Summer School 5: 250 years of trade history in three chapters

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0:27Welcome back, everyone, to Planet Money Summer School, economic history of the world. Considered a master's degree, you can literally do with your eyes closed. In fact, it's better with your eyes closed. Because in your mind, you can meet the economic geniuses, the crafty idealists, and the greedy raconteurs that created the economy we have today. This is Lesson 5, The Rise and Fall of Free Trade. I'm Robert Smith. Trade between nations. Well, it started before there were nations. In prehistoric archaeological digs, we find evidence that early humans somehow obtained stones and shells from faraway places.

1:08Trade has come up in all of the episodes of summer school so far. One of the early uses of money was to make trade easier. Trade was responsible for the birth of companies in the stock market, and trade was the lifeblood of the early United States. But over the last few hundred years, governments have placed more and more regulations on trade. Nations had to figure out whether they should encourage buying from other nations, or should they try to protect their own industries? Those questions are playing out in politics even today. We'll have just one story today about the history of free trade, and helping us understand all the moving parts is our economics professor for this lesson, Gordon Hansen from the Harvard Kennedy School.

1:48Hey, Professor. Hey there, Robert. Trade is obviously everywhere around us. So how are we all part of the trading system? You, Robert, are an exporter of communication and radio services to the rest of the world. Yes, I love it. I'm an exporter of educational services to the rest of the world. Although sometimes that involves people coming from other countries in order to study with you. That's the fun thing about trade is sometimes it involves goods going to consumers, and sometimes it involves consumers going to the goods as it happens with education or tourism and the like. What is it inside of all of us that creates this economic push to always be trading?

2:30So think of my hometown where I grew up, Fresno, bills itself as the raisin capital of the world, where Fresno, not to export its raisins everywhere else, we'd have loads of really cheap raisins. We'd be knee-deep in raisins in Fresno. That then would spark the interest of raisin lovers everywhere to say, hey, Fresno's got a bunch of cheap raisins, let's import them. And that would help relieve us of that surfeit of raisins running around the streets of our town. So if we're looking at big picture, what happens to the poor raisin producer outside of Paris, France, who can't compete with these awesome Fresno raisins?

3:10They are likely going to have to find something new to do. As we think about globalization, we think about the benefits of free trade, we tend to like to focus on the positive stories. But because trade is disruptive, bringing in imports from somewhere else means you're not buying them from somebody who's local. There's a downside, too. Trade creates winners and losers. The winners are going to be the folks, the raisin producers in Fresno, who now get to sell their raisins to a bunch more places. the losers are going to be those who find themselves competing with much cheaper goods coming in from places you didn't anticipate having to compete with.

3:49As we listen to our history story today, what should our students keep in mind? I feel like we're at this real crossroads right now in the U.S. and in the world, too, about how we should manage trade. The big challenge that we face is figuring out how do we want to engage with the rest of the world. Since World War II, we were moving towards more openness, making our markets more accessible to other people so that we can import French wine in Italian fashions and semiconductors from Taiwan. And they would return the favor by allowing us to export pickup trucks and cell phones and digital services to their economies.

4:30We have now hit pause on all of that. And we don't have a new model for how we want to go about trading with the rest of the world, having recognized that trade to date has created a lot of losers from that process of globalization who we've taken pretty poor care of. And the big debates that we're having about trade policy right now really emanate from that challenge. What do we do about people whose lives are disrupted by international competition? Coming up, we begin with a famous economist. In fact, the most famous economist in the world being kidnapped as a child. And how that gets us to the dream of world peace after the break.

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6:38AI trusts come together, innovation moves safely and faster. Learn more about accelerating safe AI at scale at veem.com. All right. All right, everyone. Pencils ready. We're about to do 250 years of history in around 20 minutes. Before we start, I just wanted to get one definition from our professor, Gordon Hansen. We'll be hearing a lot about tariffs. So what is a tariff? A tariff is a tax, and it's a tax on goods that we buy from other countries. So when we have wine from France or we have automobiles from Japan that show up in a U.S. port, if you want to bring those goods actually into the country, U.S.

7:23Customs is going to say, oh, you got to pay a tax in order to do so. Now, which international goods should be taxed? Which countries should we target? How high should the tariff be? These are the questions we will explore in this classic episode from 2016, hosted by the great Jacob Goldstein and myself. We'll tell the history of free trade in three chapters. And we'll bring back our professor after chapter one about an economist you have probably heard of. Robert. Yes, Jacob. I'm starting the show with Adam Smith. That is bold. I don't care what anybody says. Adam Smith is super interesting. He's key on trade.

