Scott Lincicome: Trump's Tariffs Are a Tax on American Families

Scott Lincecum, welcome to Dad Saves America. Thanks for having me. So you are the vice president for econ and trade at the Libertarian Cato Institute. I can think of no ideology more under assault than libertarianism as we sit here. Even our friends on the right don't like us. And... And I have you here today because we are in the midst of trade war craziness. And I had...

Oren Cass on the show yesterday, and we talked for a good long time about his perspective. And I'd say in a lot, in many respects, you are the... the counter perspective right so why don't we just start off you know with a little bit about your background i actually got my start

in uh at cato as an intern back in the late 1990s uh spent some time as a research assistant assistant in their trade in cato's trade center a million years ago, and then went off to law school and practiced international trade law for about 17 years, in which time I advised multinationals, sovereign governments, you name it, on all the nuts and bolts of international trade law and policy and supply chains.

A lot of what I did, particularly towards the end of my time as a lawyer, one of the reasons I got out actually, was advising clients on how to adjust their supply chains in response to all this tariff stuff, how to comply.

with global trade rules, whether it's on subsidies or whatever. And so it was during those years that I really got an affinity for for economics and for uh kind of manufacturing supply chain management all cool stuff um and then that brought me back to cato uh in 2020 um and i've been doing both uh economics, education and international trade policy since then. So we are in unprecedented. Yeah.

times right now right so last wednesday as of this recording president trump had his liberation day um announcing a range of things to summarize it as i understand it essentially a 10% across the board tariff rate for all imports into the United States. And then what he called reciprocal tariffs at different levels that seem to be based at least in part. or in total perhaps on the current trade imbalances or something. Yeah. And then even more punitive tariffs on China. Right.

What was your initial reaction to what was announced on Liberation Day? Let's just start there. Shock, depression. Pretty funny too, honestly. There were a lot of really great memes. Penguins getting tariffs and stuff. So a combination of all three of those things. Like you said, the announcement was quite the spectacle.

and when the original tariffs were rolled out there was a massive amount of confusion about what the heck we were seeing um you know all these different numbers how are these calculated and it was quickly you know the

beauties of the internet is you know it's the hive mind in action it only took about five minutes before we figured out how they calculated these tariff rates and like you said um there was uh they basically took a nation's uh trade surplus with the united states and divided it by their exports to the united states and boom they got a number and then they cut it in half for some arbitrary reason and that's that's what you got um then they applied 10 to everybody else um so this had a

A lot of flaws. The first is that there's nothing reciprocal about 10% tariffs. That's just a protectionism. You had, right, if your trade deficit, according to the Trump administration, is a sign of unfair trade practices, trade cheating, as one White House official put it. Well, then if we have a trade surplus with, say, Brazil, then.

Not only are we kind of cheating, right, but there should be no tariff, right? So the trade relationship is fair, as they put it. No, Brazil got 10%. Free trade agreement partners also got 10%. Israel, Singapore, you name it. Countries that are known to be very open, kind of free trade exemplars, like Singapore as well. So that's a problem. But second... You cannot find an international economist to save your life who would back the idea of using bilateral trade balance.

as a reasonable proxy for unfair trade. It's just not something they would do because bilateral trade balances reflect a time. ton of different factors, trade, non-trade, cultural, demographic, natural comparative advantages. I mean, we buy coffee from Colombia not because Colombia is...

cheating in trade, right? We buy it because they are good at making coffee. And so that's a horrible starting point. But beyond that, the... the additional calculations that they made uh b and beyond the arbitrary cutting the number in half um just simply have no basis in economics uh in fact um because i i should note

After we reversed, we, the internet, reverse engineered these numbers, the White House was very quick to say, no, we did this rigorous calculation and the United States Trade Representative issued this document. They cited some economists to justify what they did. And the economists cited, we're like, we would never sanction this calculation.

You misused our research. You didn't even use the right number. If you'd used the right number in this calculation, tariffs would be four times smaller than what you got. We would never use it trade balances as a proxy for unfair trade behavior. And oh, by the way, we would never apply a single number to every product or every country because every.

product and countries is different in how trade flows and consumption and the responses to those things work. So overall, this number that was produced is an absolute fiction. Now, I should note, though. In the broader sense, it was not surprising at all. As I wrote a couple of months ago, doing a true reciprocal system, what Trump originally proposed a couple of months ago, your tariffs on.

pickup trucks are gonna we're gonna match them with tariffs on on your pickup trucks right that kind of thing yeah um that would be herculean effort Because not only would you need to match tariffs, but you'd need to match non-tariff barriers, domestic policies. You would need to investigate. and their trade effects. You would need to convert that to some sort of tariff equivalent. You would need to do this for every product, for every country. You're talking about.

thousands of calculations uh and a herculean if not impossible effort and you know to the trade representatives credit buried in that little analysis is a part where they say it would be almost impossible for us to do this so we're just gonna going to do this shortcut right this very terrible shortcut so for them to wing it like this reflects the fact that there's an inherent tension in this reciprocal stuff between accuracy and speed

You could do it right or you could do it fast. They chose fast. They just even in choosing fast, they did a really bad job of it. So I think one of the things that. The general public. And all of us as individuals who aren't steeped in international trade economics struggles with are some of our most basic.

zero sum intuitions. You know, I'm from Allentown, Pennsylvania. You know, there's a famous Billy Joel song. We're living here in Allentown. They're closing all the factories down. We call that region. spanning into Appalachia. The Rust Belt. It's not a pleasant nickname for a reason. And I think there has been a sense, there's a whole set of things that I think are like truisms in our dialogue. We don't make anything anymore. Yeah. And also everything is made in China. Right.

And I think when you go to Walmart, it feels like that. Right. You know, you walk down the aisle, you pick up a thing, made in China, made in China. You go to the Apple store. Oh, made in China. Design in California, made in China. So can you just set the stage for... What are the most foundational facts that an American that wants to understand what's going on needs to know about what we do and don't make and how things work in 2025?

right uh where to begin i mean i think i think the place to begin is simply with the manufacturing Myth. The truth is that the United States is the world's second largest manufacturing nation in terms of output or value added. The only nation that's bigger is China and China. has four times as many people. So if you look on a output per worker basis, Americans are number one. We crush it. We beat not only China and Mexico, India, developing countries.

which are not very productive at all. But we, Germany, Japan, Korea as well, right? So the United States has a very large manufacturing sector and is highly productive. So we have very... a productive workforce um but uh we don't make low value consumables uh t-shirts footwear furniture a lot of the stuff electronics a lot of the stuff you're gonna you're gonna see at walmart so those we instead we make well we make a lot of cars but airplanes satellites

Industrial chemicals, a lot of stuff that is important for the global economy is actually high value added advanced manufacturing, but is just not something that. you and i are ever gonna go into a store or look at a label and you know we might ride on a boeing when we go to see mom and dad right but we're not really aware of any of that stuff so it gives the impression that

We don't make anything. And that's just simply false. The second really important point is that American manufacturing today is very much global manufacturing. So in other words, we depend on imports, on exports, on foreign investment, on kind of free-flowing, relatively free-flowing. capital, labor, ideas, all that kind of good stuff, right? So for example, about half of everything imported into the United States last year was stuff.

raw materials, capital goods, equipment used by American manufacturers to make other stuff. A concrete example of that is that your average American-made car contains about half of that content.

uh in that american-made car is is imported right so uh give me a sense of give me a sense of what um since cars are something we all have a lot of experience with physically uh give me a sense of kind of what kinds of things are there particular kinds of imports for cars that we rely on totally it totally depends on the manufacturer and that's another Good point. I'm about to get to, and I'll just get to it now. About a third of all global trade today is companies trading with themselves.

