

where he's almost as eloquent as the Wall Street Journal editorial page in saying trade deficits aren't to be worried about. But he says, there's nothing as absurd as this idea of balance of trade determining what our gains from trade are or something to worry about for the future. So quite naturally, depending on what we produce, some countries would have a trade surplus with us. Some people would have a trade deficit with us.

We have, what, about a $300 billion surplus in services right now? Something like that with the rest of the world? Yeah. And there's a great cover story in the Wall Street Journal on the services trade and how that's getting ignored in these calculations. And intellectual property and so many strengths of the U.S. economy don't get counted in the merchandise numbers.

And then, of course, we have trade surpluses with some countries, Australia and Peru. And are we taking advantage of them? So the whole notion that if you're getting have a trade deficit, you're getting screwed. Well, are we screwing the other countries by having trade surplus? No, we're not taking advantage of them. And certainly looking at bilateral balances is just completely bonkers. It makes no sense.

If you're worried about the overall trade deficit, you have to use fiscal policy to adjust that because one of the reasons we're drawing in so much capital from the rest of the world, or at least one reason, it's not just the US is doing well, but we have a big fiscal deficit that needs financing. So if you're worried about the trade deficit, worry about fiscal policy, but don't worry about bilaterals. And in general, don't worry too much about the overall deficit either. Okay. That's very helpful. Now, let's talk about China in particular, because

When you think about China because of its size, because of its economic production, and because of many of its policies, it poses a particular problem as to the world trading system.

I think it's fair to say it doesn't play by the normal trading rules. I mean, it subsidizes exports, for example, because it has domestic financial repression at home. They want to push exports, and that tends to be disruptive to some industries around the world, like steel, for example. It spies on U.S. businesses. In my email, for example, it steals secrets from companies. It steals IP data.

and so on. So does it pose, with its now record, I think it's going to be a trillion dollar trade surplus with the world, does China pose a particular problem

for free traders. And what do you do with a large mercantilist actor like China? It is a difficulty, and I think it's created a big problem for the world trading system and sort of led to this environment in which we're revisiting our trade policies, unfortunately, against our friends and not just our foes. You know, if President Trump and previous presidents had just focused on China and the unfair trade practices which are manifest

And you're right, it works through the financial system. It's not through... It's not the state-owned enterprises, it's the cheap credit, the overcapacity, you don't have to pay back loans, the implicit subsidy there. If they tried to address those things, those aren't sort of necessary repairs to the world trading system without going in on all the other problems or all the other countries from which we have a normal trading relationship. And once again, there's a national security element to this too. So it's not just the economic disruption of excessive mercantilism on the part of the

But if they are putting things in chips where they have back doors and can turn off the lights in New York City or turn off the water system in Cleveland or Detroit, that's something that we have to pay attention to. And I'm not privy to classified intelligence, but I'm told that these are concerns that reasonable people have. And that means that we have to temper our trade relationship with China. Well, that certainly was a concern with Huawei. And it's even a concern with TikTok.

then what do we do? What do you do with China? I mean, my preferred policy has been what I would call strategic decoupling rather than a broad tariff on everything in China. You know, pick certain industries that we really feel where we can't trust them to produce our imports, pharmaceuticals, say, or certain kinds of electronics.

I mean, what else do you do? I guess go marshal allies and maybe get them on your side to be able to present to China, look, you have to change your policies here because we're going to unite and essentially say, we're going to punish you if you don't. Well, you're absolutely right. And when you think about those allies, you know, many of them are the Asian Pacific region. And one way you cement alliances by a trade agreement, and there wasn't such a trade agreement, it was called the Trans-Pacific Partnership.

that unfortunately President Trump pulled out of in his first week of office in his first term. So that was exactly that alliance, building relationships across Asia that would exclude China and get us working on the same page and give us leverage against China. But also, here's another problem, is that the Trump tariffs are exactly backwards in terms of trying to do this. So we're imposing high tariffs on semiconductors,

from China, but we're not imposing tariffs on the final goods electronics and the iPhones and things of that sort. So in terms of strategic decoupling, we're letting in the final goods, but we're not letting in the intermediate goods. You might want to rethink that. And it's something you...

We talk about apparel and shoes. You know, there should be no problem there with respect to China. We're not going to be excessively dependent on footwear. But once again, for these other goods where there is a strategic purpose, we have to think very carefully about what it is we're going to do to reduce our dependence. We're going to take another break. And when we come back, we'll talk to Professor Irwin about what the world trading system will look like without America as a leader when we come back. Every idea starts with a problem.