8:01And, you know, we're an economics show, have not talked about Adam Smith in years. And his big book, The Wealth of Nations, came out in 1776. It's perfect. This is a show about America and trade. In three acts. So chapter one, Madam, I'm Adam. That's like an anagram, a palindrome. Is it? I'm reading it backwards. It's true. So, OK, for Adam Smith, we talked to an economic historian named Doug Irwin. And we said, all right, let's start by telling the world how amazing Adam Smith is. Adam Smith lived with his mother. He was a bachelor. He didn't go out at night. Come on, you can do better than that.

8:39You of all people, Doug Irwin. He was captured by gypsies. He was kidnapped. Wait, what? For real? Adam Smith? The Adam Smith? He almost was lost to humanity. We should probably note here that so many false accusations were made against the Roma people back then that the story is likely apocryphal. But what is true is Adam Smith grew up and basically invented economics as we know it. And a key part of that was thinking about trade in this way that was really revolutionary and that, frankly, is still central to the way economists think. So at the time, people measured the wealth of a country, the wealth of a nation, if you will, by how much gold the country had.

9:23And a pile of gold is what makes you rich. It's gold. That's right. Who doesn't want gold? And everything a country did was to get more gold. They would explore. They would go to war. They would take over continents. And they would trade. International trade was a gold-making machine. You send cloth or grain to France, France sends you gold. But the key to the way people thought about trade at the time was you wanted to keep that gold in your country. And the way you do that is you do not buy stuff from other countries. Or at least you want to buy less from them than they buy from you. You want to run a trade surplus.

9:59That's how you get a big pile of gold in your country. So countries put up high tariffs, taxes on imports, and they put quotas to discourage people from buying stuff from other countries. They basically said, keep the gold here. Buy everything in this country. Now, Adam Smith looked at these policies and just said, that just doesn't make sense. And he said, it's not how much gold you have. It's how high your wages are and the standard of living of people. Not what's socked away in the government coffers. The standard of living of ordinary people. That's just how much stuff can ordinary people buy.

10:30And those high tariffs and quotas, they made it so people could not buy as much stuff in Great Britain at the time. They had a lot of restrictions on imported food. It's just harming working people by making them buy high-priced food. Adam Smith says this at the time revolutionary thing. He says, get rid of those tariffs and quotas. Food will get cheaper. Lots of things will get cheaper. People's standard of living will rise. They'll be able to buy more stuff. The nation will get wealthier. Now, there are farmers who are selling expensive food who might be temporarily hurt. But the idea, Adam Smith said, was that those farmers, they will change jobs.

11:05They can start, say, making cloth, which maybe they can make better and more cheaply than people in other countries. And then they can trade that cloth. Yeah, I mean, Smith steps back and says free trade can make everybody better off. And so he sort of writes the original get rich quick book. But for nations, right? The Wealth of Nations is the name of his book. And the book is a big hit in Britain, and it makes its way to America. The Wealth of Nations was brought over on ships to the United States. And Jefferson, Adams, Hamilton, they all read Adam Smith. We have the Constitution, 1787. First Congress meets, 1789.

11:41The second bill they pass is a tariff bill. What? It's one of the first things they do because the government needs revenue. They had the book, Jacob. They read the book. they ignored the book. Yeah, the tariff starts out as a way to get revenue. But as soon as the U.S. has any industry to speak of, factory owners start going to Congress and saying, hey, we need more tariffs to protect us from foreign competition. And Congress agreed. And from that point forward in American history, there are ups and there are downs, but pretty much we are a protectionist country. And this political outcome, it makes sense when you look at it.

12:16You know, it's really a classic thing. You have this relatively small number of people who benefit from a tariff, And they care a lot about it. You know, these are people with factories who would have to compete against imports. So, of course, they're going to push for a tariff. They're going to go to Congress and say, look, I'm going to go out of business. All my workers are going to lose their jobs. You have to protect me. But then you have basically everybody else in the country who are going to pay more for their stuff as a result. But it's not as big of a deal because it's not like their job or their company depends on it.