So when you go back and that's intra-company trade. So the example I always use is Airbus South Carolina, massive aircraft factory. Well, Airbus is a European company and Airbus makes a lot of stuff in France. not just planes, but other stuff. So Airbus imports naturally from Airbus in France. Now, if you were to ban imports from France,

Airbus would not all of a sudden just run down the street to the aircraft parts store and start buying American, right? No, they have to qualify those products. They have to fit in these Airbus planes. They have to get regulators to sign off on them. So going back to autos and other things, right? It really depends on the car. Kias in made in Georgia get, I believe they get their engines from Korea.

he is a korean company um but ford will get its engines from united states but then we'll get stuff from canada and mexico as well they can also get steel and other raw materials from abroad or at home it just really depends on on the suppliers i forget the number now now but somebody did the looked at gm's tiered suppliers and it's into the thousands of different suppliers in these supply chains because you know our cars today are not like the 1950s right i mean they are

um they're basically computers on wheels right yeah and so everything's computer right exactly and so um that is so once you understand that american manufacturing today relies a lot on imports and then you look at the data and you see back to autos it's a great example that in automotive manufacturing capacity in the united states our ability to make cars yeah has increased as imports have increased so it's not like imports and are

killing our capacity, they're actually supplementing, they're complementing that capacity. So that's a really important point when you start to think about tariffs, right? Put tariffs on imports and yeah, you can help some. american manufacturers are going to hurt other manufacturers another big point though is that we also export a lot the united states depending on what you use the second or third largest exporting nation in the world

And companies export – that supports their production here, jobs, all that kind of stuff. But that very much depends on open trade too because if you – raise the cost of production, you make their exports less competitive, right? So let's say we put a tariff again on all those auto parts. Well, okay, you might have some... auto parts jobs that you're supporting in the united states but you're making our cars less cost competitive abroad so overall the latest data show that about

80% of all manufacturing workers in the United States work at a company that is involved in trade, exports or imports or both. So that's a big 80%. right so uh that's i mean we're based and and so we have a lot of blue-collar jobs even in manufacturing that are very much linked into the global economy and that gets to I think the third point that's really critically important here. The flip side of all of the trade and goods and services we have.

uh the flip side of our trade deficit is a surplus in foreign capital the easiest way to think about this is that the dollars we send abroad to buy let's just again let's say a foreign car Well, they have to come back to the United States eventually, right? They really can't be spent anywhere else. And they are spent oftentimes. on investment in American manufacturing. So the largest automotive exporter in the United States is BMW in South Carolina.

right so a ton of suvs are made down there we export a ton of them bmw imports a ton too and of course german investment is what built that factory right so um Foreign investors invest a lot, billions in American manufacturing. And that's another part of kind of this open trade environment that we should be thinking about. And then I think the final point.

that it's really important in all of this, when you think of kind of this mythology, right, is there are a ton of blue collar jobs in services that depend on trade. you can start at the ports and and the truck drivers and the warehouse workers and all this i mean that's millions of jobs all of which are dependent on on imports and free-flowing trade right because let's face it a lot of these consumer products are made abroad

But you can go from there. We at Cato looked at the numbers and let's say you're really concerned about. young male employment, right? You know, we have kind of male labor force participation is a concern. Yeah. Well, there are four times as many blue collar male dominated jobs and services than there are in manufacturing. And a lot of them are things like construction or transportation or those things. So when you apply tariffs to, say, lumber or nails, which we have.

You're going to reduce employment in construction. And those are, again, blue collar services jobs. A lot of other services jobs are tied to manufacturing in ways we don't. think about, right? So Nike. apple amazon other companies they employ a lot of people well they are what we call factory less manufacturers they don't produce themselves they don't manufacture themselves they outsource their manufacturing and then import

products. Now, oh, that's terrible for workers. Well, not really. Studies show that that type of outsourcing actually supports hundreds of thousands of jobs here in the United States too. Not just the blue collar ones, but white collar ones in design and marketing. and R&D and all these kind of cool things as well. So this is all good stuff, right? And it's totally ignored when we talk about Allentown, right? Or something like that. Now, those stories are important. I shouldn't.

I shouldn't just blow that off. And that, I think, gets to our kind of bigger point about the trade discussion that's totally lost is that, yeah, trade competition can. pressure, clothes, whatever you want to call it, companies. can hurt jobs in certain places in certain companies. But beyond all the benefits that I mentioned, we totally ignore that the vast majority of manufacturing job loss in the Rust Belt.

uh comes from automation right we're just making more stuff with fewer people steel it's a great example since we're in pennsylvania let's talk steel back in the 1980s you could make A ton of steel took 10 man hours to produce. Now it takes about one and a half. So we've reduced the amount of people we need to make a ton of steel by seven fold, give or take, right? That's that.

I mean, you would have to make seven times as much steel to keep the same number of people employed. You're necessarily going to have a reduction in employment. Another big one though is interstate trade. So, you know, going back to autos, we still make a ton of cars in the United States. We still employ a lot of people in automotive manufacturing. But we don't employ as many people in Michigan. We employ them in South Carolina, Georgia, Alabama, Tennessee, elsewhere. States that have.

easier labor regulation, right to work states, lower taxes, a lower cost of living, all these types of things. have led to this kind of the center of gravity of American automotive manufacturing has just moved south. So interstate trade.

an interstate competition we never talk about any of that right it's always your jobs were lost to china not to south carolina which is quite frankly um yes there were some jobs lost to chinese china and the china shock and all that but the sunbelt shock was was pretty darn big too um in fact i'm actually working on a paper on this exact point right now um but because it is a huge one and one we we never talk about and then the last thing that we definitely nobody ever talks about

is some of the shift away from manufacturing in the United States is just a kind of natural consequence of us getting rich. So as countries get rich. We tend to consume, as a share of our incomes and our budgets, fewer manufactured goods and more services. An easy way to think about this is you only need one washing machine. one refrigerator okay maybe you have a garage fridge too but you know you're not just piling up appliances right but on the other hand you go get your hair cut once a month

Maybe you splurge and get a massage or a manicure. You spend on health care. You spend on housing, finance, all these types of things, right? Education, entertainment. Yes, leisure. all of this kind of stuff. Because by the way, trade gives us more leisure time too. That's another thing it does for us. But so we have, we spend more on services and that.

This necessarily means that manufacturing is a share of our economy, which protectionists love to pull. They show this chart. Oh, manufacturing is a share of the workforce or is a share of GDP keeps going down. That is happening everywhere in the world. There are amazing, beautiful charts out there showing dot plots of every country and every country follows about the same inverted U where they start as a share of their economy goes up.

And then it starts going down. And it's happening in China today, even. China is losing manufacturing jobs, millions of them because it's such a big place, and is moving itself along this pattern. So those are the types of things, along with... Little things like the fact that the iPhone has destroyed camera jobs, right? They're these kind of innovative. Yeah. Where we become.

dematerialized, right? We use less paper, less metal in our stuff, right? You put all this together and some of this manufacturing decline is simply...

the development. It is kind of these seismic forces and trying to reverse engineer that is crazy, especially with tariffs, right? Going back to my previous points, tariffs are going to actually do more harm than... good in a lot of cases by raising manufacturing costs reducing exports and not even to mention potential foreign retaliation and all that jazz too so it's um it's kind of as i always just try to strive it

Tariffs are a 19th century tool trying to be applied to a 21st century economy, and they tend not to work out very well. So that was. That was like an entire college course in international trade delivered in short order. That's my job, man. I have a comparative advantage in this. Okay. So. One of the things there's, okay, I'm going to play against my biases because my biases are in your direction and try to really disentangle some of the concerns that we have.

And I think one of them is whether or not the level of interdependency. we have with countries, especially China. And maybe it's important to even just raise the question of whether China... needs to be treated differently than everyone else so maybe let's just start there because we've because the trump administration has applied all this this like new high watermark of 10%. And I know as we sit here, as of 24 hours ago, the rest of the...

non-Chinese extra tariffs have been paused for 90 days, which is like hot off the presses as of, you know, every day things are changing. But... Do you think of it that way? Is there an important distinction because of the security and geopolitics in talking about China separately from everyone else? yeah yeah so yes and no uh sorry to hedge um any free trader worth his salt will make a

clear and open exception for national security. You know, whether that means tariffs or by American rules or whatever. Nobody that I know of is going to say we should be buying tanks and planes and laser guided missiles and everything else from from potential adversaries. So it's a country like China. And China right now is.

the clear exception that falls in, or the clear country that falls into that exception, right? So that's correct. But, and this is where you get to the no. First, we need to remember that this should be the exception. China, as of last year, represented about 9% of total US trade, imports, exports, goods, and services. I would be fine to have a policy for the 9% and then a free trade policy for the 91%, which a 10% global tariff sure as heck ain't, right? And by the way,

Steel and aluminum tariffs are in place. Potential automotive tariffs are in place. Those Canada, Mexico, fentanyl tariffs are hanging out there. Trump wants semiconductor tariffs. There's lumber tariffs. There's copper tariffs. I mean. this this is not the nine percent and the 91 there's a lot more overlap in policies that are just rote protectionism not china policy okay so that's the first thing

The second thing, though, is when it comes to China trade, we need to be smarter about what we mean by. Protectionism and China, right? So, for example. Even before Trump's blanket China tariffs, we had 25% tariffs on tiki torches from China. Now, where is the national security issue with tiki torches from China? There is none, right? And these were being made on these kind of ostensible national security claims, right? They could be bombs. Well, I mean, look, you know, tiki torches. Right.