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Welcome back. I'm Paul Gigot here on Potomac Watch with Professor of Economics and Trade Historian Douglas Irwin. There's a thought that actually President Trump's quiet goal, he won't say it out loud, is a total decoupling from the Chinese economy, a total separation. 145% tariffs would suggest that that may be the goal. And China, of course, is responding with withholding certain critical exports, also critical minerals and other things that

we rely on here in the United States. Can you have a total decoupling of these massive, well, essentially the world's leading economy and the second leading economy,

have them totally separate without doing really pretty significant economic damage. No, there will be significant economic damage, but there will also not be complete disintegration of the relationship because it'll work through third countries. So they may ban the export of their rare earths or what have you to the US, but they can go through a third country just as a lot of Chinese goods that we've banned or imposed high tariffs will work through Vietnam or Cambodia or something like that.

So it's very hard to suppress all of trade because the incentives are just too great. But you're right. This is a breach in the relationship. It will reduce bilateral trade significantly. And there are some benefits from doing so, but a lot of costs, too, that I don't think a lot of people are considering. Well, of course, the Trump administration says we need to have tariffs on Vietnam and other countries because China has farmed out

production there and they evade the tariffs on China directly. And that's why we have to have tariffs on all these other countries. So, and the consequence of that is you're imposing tariffs on the allies you need if you're going to put together an anti-mercantilist policy against China. Yeah. And that's where your point about strategic decoupling is important because if a semiconductor chip made in China is just going through Vietnam or

put in some product that comes to the US, there might be the back doors and the other worries. But if it's just a furniture manufacturer or apparel, Nike, shifting to a different country, well, that's not a problem because once again, the strategic and the defense issues are just not there. I want to step back a bit and think about this in historical terms, which of course is your specialty. And as you think about the global trading system, you go back a couple hundred years,

We have had, except for a couple of decades, in the 20s and the 30s of the last century, we had a global economic leader that was willing to import world goods. And, of course, Britain, after repeal of the Corn Laws, did that for the 19th century through, I would argue, up through World War I. It emerged from that war unable to continue that role.

And as Charles Kinderburger wrote in his great history of the Great Depression, the U.S. wasn't willing to take over that leadership from Britain at that time and didn't really until after World War II. And then we did and have since then. So except for those two very unfortunate decades, the decade of Smoot-Hawley and the Great Depression, you know, the world had a global trading leader who thought that it was in its own national interest.

to be a market for, in Kindleberger's phrase, distressed goods. And you had a leader. And when there was no leader, the world trade deteriorated and you ended up with a tremendous mess. Now, if the U.S. is really backing out of that leadership role, which I think it is right now, we don't know if it'll end up there, but it is at least on that path now.

What kind of world trading system are we going to end up with? I think it's going to be very fragmented. We're going to have various trade blocs. You know, it would be one thing if the U.S. said, you know, letting China into the WTO was a bad idea and China is a bad actor. And we have to pull back and form a different arrangement with our allies in Western Europe, in Asia, democracies, and the other market-oriented economies. We want to form our own new institution, our own trade bloc. Mm-hmm.

That would be fine. That would be understandable because geopolitics really is supreme. It's not just economics, it's the geopolitics. But the US seems to be doing more than that. As President Trump has said, friend and foe are against us. And sometimes our friends are worse to us than our foes. I don't think that's the case. We're alienating a lot of people. And what we're doing is we're isolating ourselves from natural allies and harming those relationships. So one example that comes from Smoot-Hawley.

Smoot-Hawley was against all countries. It wasn't trying to figure out who's doing well with us and who's not. And what happened was it sort of reinvigorated Britain and other British Commonwealth countries to focus not on the US, but on Britain once again. So Canada, we pushed Canada back into the hands of the British. Australia and New Zealand, which had looked for us for security and friendship, we pushed them back to the British. The British couldn't handle it, but it isolated us. We were discriminated in their markets. Our exports faced a tougher row.

Because their tariff barriers went up. And basically, a big chunk of the post-World War II system was just getting rid of those barriers that accumulated during the 1930s, which were sort of unnecessary in some sense, which we had spawned ourselves by passing Smoot-Hawley.

So these barriers, once they go up, they're very slow to come down. And if we're doing it against everyone, it's going to be very hard to rebuild after that. Well, what kind of system do you think will emerge? I'm struck, for example, just this week, Xi Jinping is in Southeast Asia on a tour. Okay. He's courting them on trade. He's saying, see, you can't trust the Americans. We're not going to impose tariffs on you. So trade with us. I think he signed 40 agreements with Vietnam. Most of them are secret, but 40 economic agreements with Vietnam.

So do you think that China will emerge here, taking advantage of this to be able to form its own trading system, which, of course, will always have the Middle Kingdom at the center of things and in a dominant position? Well, we certainly give them a great opening, because if we turn away from the world, it creates opportunities for them. I still think there's a lot of suspicion about China elsewhere in Asia. Sure is. Once again, that's an opportunity, that's a void we're leaving. And once again, Trans-Pacific Partnership was sort of this big

unforced error, I think, in terms of leaving that region. But I guess I'm even more worried about North America. We had thought about NAFTA and USMCA as sort of this North American bloc that could deal with the European Union, deal with Asia as a production network and a geopolitical alliance.