12:47They aren't going to get on a horse and ride to Washington, D.C. to yell at their senators and complain that their stockings, say, cost two cents more. How dare you, sir? Yeah, this is like a political truth. You know, when you have a concentrated benefit, in this case the factory owners, up against a diffuse cost, everybody else, the concentrated benefit usually wins, even if it's much smaller than the cost. And that's really the story of Chapter 1. Tariffs win. Adam Smith loses. And tariffs in the U.S. stayed really high for a really long time. Hey, this is Robert Smith in the year 2024, rudely interrupting my own story, interrupting my own self from 2016, because I just wanted to discuss a few things with our professor, Gordon Hansen, before we move on to chapter two.

13:33Hey there, Robert. This argument that the early United States makes, oh, we're just a small country. We can't possibly compete with France and England. So we need to have high tariffs. We hear this argument even today from a lot of developing nations. So this is known as the infant industry argument, and it was something the U.S. embraced pretty wholeheartedly even before we had a term for it, beginning with Alexander Hamilton. And there are many cases where protecting those nascent industries from import competition could make sense. For instance, I can imagine a country that is just starting to make cars, say, and they might want to put a temporary tariff on foreign cars so that their local car companies could, you know, get a little time to get better at manufacturing before they have to compete with a Ford or a Honda from overseas.

14:22The challenge in doing so is that everybody feels like they deserve that sort of protection. And so what might begin with an effort to strategically target some industry that could be really important for you in the future ends up covering everybody. So we talked about Adam Smith in the previous episode, but we left out another huge figure in the sort of economic theory of trade, and that's David Ricardo. He was born sort of a few years before Adam Smith published The Wealth of Nations. Who was David Ricardo, and why does he matter? David Ricardo was one of the great classical economists coming a generation after Adam Smith, and he elaborated the idea of comparative advantage, which is one of the most powerful concepts in economics.

15:12So explain this to us. Comparative advantage is about the idea that different places tend to be good at producing different things. So when Ricardo tried to explain comparative advantage to the world at the time, he used the example of Britain and Portugal. So Portugal at that moment in time was pretty good at producing wine. What Britain had was an abundance of good technical knowledge in making things that allowed Britain to become very good at making textiles. So in Ricardo's view of the world, he said, look, Britain shouldn't be making wine. We should let Portugal do that because we can import all of this great Portuguese wine much cheaper than we could ever imagine producing it for ourself.

16:00This was also a good thing for Portugal, in David Ricardo's view. Portugal can then turn around and buy that English cloth. So it's using wine to buy cloth. So under comparative advantage, a country should look toward the thing they are most efficient at. Well, here's the interesting thing about Ricardo's idea. Countries don't need to look for it. If you just engage in free trade, markets will guide you towards doing that thing. All the government needs to do is kind of stand back and let the trade happen, and markets will take care of the rest. Because the poor person who is trying to make cloth in Lisbon, Portugal, will find that their shirts are just way too expensive in the world market.

16:47Their shirts are way too expensive, and the wine producers are hiring all of their workers. Yes. And they have perks that you don't get in a factory. Exactly. Free samples. Let's take a quick break here. And then when we return, a hero of free trade emerges and shows the haters how trade can maybe even bring world peace.

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19:29When we last left our story, Chapter 1, the founding fathers of the United States studied Adam Smith carefully, and then they threw his book out the window. We decided to be a protectionist nation. High tariffs. And the U.S. stayed that way for a long time. But it finally changes. Largely because of one man. Chapter 2. A man, a plan, a free trade hero, Cordell Hull. Not a palindrome. True. But this was the man who unleashed free trade upon the entire world. He was a hillbilly from Tennessee. Doug Irwin told us Cordell Hull grew up in a log cabin. I read that when Hull was a kid, he would go on these trips where they would make a raft out of a bunch of logs, float on the logs down the river, and then sell the logs in Nashville.

20:16In the South where Hull was growing up, and this is around the turn of the 20th century, most of the politicians were anti-tariff. Not because they'd read their Adam Smith and thought everybody should get cheaper goods. But because the farmers in the South grew tobacco and cotton, which people all over the world wanted to buy. They were exporters. They loved free trade. But the U.S. factory owners, these are mostly northern Republicans at the time, they mostly wanted to sell stuff to customers in the U.S. So they wanted protection from foreign competition. They wanted tariffs. Cordell Hull becomes a lawyer, then a congressman from Tennessee.