uh baby blanket baby blankets baby that was another one okay uh breast pumps from china i mean you can go down the list we made a very funny list of a lot of the stuff vacuum cleaners this kind of stuff right so uh One of the problems with just a blanket tariff on everything from China is that you're hitting a lot of stuff that has absolutely no security nexus, is not boosting the Chinese military.

is just simply stuff that makes americans and particularly poor americans lives easier right cheap shoes uh baby blankets um Raising taxes, which is what they are, on this stuff does not hurt the Chinese, certainly doesn't hurt the CCP, but it doesn't hurt the Chinese economy. It hurts us.

and so we always have to remember that tariffs are a tax and they're primarily paid by americans so uh you shouldn't just be they should be applied judiciously and they're not being applied judiciously um and that i think gets to a broader point about

China policy and national security policy. National security policy has become this kind of get out of jail free card for any and all tariffs. And in fact, it really demands the opposite because national, you know, this is kind of the last refuge of the protectionist scoundrel.

is to claim national security so you see marco rubio for example famously saying sugar was a national security threat when he was a senator from florida which is a sugar producing state and you hear this all the time and then when trump started his steel aluminum tariffs on security grounds, which, by the way, applied to junky steel like rebar from Canada, one of our closest allies. This national security thing gets thrown around as an excuse to do all sorts of...

just protectionism. And so in general, China policy and national security trade policy should be fundamentally different from our kind of general.

trade policy, but should be very transparent and narrow and smart. And the smart is the last thing I would note. A smart China policy would not just be tariffs on national security related goods from china it would be freer trade with all of the other countries that we want to bring into our orbit right um one of the things we talk about in trade econ is gravity uh the gravity model of trade says that countries that are smaller almost

by like a gravitational force tend to trade with the bigger countries in their neighborhood, in their region. So the United States needs to, China has a massive center of gravity in the Asia Pacific region, which is a very important region for. policy reasons and the rest so smart China policy says we need to trade more with Japan Korea Malaysia Taiwan Singapore Vietnam you name it right and

We're not. In fact, before yesterday's pause, some of the highest tariffs, Trump in his reciprocal tariff regime, were going to be on these countries in China's orbit. or countries that could be manufacturing alternatives to China, like Vietnam. That's not smart at all. And so when you think about is this smart China security policy or is this dumb protectionism, those stuff like that gives you a big clue.

That this really isn't about China at all, that China is being used as excuse just to pursue the 91 percent protectionism. Right. Yeah. So. I think it's pretty clear from his history that President Trump, I mean, you just can go back to his interviews on Oprah in the 80s and 90s and all his rhetoric. You know, I think there's...

You know, I voted for President Trump. This is the area where I don't like his positions, but I like his positions on other things. And I think one of the things that was a tradeoff. as a voter was for me was i think he viscerally hates regulation which i understand which makes sense because he's in new york

builder. Right. Which is about as regulated an experience as you can have. Stupidly, stupidly regulated. So you're like, oh, I hate all that. Get out of the way. Red tape sucks. But he but then. on from my from my perspective and i think from yours the flip side has been he's been obsessed with trade deficits um forever

Yeah, he was talking about 200 billion being ripped off to the tune of 200 billion by it's always been 200 billion to 200 billion from Japan. Now it's 200 billion from Canada and Mexico. This is the trade, you know. the capital surplus trade deficit that he's focused on. And I think his notion of what trade... should look like is something like treating the country itself like it's a single company. Yeah. And that.

Because he's a business guy. And so he's thinking about companies and doing deals between one company and another. And I think that there's an intuition to that, that resonates with a lot of people. People understand, hey. Well, I can't do this personally. I can't just keep buying more stuff than income I earn. I would need to be borrowing to buy that stuff.

And if I just keep borrowing, like JD Vance said, we're borrowing from Chinese peasants to buy the stuff that Chinese peasants are making. And I know that's like. Not really true, really, at the numbers level. It's very wrong, but anyway. But the rhetoric of that, I think, resonates for a reason. I get it, yeah. So let's, like, so what is, from your perspective...

What is wrong about that narrowly, that understanding? Help me and help our viewers understand from your perspective how to think about a trade deficit. specifically like what is going on there and why might it not be what it seems like yeah it's really hard i'm gonna start with um you know i've been doing this a long time And, you know, in some sense, to be a policy person is to be a psychiatrist, right? Because you need to understand why people are innately protectionist.

And it does come from a lot of the things that you mentioned. Protectionism scratches a lot of our lizard brain itches. Who doesn't want to be protected. Right. Also, though, zero sum, people tend to think in zero sum. Trade is mostly a positive sum activity. And by the way, it occurs not between.

one company and another company germany and the united states or whatever but between people in these countries it's the Trade balances, trade deficits are the result of millions and millions of individual economic decisions that happen every day without any. puppeteer or planner and without with little regard for geopolitics or whatever. It's you and me clicking on Amazon or whatever it is. Right. And.

That is really important to think about when you think about trade balances, because trade balances distill those millions of transactions into a single figure. And they say, you know. negative 200 billion or whatever oh you know oh japan is is is screwing us right so that that's just wrong it all it ignores entirely that we are getting something For our money. We are not just simply is not a loss of wealth. We are we are getting stuff, stuff we value.

and stuff we believe as individuals benefit from. So that that's, I think a huge, and that's really hard. It's really hard to convey to just kind of the general public. The other thing that, so, so. The other thing that is ignored is the capital flows, right? So I mentioned before that as our dollars go out. they eventually make their way back to the united states as some form of investment in the united states

That can go into equity. So it can go into stock market. It can go into real estate. It can go into government debt. It can go as foreign direct investment. It can go as corporate debt, whatever. And so you can look at these. at these capital flows and they are the mirror image uh of our trade deficit so every trade deficit of uh 200

billion is matched by a capital surplus of 200 billion. We don't see any of that either, right? So that's it. When you say we don't see any of that, how do you mean at the individual level? Or when these numbers are reported. It's very, you know, when the trade deficit numbers come out, they come out every month and we all there is a trade deficit of 200 billion. They don't say it. Oh, there was a capital surplus of 200 billion. Right. Nor do they note that we got all these goods.

As part of that. And of course, the word deficit sounds bad too, right? That's another part of this, right? So the next thing that people don't get, and again, I totally get it. If you're not like... a dork like me why would you ever even spend five minutes thinking about this stuff. You wouldn't. We're all rational actors. We're rationally ignorant about all sorts of things. I don't know how to repair my lawnmower. It doesn't make me a bad person. I'm not going to spend time learning that.

There's a lot of these things, but I think another one that's very important is that the trade deficit doesn't necessarily mean... any sort of loss of industrial capacity or loss of wealth because the pie can always get bigger. So this goes back to this kind of zero sum. Right. So if you think of the pie, the economic pie as fixed, if you lose 200 billion, go abroad of our dollars. Oh, that's it. We're 200 billion.

poorer right but if you don't think about that the stuff we're getting can actually lead to more capacity so if we import more auto parts we get more automotive production right uh we import more lumber we get more houses whatever right so in reality the the pie is not fixed and trade can help grow the pie it can boost economic growth

it can boost industrial capacity all these other things right so when you look at the numbers um you actually see that far from having a loss of wealth over the last several decades that we've had trade deficits the u.s capital stock so kind of size the stuff we have has expanded substantially

American household wealth has gone up substantially, adjusted for inflation. Non-financial assets have grown substantially. And I looked at all this in a recent piece, if you want, I mean, several data points. It's not just theory. It's practice that the pie is getting bigger as we have these trade deficits. And then finally, on jobs. Look, we've had decades of trade deficits and we've had unemployment until very recently, you know, around 4%. It was low before.

labor force participation employment to population ratio so looking beyond just the unemployment rate because that can mask and things i don't near near an all-time high uh native born employment very high This is we are it is there's end trade deficits are there. Even manufacturing jobs. have increased over the last decade plus so they plummeted in the great recession there was just massive sell-off but ever since then they've been on this kind of slow and steady

creep upward, even as the trade deficit has persisted. So this idea that this zero-sum calculation, trade deficit bad means we're losing wealth. production, jobs. None of it is in the data. And again, you would be hard pressed to find an international economist that says that the trade deficit is a cause.

these things you might find some economists that say it's a symptom of some underlying problems with how we save or spend or invest how our government spends beyond its means that i totally agree with uh but Is it a cause of problems, a thing to be solved? Very few folks in the profession would say that, people who study this stuff for a living. So one thing in my conversation with Oren, and this is maybe the area that I personally have feel weakest in, in thinking about is, is, is.