And to the extent we're alienating two countries right on our own border and possibly ripping up all the North American supply chains, that's also going to create difficulties for the U.S. and really isolate us and, once again, make us seem as a very unreliable trade partner. So here we are. We have President Trump seemingly, certainly rhetorically, set on imposing high tariff walls because he sees them as economically virtuous in and of themselves. And yet...

He has had to back down here more than once. The 90-day pause from his so-called reciprocal tariffs, one example. He even backed down some on the USMCA, giving some preferential treatment to Mexico and Canada for goods that are USMCA compliant.

And then we have the weekend exceptions on electronic goods. It was about a third of the trade with China. Now the president says there'll be no exceptions and we're going to impose tariffs anyway on these goods. But it isn't clear who's going to get an exception and who isn't. There are going to be some exceptions.

So, how do you read these walkbacks by the president? - First of all, I think it's apparent of the cost and the disruption of exactly how we opened this discussion about going from zero to really high tariffs overnight. So the auto executives,

The plant and equipment that is built, these are multimillion-dollar decisions, if not billion-dollar decisions. They take a long time. You built up these networks. To rip them up overnight is incredibly disruptive, harmful to the U.S. economy, higher price for U.S. consumers. And I think it was a dim awareness that this is not going to be all positive, that there is, even he admitted, that there's going to be this adjustment period. So that's part of it. You know,

In monetary policy, there's always been this debate about rules versus discretion. Do you want to set up a rules-based system where you sort of know how to operate, or is it going to be at the whims of who's ever in charge? And we've moved from a rules-based trade system to a discretionary system. So we used to have WTO rules. There was certainty about conditions under which you could import and export. And now, as you said, there's going to have to be exemptions because there's a lot of products that we don't produce here.

And if we want to remain competitive in terms of our final goods manufacturers, they need access to those things. And then you have to go to the president and you have to say it's going to be too disruptive. And then the administration is going to be not only dealing with 70 countries that are coming to it asking for exemptions, but millions of businesses asking for exemptions on any particular products. And that just overwhelms the Department of Commerce and the U.S. Trade Representative's Office and just makes trade policy a mess. So many different tariff rates, so many different exceptions.

whether things are on or off, just that business certainty is lost. The predicament we're in, how do we get out of it, is what I'm saying. I mean, some of us have been fighting this from an intellectual political point of view.

But what I don't see very much across our political system right now is any voices for free trade outside of some in academia, some in the press, and not many on Capitol Hill. Even the business community is very muted. I mean, they're all looking around going, I can't alienate Donald Trump because I might need an exemption.

and I might have to go for him. I mean, that's Tim Cook's strategy, obviously. He's not going to come out at Apple against Donald Trump in any way because he needs that exemption for iPhones. So you're right. Tim Cook, Apple is... And this shows you sort of what happens when you move to a discretionary system. The big players, the ones that curry favor with the White House, they might get the exceptions, but the smaller businesses who don't have a voice in Washington, who don't have a lobbyist to advocate on their behalf...

they're going to be left out and harmed. So is that the sort of system we want to go to where it's political influence? I mean, one reason Congress started delegating authority to the president after Smoot-Hawley was saying, we don't do trade policy very well. Let's have a more regular system. And now we're going back to, we just moved it from Congress and lobbying for congressional favors to the presidency and the executive branch and getting favors there. Yeah, I think Congress's statement there in turning...

giving Roosevelt administration the opportunity to negotiate some bilateral trade deals after Smoot-Hollywood stopped us before we kill the economy again. So FDR and Cordell Hall, his Secretary of State, negotiated those. And that became the basis for what then ultimately post-war became the GATT system and the institutions that have served us well for

75 years, but now are in so much jeopardy. Exactly. And it's precisely because Congress thought we don't do this well. And the president is sort of a good actor that has national interests at stake and can take into account foreign policy interests that they delegated so many powers to the president, thinking the president would be a reasonable person on trade and think about what's in the national economic interest. And unfortunately, all that power has been delegated. The president has enormous powers now for ill as well as good. And it's hard for Congress to get that back.

And so we're in a really bad situation with respect to where we are with trade policy. There's one lawsuit against the president's reciprocal tariffs because they use emergency authority, which has never been used for tariffs before. We'll see how that goes in court. But again, the president does have other authorities to be able to impose tariffs.

tariffs, and he will no doubt use them if he has the opportunity. Well, we're going to leave it there today. I want to thank you, Professor Doug Irwin of Dartmouth College and trade historian. Thank you for your time. Thank you all for listening. We're here every day on Potomac Watch.