20:50And during World War I, he has this revelation. He realizes tariffs aren't just about economics. There is something much bigger at stake. And as he looked at the war, he said there were economic causes to this war. Those causes are that there was protectionist policies, the lack of free international trade. And that led to political frictions, which led to war. And therefore, my mission, my life goal is to bring about freer trade because that will bring about world peace. Think of how amazing this argument was at the time. He was saying Germany and France would not have needed to fight in those trenches if they had traded more stuff with each other.

21:31If there were thousands of businessmen in Paris and Berlin saying, hey, don't shoot them. Those are my customers. But that argument didn't really didn't really convince the world. It wouldn't be the first thing you would say caused World War One. But Cordell Hull latched onto it and pushed it and pushed it and pushed it. In the 30s, Hull becomes FDR's secretary of state. And he does have some success. Congress passed this law that said the president could negotiate lower tariffs with other countries. Still, Erwin says that Hull's obsession, that the key to world peace was free trade, that all you need, man, is free trade.

22:05This just rang false in the 1930s. People thought he was nuts. It's the reason why there's Nazi Germany is because they didn't trade enough, because they didn't have free trade. And even Roosevelt, President Roosevelt thought, you know, he's a little bit misplaced here. He's, you know, the world's, you know, burning up around us. And he's talking about trade agreements. And people said, that's just not it. He's off base. And there was something else. There was another reason why people were not taking Cordell Hull seriously. He also spoke with a lisp. He spoke like Elmer Fudd. Dean Acheson in his memoirs.

22:39He was at the State Department at the time. He said, these off-enunciated words, due to a speech impediment, emerged as reciprocal tweed program to reduce tawhus. This is sort of mean. I think it's mean. This is sort of mean. People are making fun of him at the time. They are. They are behind his back. But we really haven't reached the Hull moment because he does win. Cordell Hull's moment came because of World War II. The State Department was not responsible for fighting the war. So they're spending the entire war thinking about what comes next. And there's this moment, there's this pause, nobody knows which direction to go in, and Cordell Hull steps forward and says, how about this direction?

23:19Absolutely. I'm going to play some music under you.

23:26Give me a Cordell Hull speech that is the most idealistic, the most visionary, the best possible pitch of his for free trade after the war. I'd say this is the pitch. By turning inward after World War I, the United States abandoned its international responsibility and we had World War II. That was a grievous mistake. We cannot repeat this mistake after World War II. We have to become an economic leader, a political leader in the world. And an essential component to ensuring peace in the post-war period is having a strong economic foundation. If people are fully employed and trading with one another and they're economically prosperous, they'll have a vested stake in preserving peace.

24:10If they're unemployed and there's economic rivalry and bitterness and resentment about other countries stealing our jobs or this or that, It's going to lead to a political breakdown and lead potentially to another war. That's a pretty good pitch. Yeah. And imagine hearing it as World War II was winding down. You know, the world was exhausted and devastated. And the president, President Roosevelt, strongly supported all this. And that was his moment. So Cordell Hull is standing there. He finishes his pitch and there was dead silence in the room. And then all of a sudden in the back, Dean Acheson, the man who had mocked him for a speech impediment, stands up and starts a slow clap.

24:54And locks eyes with Cordell Hall. And then everybody starts to stand up. Hull, hull, hull, hull. And the whole room is going crazy. Hull, hull, hull, hull, hull, hull, hull, hull, hull, hull, hull, hull, hull. In 1945, Cordell Hall wins the Nobel Peace Prize. That was amazing. You pictured it. Astonishingly, only the last sentence was true. The whole thing about Atchison in the room, that's from the movie you just made up in your head. It's a John Hughes movie. But he actually won the Nobel Peace Prize. In 1945, he won the Nobel Prize, partly for his work creating the United Nations, also for his idea that trade barriers are, and I'm quoting from the awards speech here, quote, barriers also to lasting peace.

25:37A couple of years after that, Hull's free trade dream comes true. Twenty three countries create, wait for it, the General Agreement on Tariffs and Trade. GATT. It is the GATT, the first really big mechanism for free trade between countries. And the amazing thing about this was that the usual people who would stand in the way of free trade, you know, U.S. manufacturers, all of a sudden they looked around in the world and said, you know what? We're the only factories left standing. This is a chance for us to sell to the world. Yeah. So the manufacturers and for that matter, the unions, too. Like they were like, yeah, this will be more jobs for us.