It's pleasant to call the cap the money that comes back investment. A different way to look at it is buying us up. Buying our assets. So if the Chinese Central Bank, let's say, is buying U.S. Treasury bonds, that means the Chinese government... has like owns our kids future future tax revenue yeah plus interest accruing over time yeah that's uncomfortable it's not clear that it's making us more productive it is probably making us less yeah

And even if, let's say, the Japanese central bank or pick or Japanese individuals are buying our stock market. Yeah. Well, a lot of that is not. necessarily at least again this gets very complicated very quickly but i'll just i'll play oren for a minute because this is how he talked about it uh okay so japan japanese people have all these U.S. dollars from selling us all these awesome Toyotas. And now they turn around and start buying stocks on the U.S. Stock Exchange. Yeah.

They're not IPOs there. So they're basically just buying Apple stock from my grandmother. Right. Is that making us more productive? I mean, indirectly, perhaps, because then my grandmother turns around and maybe her index fund buys an IPO. That gets into financial intermediation complexity.

They are owning more of Apple and more of all the stocks they buy. They're literally, so they're investing, but they're also buying us. And to continue that, it's not just Oren who's talked about this. Warren Buffett. Yeah. Did a story, a kind of parable. He called a, you know, what was it? Like Thriftsville and Swindleton. And then he basically said, look, if you run persistent trade surpluses, this is about, this is around the 2008 time he told. Yeah. Yeah.

If you're running persistent trade deficits, you are ultimately selling off more and more of your country. country yeah your country's assets your people's assets to foreigners and at some point they own the place right and so he did he sort of pointed to that and i'd say he's by and large a free marketeer um Like, that's not a long term strategy. That seems like in the long run, if you just keep doing that and it doesn't reverse it, you end up being owned by.

other countries out right so what's wrong with that story from your perspective where to begin uh well it's okay so it's wrong in the theory uh that's the best place to start The reality is that there is absolutely no reason why increased foreign investment in whatever, Apple, a factory in Ohio. Our government debt means that they actually are going to own a greater share. The key is the share of the country because the U.S. capital stock can always grow.

It is not. There's no constrained cap on the size of the U.S. economy, on the size of our stock market, on Apple's market capitalization, on any of these things. They can. They can go. And there's no cap on American wealth. So once you understand that, then the next step is to look at the actual data. And here's where this stuff falls apart.

So let's just start with the basic fact that foreign government holdings of debt, government debt, have actually been going down in recent years. Really? Yeah. So instead, foreigners... Foreign governments have been more, and it's mainly foreigners, private individuals, I should note, are buying equities and other, they're basically investing in our stock market. Now, oh, this is a problem, right? No, actually it's not. Because here's the thing as the nominal value of their whole on up.

So has ours in the United States. And ours has actually gone up as fast or faster. So the Treasury Department does these. fantastic dives into all of these data i just wrote a piece on this for the dispatch for those of you who really want to get in the weeds but i'll give you the very short version the share of foreign holdings so the share of foreign ownership of our stuff has been flat for decades totally flat why because our denominator are our total

pie keeps getting bigger. So this is, again, the lizard brain take. No offense to Warren Buffett. but it just is the reality is that they are thinking of the u.s economy as this lump as this fixed lump when in reality the u.s economy can grow um and Thus, the actual holdings of these foreigners can remain steady, right? Because even as it goes up, we're growing too. The second point that's just as important as that just math point.

and the empirical stuff that I just mentioned, is that it ignores that the foreign investment can actually help us grow. Right. So foreign holdings of government debt will tend to keep interest rates a little lower. That's good for businesses that want to expand. It's good for you and me. We can have a house and a lower mortgage and it allows us to then go spend elsewhere. So that's one way. When a foreigner buys your grandmother's Apple stock, she doesn't.

jam that money in her backyard in a tin can. She either spends it, she invests it, she gives it away to you and you do something productive with it. So again, there's no reason why Those foreign, that foreign capital can't actually be very productive and actually grow the pot, help grow the pot. It's not the only thing going on, but help grow the pot. how and yeah okay keep going no and i would say and then of course foreigners do

build or buy factories here. And when they do that, BMW, South Carolina, Kia in Georgia, you name it, Nippon steel wants to buy us steel, right? They don't just sit on their holdings. they invest in those too foreign owned companies in the united states including in manufacturing spend

Billions of dollars every year on capital expenditures and research and development and all of these great things. Even when they don't spend money, they transfer knowledge and know-how to our workforce. They help. communities around these investments improve, compete, supply. So there is absolutely no theoretical reason why this capital has to actually be a drain on our wealth.

And there's no reason why it actually can't help us grow. And again, the empirics just simply don't support this kind of zero sum notion. I know it sounds very scary. right but the reality is that it's just it isn't um and it's hard you know it's so easy to prey on these misconceptions and it's so easy to throw around numbers that sound very very scary when you don't include the denominator along with them right when you only include the numerator oh this is very scary and

The realities are different. And I get back, I think, this fundamental notion that trade, economic openness, all these types of things are positive some. interactions um that yes you can slice off some national security related stuff that really does raise very real concerns but the vast majority of this stuff is is good and

natural Americans, not Americans, individuals, human beings have been doing this stuff, trading long distances, engaging in long distance commerce and all this stuff since the dawn of recorded history. I mean, you can go back and find evidence of this. This is not like. some nefarious scheme that Milton Friedman and Larry Summers cooked up in Davos 30 years ago, right? It is something that's very innate and human in us that we want to do this. And it is overall a net benefit.

I think at the most... practical level this this notion of trucking and bartering as adam smith talked about and even just the way you know as as a dad you have kids you watch your kids uh play with toys and they invent this very very quickly. They invent like, oh, I'll give you this in exchange for that. And then we both feel happy because now we have the thing. I know Vernon Smith has done trade experiments in sort of.

constrained environments and like a classroom where you basically hand out candy bars and you end up with basically without much really doing anything. Everybody in the class ends up with the candy bar they want. They find a way. It's like so much of this, and I raised this with Oren, and I think this is true of a lot of this debate. It is adjacent to this question of... bottom up organization of society through the actions of individuals versus top down, essentially like.

Creationism, economic creationism. And I say this as a Catholic that's very much a believer that, you know, there's a kind of like, oh, no, no, we need the president. or the Congress to decide what's important for we the people because we elected them and that's their job is to do that. i mean how do you how do you think of the the broader politics and rhetoric that that comes around with this well i think it's very one-sided because look markets are imperfect uh whether it is

internal domestic trade or global trade or any other situation. People are not going to make the right choice every single time. There will be deals gone bad. There will be disruption and problems, and it will be hard to adjust at times. There is no... sincere free marketer, no matter how dyed in the wool he or she is, that would say that free markets are utopian, right? The point is they're just better than the alternative.

Because the alternative is just some dudes in Washington or wherever picking and choosing and putting their thumbs on the scale and changing the rules of the game on a. Wednesday afternoon by Truth Social Post. This is, so it is the alternative. And this is, I think, is really important when you talk to protectionists these days, because they say, oh, the China shock was tough, and oh, the foreigners did this, and oh, you know, we have...

man out of the workforce and whatever. And, but they don't say, and oh, by the way, my alternative is X, Y, and Z, and it's going to achieve this. It's really just this kind of unstated. what we have is bad ergo protectionism will be better or whatever and look we know that we know that not only are the economics not there but the political economy of this stuff is absolutely terrible

Right. That when you have government picking winners and losers, when you have it setting tariffs and then inevitably giving exceptions to those tariffs, it. politics, economics, the economy becomes politicized. And when the economy becomes politicized, two big things happen. One is you just end up with a less efficient allocation of resources, right? Because markets do work.

pretty darn well at getting things where they need to be eventually. Prices are pretty awesome in that regard too. And I would just add to that, that when we say markets, we're not talking about... Wall Street traders. We're talking about individual people out there in the world. You and me looking at, hey, the cost for X went up. Hmm.

Let me find an alternative. Right. Yeah. Or let me invent one. Yeah. Let me invent an alternative. How can I make that cheaper? Let me invent a new tool. That's what we mean when we say markets. I think the use of in free market language of markets. Yeah. starts us off in a place where it's not people. Correct. It's this other thing. It's the stock market. It's graphs. No, we're talking about people.

Exactly. And this is a really great point because you'll hear markets are just a tool to be used. And I'm like, no, markets are millions of people making dozens of decisions. every day about all of these different things the information generated and consumed is impossible for even our AI masters today to figure out. And that's what I mean by when I, yes, when I talk markets and that market, that process. is very good at eventually getting things in into a better place right well um

this kind of top-down planning, whether it is via protectionism or industrial policy or aggressive antitrust or whatever, right? These things... tend to be not very good at allocating resources well. You might think, oh, the market didn't give me enough widget production. I'm going to do even better in widget production. And at the end of the day, they... They tend not to do that great. But the other big point is the politicization.

And the inevitable government involvement in this stuff, because government actors have to set your industrial policy and your tariffs or whatever, injects a huge amount of uncertainty into the market. uh into the economy such that it makes decisions harder for private actors and you're seeing this over and over right now with the trump tariffs If you talk to manufacturers, small companies especially.

They're like, I can't plan tomorrow, no less six months from now. How on earth am I going to invest or hire or buy or sell? Walmart pulled its guidance. to pull its guidance for their shareholders. Cause they're like, I got, I got nothing. Right. So this, and this is inevitable. This is not, you know. planners out there like to pretend that they can plan this stuff away. But the reality is, even if you legislate it, it's not permanent. It's better, but it's not permanent. And the...

Problems arise with this process. A president is elected every four years, a new Congress every two years. This inevitably weighs on an economy. And we can deal with a little of it. We've had a little bit for a while. But when you start.

increasing it more and more and more when you start setting individual tariff rates by product or country when you change them once a week it's all very very bad for a a functioning economy you know one of the one of the things and a broader point that i like to the way i like to talk about trade stuff is that you know economic openness is scary and disruptive but it's Just so important for the proper functioning of a prosperous society, right? Letting people trade and innovate and...

Win and lose is just this, it's kind of the price of admission to a prosperous place. And free trade is just one part of that openness. But when you start closing down these channels, you inevitably... slow things down and you make it make it harder for for us to uh live better lives i think um One of the things, gosh, the thing that's so hard about having a trade conversation is in part keeping it linear because it's not linear. No. It's like five different branches.

Come to mind. One is. So. At the most basic level. The way I understand the benefit. most simply from trade, going back to Adam Smith and David Ricardo, goes something like this. And this is at the most theoretical level, the most simple logic. Well, if... If I am just one person and I have to make everything I need, I only have 24 hours in a day. I only know what I know how to do. And so that's called poverty. That's how we are born into this world. We are born into this world.

naked, and impoverished. That is the state of nature, poverty. Okay. So even if I'm really great, I can't be great at everything I need. And so the more people I have, the more we can start to specialize. Okay, I'm going to be a doctor. You're going to be a mechanic. You're going to be a farmer. And now it's like one plus two equals five because it's not simply there's more people.

doing stuff it's more people specializing, focusing their time, putting in their 10,000 hours to master the skill, like getting in a flow state, working on this thing, figuring it out, getting better at it, coming up with ideas to invent new ways to get even better at it. And that's division of labor and specialization. Right. And we all experience that. You experience it inside a company. And then you have this second insight that is from Ricardo, the comparative advantage.

which which is not merely i'm better than you because i've specialized it's um as i understand it i might be better than you at everything Yeah. But this is where it gets really hard. But I'm better than you at literally everything. However... If I focus on the things that I'm not only best at, but that are the highest value thing I can do, highest value to other people and give you.

something the things that are lower on the rank for me even though you're going to do them worse the total ends up being higher correct than if I don't give you anything because, and we can experience it. I think one, yes, in my conversation with Oren yesterday, this occurred.

I'm sure others have written about this and I'm sure this is just me being stupid. But it was like, oh, wait a second. Comparative advantage is really about opportunity cost. Yes. 100%. That's what it is. It's I. Yes. It's like if you're. if you're tim cook You can probably run your own schedule because it's you better, but you have an assistant because you need to be spending your time thinking about the future of Apple, not dealing with scheduling your calls. Exactly.

Exactly. And the way you hit the nail on the head, the easy part of comparative advantage is Columbia grows coffee better. than the United States or somebody in Columbia does that, right? Better than somebody in the United States. That's the easy part of comparative damage. The hard part of comparative damage is what you just said, that it is really not about.

You versus somebody in Columbia. It is actually you versus you. What how is your time best spent? And I should note, by the way, it is not just about. running a company. It is about how you value that time too, right? Because, you know, I think your assistant example is perfect because Yeah, you know, you could do all of this stuff and it might actually be better in your entire day. You could probably, you know, you could work 18 hours and do the scheduling too and do what you do, but you don't.

For you, you value having some leisure time. You value your family time. So the beauty of trade is it allows you to spend as little time as possible on work. You can just focus on the stuff you're really good at. You can make money doing that. And then you can go do the stuff you want to do the rest of the time. And that's this really beauty.

And by the way, what allows you to do that is by trading with someone who isn't as good at your scheduling, but wants to do it and can. And so you both are better off from that relationship. And that's just hugely important. And it's hugely important because it gets, I think. Really down to how so much of trade isn't actually about being a producer. It's about having a good life.

It is about being able to do what you got to do and then do what you want to do. There was a great new study that came out just a couple of weeks ago that said that open trade has given us. several extra days a year of free time, of leisure time, because we can, compared to an autarky, right? If we were in autarky, we would all be having to work more to achieve the same standard of living.

right because another insight not of comparative advantages but just of life is that we don't all just work to work to work to work we work to consume stuff and once we hit a certain level of consumption we're comfortable with generally we We stop, right? So trade allows us to have free time and leisure and we can spend that.

training for a new job or hanging out with our family or playing video games, who cares, right? It is doing what we want. But at its root, it does get back to those comparative advantage concepts. I think that one of the things that is hard right now, there's multiple things going on, and they're being conflated for a lot of people, and I think understandably so, and for me.

And that is first, let's say you look so you hear we've spent this past hour talking about how complex it all is, how interconnected everything is, how all the simple stories about where the costs and benefits are. end up being basically kind of lies when you just look at the facts. This notion of America being deindustrialized. Well, you've touched on that, but I want to make sure we hit this with clarity because, yes, we're manufacturing more. We're exporting.

$3 trillion roughly a year, but then we're also producing massive amounts of stuff in our $30 trillion economy for each other that isn't captured in our exports. As you said, we think everything's made in China, but you said- 9% of our trade is with China on. Yeah. So that's crazy. No one thinks that. No one on the street would say, if you ask the person on the street, what percentage of US trade is with China? They would probably say 80%.

yeah we did a poll and it's it's the range is 25 to 50 60 so they're they're lower than that but a lot and but here's the other kicker For the latest data, and this is again pre the latest trade war stuff, about 5% or less of our total consumption is China. Because that's the other thing people don't get.

Cons of our consumption are services. Yes. Domestic services that don't get captured in any of these stats. And I talked about this in a video last Friday, that if you just think about your individual life. what you buy, where you spend your time. Your single biggest expense is your housing. Food, depending on your income, is not a huge percentage.

But it's non-trivial and it's super important, especially as an Italian. It's like the most important thing. Italian-American. And then you quickly get into stuff that's health care. it's 18 of the economy depending on whether you're healthy or not big could be a big percentage of your your expenditures as an individual So very quickly at the individual level, the notion that the stuff, the consumer goods I buy on Amazon.

isn't as big of a share of my life as I think. But it doesn't feel that way because every day a box appears on my front step with some trinket in it that's a tiny percentage of the total size of the box. And it's like... Everything's getting made in time. Right. And I understand that it's an inescapable feeling. So to come back to something that Oren and others.

and Trump and Vance and this more protectionist strain, and Bernie Sanders for that matter. They say we have been de-industrialized. Now you've already basically addressed this, but I want to attack it. through at this term what is wrong from your perspective specifically with the idea that we have been de-industrialized Yeah. So beyond the capacity and production numbers, we already said, I think the other missed point is that, you know, nobody.

that i know of on the kind of free market side of things says there's nothing we can do for manufacturing in the united states to improve manufacturing nobody is anti manufacturing right uh it's instead the idea that that trade caused all the problems and we'll solve them it's you know it's the old homer simpson quote right the the cause of and solution to all of life's problems is trade now the reality is that trade plays a role in this um some bad a lot good but there are

massive number of domestic policies, non-trade policies that both have harmed manufacturing over the years and that could help. tax policy, regulatory policy, immigration policy, some trade policy, but there's a lot of other things going on. And one of the. Real frustrations for working in this biz, and particularly when we talk about de-industrialization, is this myopic focus on China and on trade.

Studies show that modest changes... ...tax policy, you know, allowing for the full expensing, full immediate deduction, immediate write-off of construction, investment expenses, R&D expenses could help a lot of... manufacturing, right? Instead of giving them subsidies, you just let them write off whatever they want to invest in already. That could help.

ridiculous barriers on high-skill immigration in particular, which advanced manufacturing depends on, particularly things like semiconductors, regulatory and permitting reform. You know, it takes years to get the permits you need. You could go on and on down the list of these things. And we never talk about any of those in this discussion. Instead, it's just, ah, China did this and tariffs are through that. And not only is it wrong, I mean, just straight wrong, but.

There's an opportunity cost in politics, too. And I don't think people talk about this enough. There are only so many hours in the legislative calendar. There are only so many minutes you have on it. tv or in a town hall and every minute Every hour our politicians and policymakers spend blaming trade for everything is a minute they can't spend on enacting good policy to actually improve the defense industrial base.

And it also gives voters a real misconception about where the problems lie. I mean, my view of trade politics is tons of our trade politics are... top down not bottom up you know contrary to what you might hear there is not this massive popul populist uprising against trade and imports and all of this stuff i mean beyond the fact that inflation adjusted imports into the united states last year hit an all-time high and beyond the fact that when you ask people when's the last time you

actively sought out to buy American and were willing to spend more than an extra dollar or two on something American made instead of made in Japan, China, wherever. And it's like 20% of the people are like saying they do this stuff beyond those revealed preferences. The fact is that when you ask people about their views on trade, they don't think about them at all. When you ask them about free trade, even using that coded term free trade, majority still support them.

They're just this idea that this is, you know, torches and pitchforks out there depending, demanding that we wall off the country is far more of a top down. coming from political elites, coming from Donald Trump, and then people pick up these cues. They also see it as part of the partisan identity, cultural identity, all that kind of stuff. Again, you got to be a psychiatrist in this biz.

That is a going back to this kind of opportunity cost point. So you spent 30 plus years telling a bunch of people in Allentown that their jobs were killed by Japan or Mexico or China. after a while they're going to believe it and you spend years promising them you're going to bring back those jobs even though again most of them were killed by robots and consumer tastes and the rest right

And then when the reinvigoration doesn't happen, what happens? People get ticked off. Right. And so all of that feeds into this deindustrialization soup. And it's very frustrating because. At the end of the day, trade's a bit player in a much bigger movie, and we're ignoring the entire rest of the movie. So you talked about robots. um and one of the other things that's like happening

With as much frequency as crazy policy change is new AI announcements. This week, Google announced all kinds of crazy stuff at their conference. Agent. platforms where you can just talk to it and be like, build me a robot that will analyze all of my stuff and pull my emails and tell me who needs my attention the most on a weekly basis. That's my dream there. So. And that technology is running on high-performance silicon that is overwhelmingly manufactured by Taiwan Semiconductor, by TSMC.

It used to be the case that Intel was the most powerful chip foundry in the world. Yeah. All of this tech originated in the U.S. by and large in places like Silicon Valley and Texas and Texas Instruments and with help from the U.S. military to some extent.

I'm telling this story for a reason, and that is that it does seem to be the case that China, and obviously Taiwan is separate but connected, but that the Chinese... have spent decades developing and subsidizing a comparative advantage in high performance. electronics manufacturing that is turning out to be a pretty big effing deal for all the stuff we rely on. When COVID happened and supply chains broke down, like...

Automakers were shipping cars with non-functional dashboards and no USB ports because that stuff was built there. So that interconnectivity really exposed itself to us all. But one of the outcomes... is that that sort of simple comparative advantage and specialization story we were talking about earlier has spent decades developing with the benefit, it seems like, of Chinese industrial policy.

So I think the question that I think most people have and would want to ask you, hearing all this pro-free trade stuff and all these benefits is, yeah, yeah, yeah, Scott, that's all great, except... China's not playing by those rules and other countries aren't in various areas. But in some areas, it really matters. And whether it's military or not, the fact of the matter is, it doesn't seem good that we've been...

laissez-faire. I know that's not exactly true, but like we've been relatively laissez-faire. Maybe, maybe not, but sort of, kind of. You want that. You want that. You don't want to, you want us to like, you know. Don't do anything. Let the free market people decide. But China's like, we're going to own this sector. Yeah. And they seem to have succeeded. And maybe that's-

And isn't that bad? And when that's happening, even if it's clunky and imperfect, imperfectable, don't we need to counter that? Yeah. Doesn't isn't it like. We're getting isn't that where maybe Trump's right. We are kind of getting screwed because it's you know, it's like, well, you said it yourself. Oh, do we want we need we need to import the labor because we don't even have anybody that knows how to make this stuff anymore.

Yeah. So we need, oh yeah, we can have chips as long as we have H1B visas. So the only people that know how to do this stuff that everything relies on, including like this thing, aren't here.

i'm trying to i'm i'm steel manning this because i understand yeah but i mean it's not i'm not doing it flippantly there that's all real yeah uh what's your answer to that to that like yeah well there's a lot a lot to unpack uh first um look china has spent the chinese government has spent a fortune trying to build a semiconductor industry

and is still several generations behind Taiwan. So they are not at the bleeding edge. They have had some advances the last couple of years, in part motivated because the United States decided to cut. China off from US exports of semiconductor technologies and stuff. So in a way, US protectionism and security policy kind of motivated the Chinese government to dump even more into...

semiconductor sector. So a bit of a perverse outcome there. Reality, though, in terms of the bleeding edge stuff, Taiwan is king. Now, why is Taiwan king? That's what we need to ask. Yes. First, Intel. Intel, up until about a decade ago, Intel was at parity on compute with Taiwan. And then Intel just fell apart. That was not industrial policy. That was not tariffs. That was not China. It wasn't Taiwan. It was an Intel problem. It was a corporate governance problem.

amount of laissez-faire or industrial policy or protectionism that's going to fix that. So we need to understand that issue. Second is... Taiwan became so dominant in there were some subsidies, no doubt about that. But even the. The industrial policy folks in the United States admit that one of the big reasons why Taiwan is dominant is because it is so expensive to build fabs, manufacturing facilities, in the United States. Now, why?

Is it so expensive? Construction materials, labor costs, regulation, taxes, all of the things I mentioned when I said, you know, this deindustrialization narrative avoids. all of these policies that I said we should be focusing on to boost manufacturing. So look, if we want to make it easier and better to build fabs in the United States, we should...

Do that. We have policy levers to pull. None of them involve tariffs. Tariffs, in fact, can make this worse. They will raise the cost of your construction materials. I mean, everything you need.

to build a fab is now subject to some tariff of some sort that's bad right uh immigration restrictions and the rest make it again harder to build harder to staff these places so we did all of this and then we throw our hands up and go oh laissez-faire got us right this is the it's the joe stiglitz of it all it's the right

Since 1980, we've had total deregulation. It's like, well, last time I checked, that's just a lie. Yeah. In 1950, something like 5% of jobs were subject to- government licensure and now it's something like over 50 percent yeah which actually matters like a lot because that's where that's like whether or not you can get into a job and a trade and start and the government is has made it

10 times harder since 1950. That's not laissez-faire. That's not deregulation. That's massive regulation. And so once we've identified, okay, these are problems and they're things we should fix. We can't fix Intel. no matter how many subsidies we give them. But we can make it easier to build here. And we should make it easier to build here. But then you have to ask, well, what is the industrial policy or the protectionist solution to all of this, right?

I could give you I could write or think of a actually government subsidy program that for for bleeding edge two nanometer or below. semiconductor production in the United States that would run the United States government five or $10 billion in taxpayer dollars. And honestly, I'd be like, okay, that's fine. It's connected to the defense department. That's fine.

But we didn't get that, right? We got this massive slush fund, 50 plus billion in direct grants to anybody who has his hat out, right? Bleeding edge, not bleeding edge. Memory chips or logic chips doesn't matter. Intel, this failing company, was the biggest.

Grant awardee. Why? Well, Intel built in Ohio, a politically important place, not a semiconductor area. And of course, is the American national champion, right? So now Intel might need to get bailed out by whom? TSMC, which is... crazy right so and hundreds of billions potentially of tax credits that we're not even documenting that we're also giving out to again anybody with with with semiconductor in his name so this is

Just a huge waste. And what is it going to get us? That's the next question. So TSMC is building some fabs in Arizona now. As of today, the one that's... finally now coming online is one or two generations behind depending on the exact start of the bleeding edge so it's at four nanometers when the bleeding edge is now at two or

tsmc in taiwan says it's going to be below that even soon so um so that's two generations behind because you have three and then two yeah uh the actual production is relatively low volume It is supposedly pretty high cost. Is that a win? The stuff that TSMC promises to build in the future. Well, maybe they do that stuff, but it still will. very likely be generations behind the bleeding edge. And oh, by the way, even if we built everything that our.

billions of taxpayer dollars have been forced to purchase. Taiwan would still be home to a huge chunk of advanced. semiconductors, meaning that a Chinese invasion of Taiwan would have almost the exact same repercussions as it had before we had all these subsidies. And then finally, tariffs have no... logical role in this stuff, because what's going to happen if you slap a tariff on semiconductors? Well, OK, you might encourage.

some more semiconductor production in the United States. But what else are you going to do? You're going to raise the price of semiconductors. Who needs semiconductors? Everyone else. Exactly. So we did exactly this in the 1980s. We negotiated a semiconductor trade agreement with the Japanese, which, by the way, we should at least acknowledge. That boogeyman Japan. Remember, you know, in the 80s and 90s, we were all going to be speaking Japanese. And to President Trump's record, he was...

a leading voice and being like, we're getting screwed by Japan. You know, they're cheating on trade. They're ripping us off. He was there. We have the video. yeah and and it didn't of course it never happened we you know all the china hawks today if they're old enough were japan hawks back then they all have you know, quietly erase that from the resumes. But so we did this in the 1980s. And what happened? Well, we picked the wrong type of semiconductor.

We went hard into memory chips when the entire industry was moving to logic chips. So good old Hayek wins again. Knowledge problem. We raised the price of memory chips in the United States, and that ended up pushing computer companies offshore because the costs were so high. Mostly the Korea, I would think, Samsung and LG. That's the next thing. We encouraged the growth of the Korean semiconductor industry. And now Koreans are Samsung, Hynix, huge memory chip guys.

A lot of unintended consequences. There's even hilarious stories because this was a managed trade deal that required guaranteed Japanese purchases of American chips, of just dumping those chips in the Tokyo Bay because they were worthless. basically you had to buy them in just total i mean you can't have wealth destruction any worse than that right you know bastiat's rolling over in his grave at this type of trade balance nonsense and so so we have to ask

What is the smart way? I agree. I think having semiconductor production is important. What's the smart way to do it? What's the dumb way to do it? Tariffs are just very dumb way to do it. And again, tariffs on China, maybe. Tariffs on everybody else? No sense at all. There is a case study that in protectionism at the intersection of both global trade and the military, and that is... the shipbuilding industry. I understand that you know something about this history. So to set the table.

When you go to a port, what you see are massive ships filled with cargo. We make almost none of those ships. Almost none, as I understand it. I think the U.S. used to be able to make ships. What happened? Because ships, you know, it used to be a thing like, oh, you know what means, you know how, you know what a strong nation is? A strong nation has a powerful Navy. Yeah. We don't build ships. Why? Well, there are a lot of reasons, but one of them. Protectionism. We have.

Two laws in place that effectively require both tourism, so personal travel and cargo shipping between two U.S. ports.

to be on american-made ships that are owned by americans crewed by americans and flagged with us flag um this is called one of them is called the pvsa passions or vehicle safety act the other one is uh the jones act the jones act the one we always bring up that pdsa applies to cruise ships and other stuff and it it's important too so what has the been the effect of these laws that have been in place for quite a long time uh well

It has been the slow and steady decline of the U.S. shipbuilding industry and of the merchant marine, precisely what these laws were intended to. to protect and to to grow um why well uh it costs today four to five times as much to make a cargo ship in the united states as it does to make one in korea Or...

other places too. China, yes, but Japan, Europe, elsewhere. It is just insanely expensive to make a ship here because of all these Jones Act rules, which also, by the way, have additional things like steel protectionism is buried in there too. So it's not just... not just the shipping mandate. So we have these rules and because ships are so expensive, nobody uses them. So today, instead of, if you say you want to have some orange, you have oranges in Florida, you want to get them to Boston.

you do not use a ship. It is just too darn expensive. If you have liquefied natural gas in Houston and you want to get it to New York, you know what? Good luck. You're very likely in New York, you're going to buy from... abroad, Middle East, Africa, you name it, because we don't even have any LNG tankers. That's how expensive it is. What? Say you want to build. wait wait hold on one second so so you are if you're in the northeast yeah it is cheaper for you to import energy

And this energy is one of the things where, as I understand it, the U.S. is a net exporter of fuel. So we are the new Saudi Arabia. LNG tankers leave the United States every day. But... if you're in new york you're gonna buy from across the ocean this before you buy from i'm sitting here in austin texas before you buy from texas because of our shipping nonsense because of protectionist shipping laws

yeah that's right that's right and and the the the you can the absurdities continue on and on and this is a textbook case of what happens when a company is given a high level of trade protection Over time, it just simply doesn't innovate. It takes profits. It has a captive domestic market. It only serves that captive market. It doesn't try to find a niche that in which it can be competitive. And over time.

You just simply destroy the industry. I mean, it is protectionism 101. And I should note, you know, the Jones Act is a classic example. of this and and i should what before i actually get on to that next point i should know the biggest fans of the jones act the reason the jones act stays lobbyists industry groups

and politicians. I mean, it's really hard in the real world to find somebody who likes the Jonesette, particularly if you live in Puerto Rico or Alaska or Hawaii, the places that are just getting choked off by these dumb laws. But in... In Washington, you can find a lot of Jones Act fans because they're all in the biz. And that's the other thing that protectionism does, right? It creates a very intense, vocal constituency.

for maintaining or even expanding the protectionism, right? It is always about denying waivers in case of emergencies. It is always about Oh, now we have a new enemy and we need even more protection or now they want subsidies too. It is always going back to government for more, more, more. I should note, it is textbook. We use it all the time at Cato. It's a great, terrible example of how these things can go very, very wrong and cost us all a lot of money in the process, us being Americans.

But it's not just the Jones Act, right? I mean, I wrote a paper several years ago. I mean, you can go and look in the history books and there are dozens of cases of protectionist policies. Not just raising consumer costs, but not creating... Lean, mean, innovative industries. In fact, in a lot of cases, the companies still went bankrupt, or when the trade protection went away, they immediately went back to the government for more.

US Steel is a poster child for this. US Steel has had some form of government support going back, I mean, to the 70s at least. Steel is one of the most protected industries on... in the United States, if not on the planet. And what's been the result for US Steel? Well, instead of innovating into new technologies, instead of rationalizing capacity when they needed to.

It's just kind of this lumpy zombie industry that's now desperate to get bought out by a Japanese steel company. And this, you know... This is often called like market failure. Oh, US Steel is a market. No, this is exactly what you would expect to happen. And I worry when we talk about advanced technologies.

semiconductors or whatever i really do worry that you know we're going to be creating similar situations for these really bleeding edge industries which might seem okay now but could be a real problem in you know 20 years yeah it's um you know i think one of the things that hit intel that has nothing to do with any of this we you know that is an example is they couldn't succeed in moving into phones they they stayed with their with the x86 architecture to get

Computer geeky, they didn't embrace ARM, which was more efficient, which meant they were not building products in the fastest growing, highest volume sector, which was the smartphone and the computing platform of the 21st century. century and then they just got bad at that because the because that the doing that getting good at it figuring out how to optimize for performance per watt of energy consumption, which doesn't matter on your gaming PC, but matters a lot in your pocket.

Intel just wasn't in the game on it. And here we are now 20 years later from just about from the launch of the iPhone and Intel's basically virtually a zombie. Yeah. Yeah. And that's good. And that and that that. that is just like completely, that is a story, that is a detail that those of us that are computer nerds kind of can remember and think about, but that you never hear in any of the rhetoric.

At all. At all. It is all about Taiwanese industrial policy. Nobody mentions Intel. And look, there's stories to be told about policy here. I grant that. But if you don't bring up Intel's internal failures in all of this, you are. either ignorant or you're trying you're misleading right and and i should add on the intel point what was intel's big move a few years ago to get back into the game go to the government for subsidies man the it is a

Known secret in Washington that the main driver where our chips act that is now in place was Intel. Intel spent a. fortune lobbying for those subsidies as some sort of lifeline and again you know i don't know the the history of intel that well uh but i do know that beyond all the business mistakes they've long been pretty cozy with the government right and this is uh this is a protectionist story

to right protectionist companies companies that want terror protection are extremely popular in washington they are extremely present in washington and that type of stuff over time It means your company is spending a lot of money on lobbyists and lawyers and government strategy and less on innovation and on what actually makes a good business. And I should note...

When you have a tariff policy that says we're open for business, what is it going to do? It's going to attract more companies. You know, there was this amazing PR statement just a couple of days ago from a machine tool company out in California that said We don't like these tariffs. They're hurting our business. But we really want tariffs to stay on our competitors, and we want them removed on all of our inputs. And this is – right, of course. Tariffs for me, but not for thee. Of course you do.

To say it so publicly was just comical, right? But this is when you instill this mindset in corporate America that... The tariff setters are open for business, babe. Come on down. You're going to get a lot of that stuff and you're going to actually, you know, tariff lobbying has skyrocketed in recent months. It's, you know, for guys, not just for libertarians like me, if you care about corporate America spending on innovation and not spending on government, that's a scary thing. A criticism.

That can be leveled on libertarians and on neoliberalism is that. you don't care about america you see the world as a globe you are a globalist and i guess so am i perhaps in this instance um and you know We are a country. We're not just economic units. And that there are all these things that move kind of together in tandem that come with being part of a cultural unit of solidarity that we call a country.

And, you know, that free trade with the whole world, treating economics as a globalist enterprise, globalism. corrodes these other things in ways that are large and small and perhaps are never really fully explained. Yeah. but are somehow there and felt that we are being turned into like, we're like that. I'm not trying to be dismissive of this. You know, the nation matters.

Maybe you're an anarcho-capitalist, but I'm going to assume you're not. I'm not. So what do you say to those who say, Scott, and they're probably hitting you with this on Twitter like every day. You're just a globalist. You just don't care about America. And Donald Trump is fighting for us.

And he wants to put America first. And you don't care. You don't care what industries we have here or don't have here, really. I know you've got all these examples and all this data and all these studies and blah, blah, blah. But at the end of the day, you want zero tariffs. You want us to...

go where our money's treated best. And if none of our money's treated well in America, well, America gets to go screw off and we just pile up on government debt until eventually we crash. Yeah. What do you say to that broader globalism narrative?

Well, where to begin? Look, I'm... All the things we've already said about the... Notwithstanding. Yeah. Well, I mean, I start with... the fact that i'm i'm actually a big fan of america uh i think that uh it's the greatest place on earth and uh i'm actually not shy about it uh you know i always joke that uh foreign age should be you know john hu films van halen cds and uh five guys hamburgers i mean i it this is all great stuff um but look debt facts matter here right uh and

if we assume everybody wants the best for the nation except the anarcho-capitalists uh maybe um you always have to ask the next question is what is the best and and by the way The nation, sure, but Americans, people in the nation, right? Because that's often lost in all of this, in all of this us versus them.

china versus america this is a all a basketball game and there's a winner and a loser um no i mean it's americans that you want the best for right and that's where from there an understanding right that that these things are not zero sum There is not just a winner and a loser from a trade deficit. There are millions of winners on both sides. Once you get past that, then the data matter. And the data show time and time again that freer markets, economic growth, economic freedom are good for.

people and they're good for the country as a whole um gdp is not the only thing that matters but it is highly correlated with a lot of other things that do matter family formation and infant mortality and measures of happiness and the rest. And as countries get wealthier in terms of our per capita GDP. Those things go up too. And so that leads to the question is, has this stuff, have we been getting more prosperous?

by all of these metrics? And the answer for the most part is yes. And certainly there have been bad things. You know, COVID was a terrible. And not just a terrible time because of COVID, but for drug overdoses and other things, right? But if you look at the latest numbers, those trends are getting better. Overdoses again. heading in the right direction now. And so over very long periods, it is just undeniably true.

that the American system we have, the modern American system, not the one of Henry Clay, the modern American system has been immeasurably good for Americans.

uh economic openness generally relatively low regulation relatively low tax those types of things again we libertarians can complain to the that till the cows come home but in general a very open economy and that's been great uh and it's been great for our economic strength right when you have when you're home to i forget the exact number but it's you know 10 of the largest 15 and companies on the planet in terms of market capitalization

An economy that has outperformed our industrialized peers by leaps and bounds in recent years because we are so open and dynamic. Right. Because we have we are so wealthy. When you look at household wealth and all of these other things, I mean, median working class wages since the 90s are way up. You can go down the list. All these objective metrics, things.

are generally getting better for the vast majority of Americans. OK, so these that's these are just things you have to understand. And that system is helping, you know. globalization trade and stuff it's not the only driver but it's part of that secret sauce we talk about that kind of what helps create this dynamic and vibrant uh american society and i want to keep it that way But then we always have to say, beware of people offering economic solutions to complex social problems.

There is not a lever in Washington, whether it is a tariff or a subsidy or a tax credit or whatever, that is going to fix. Things that have really little to do with economics. And I hate it when these very difficult issues. are boiled down to, oh, that's because of free trade or, oh, you just need tariffs. And I'm really skeptical of the people offering that kind of snake oil solution. The people who are serious about these things will acknowledge, you know, there's a guy at American.

enterprise institute scott winship very Brilliant guy. And he says, you know, these are their real issues with economic mobility at the bottom end of the income spectrum and with marriage and family formation and these types of things. He goes, I got to tell you, man. There is not just some sort of economic solution to this stuff. And so you get back to, well, what can I do in my niche policy field? All I can do is help with the economic stuff. I can tell you.

This is going to be good or bad for the economics. I can tell you also that in general, this will help you have a little more leisure time. I can't tell you how to spend that leisure time. And there's nothing I can do that's going to force you to go to church instead of... play video games or whatever. Right. I, and Tara can't do that either, by the way. And, and we need to be honest about that stuff because if we're not honest about it.

We're just having a really stupid conversation. This is one of the things that rhetorically gets delivered like this. Scott. Man is not homo economicus. There's more to life than GDP. you know, the world isn't just a Steven Pinker line up into the right go boom. Yeah. And it does strike me that I think there are those for whom that kind of criticism is reasonable.

But I think it is very often just a straw man way of pretending that defenders of sound economics are somehow making a broader claim than they're making. Correct. And that there isn't really anything on. And one of the things I think is so interesting about this, and frankly, kind of fundamentally Marxist in its nature. Because is to say that we can fix these cultural, social problems with these economic levers. Marx, I think, is one of the most misunderstood things in our culture.

especially in sociology and history departments and universities, is the idea that Marx isn't a materialist when he is, in fact, singularly a materialist. He is explicit. in believing that all that matters is the economics, that the social order is entirely a function of material outcomes. And he is the one and his. adjacent his cousins his nephews philosophically are the ones who actually don't account for faith and family and community and and and the other stuff of life that

if you've traveled and you go to actually poor places and you encounter happiness, Marx has no answer for that. Marx has no answer for why suicide rates go down during times of war. Because that doesn't make any sense. War is bad for the economy. War is materially destructive. And yet there's something else in human nature about having loyalty and having group solidarity that isn't about trade. It's about other stuff.

And I think this is something that in this moment we're in, we've been through a lot of disruption and there's a lot more to come. that I think this is one of the scariest things around in the rhetoric of our times is that the very real problems, the very real challenges, the scary things that Goliath had all just get bundled into a blob.

And on the other end of that blob is policy lever X that I happen to like that I would like even without all the problems I'm talking about. I just like it. Yeah. Yeah. And, you know. For folks in the policy community, the disconnect is so obvious because they'll say, you only care about GDP and economic stuff. You don't care about all these.

fuzzy things and but here are my solutions they're all economic solutions so like look i am not a life coach uh i'm an i'm a wonk and i'm gonna i can only fix or not even fix i can tell you about the wonky stuff um to kind of think that that you can fix all these other issues with the wonky stuff is um I don't know. I mean, it's batty stuff or just disingenuous. I ask this question of every guest. The show is called Dad Saves America. And it's because I think that in the non-economic realm.

That being a father is a role we play as men, or can play, I think mostly should play, that is powerful, is high impact. It works its way through all of reality, starting with the family, the community, the church, the culture, the country. In your work, in your life, how do you think about your role in the American story? Well, you know, I'm a dad too, and it's awesome. And I definitely, that's first. Beyond that, that's a hard question, really.

you know my my number one job every day is to raise my kid and i love her to death and that's what i do um the rest of this stuff is uh it's fun and i hope i'm helping uh and it's food on the table Also, at the end of the day, it's a job. Right. And so my my hope, honestly, in the work that I do is that people.

from both my the way i handle this stuff you know with a smile and not being always so in serious about it all but also with with the information is to be uh to make better policies so that we can have better you know material lives and then hope that

The people on the life side can handle that stuff separately, right? I'm going to give you the tools, help to give you the tools that people need to live their lives, to have comfortable lives. But I can't fix those other problems. And I'm going to be very honest about it. Scott, thanks for being on Dad Saves America. My pleasure. For more content like this, including video versions of these conversations, Check out our YouTube channel at youtube.com slash DadSavesAmerica.