Chad Bown interviews Paul Krugman on the Commerce Talks podcast on a variety of topic associated to commerce and industrial coverage (Commerce Talks, March 16, 2025, “Paul Krugman talks commerce, industrial coverage, and Trump”). Listed here are a couple of feedback that caught my eye:
If you’re apprehensive about dependence of the US financial system on overseas provide chains for sure merchandise, the suitable reply could be industrial coverage, however not tariffs.
Max Corden’s 1974 guide Commerce Coverage and Financial Welfare stays related. And what Corden and others stated was, if there’s one thing that you just suppose it is advisable be producing, then encourage manufacturing. The reply is industrial coverage. The reply is to subsidize or in any other case promote. Usually, a tariff has unwanted side effects that will not be what you need. For those who had been apprehensive that too most of the world’s semiconductors are being produced inside putting vary of China, you then wish to subsidize manufacturing of high-end semiconductors in the USA. However that’s not a great cause to boost the price of semiconductors to the U.S. downstream trade. So, there’s a extremely fairly robust case for industrial coverage right here. That’s the generic precept.
Now truly implementing it’s tough, by the best way. The factor about these agglomeration economies is that, as soon as they’re nicely established, they’re actually onerous to interrupt. … And so if you wish to develop rival agglomerations to the present agglomerations that you just suppose are within the fallacious place, it’s going to be costly and onerous, which doesn’t imply you shouldn’t do it, however you need to understand that it’s not one thing you do by throwing a couple of {dollars} on the drawback.
On Europe’s competitiveness drawback:
I might suspect that the Europeans could be feeling comparatively okay about their financial efficiency if it weren’t for the comparability with the USA. The previous Eurosclerosis of persistent excessive unemployment is gone. Usually, prime age staff usually tend to be working in Europe than they’re within the U.S. In quite a lot of methods, the standard of life is first rate. Their life expectancy is a number of years longer than ours. So Europe appears fairly good, besides that they’ve clearly fallen behind in some superior applied sciences and a big productiveness hole has opened up. …
A major a part of that hole in productiveness between the U.S. and Europe is de facto very localized. It’s an inexpensive guess that roughly half of the U.S.-European productiveness differential displays very excessive value-added per employee in Silicon Valley and likewise Seattle, which operates in considerably the identical approach, on one aspect of the continent, and higher New York on the opposite. That it’s actually the agglomerations of the tech trade in Silicon Valley and the agglomeration of the monetary trade, on the East Coast, which might be the distinction.
On why tariffs aren’t the reply to lowering the US commerce deficit:
It’s additionally most likely not the case that tariffs will do a lot to cut back the commerce deficit. There are some subtleties there, however the fundamental level in textbook economics says that the commerce deficit is de facto decided by the capital account. It’s the truth that foreigners wish to put money into the USA – so there’s a internet influx of capital – and simply as a matter of accounting that implies that now we have to have a commerce deficit on the opposite aspect.
For those who ask, “So what occurs in the event you placed on tariffs?” The reply is, even when different nations don’t retaliate, what occurs is that the greenback rises. And now we have decrease imports, however we even have decrease exports as a result of now we have a stronger greenback. And naturally, if different nations do retaliate we don’t want as robust a greenback. However a method or one other, exports fall to just about offset the impact on imports. …
Throughout the vary that we’re speaking about, tariffs are actually unlikely to have an effect on the commerce deficit. On the similar time, they are going to elevate prices. What’s actually putting … was this disproportionate focus of tariffs on intermediate items reasonably than shopper items, which meant that even manufacturing was most likely not benefiting. You had been most likely truly lowering manufacturing employment. And we’re doing it once more. As we’re holding this dialog, the tariffs which have already gone into impact are on metal and aluminum. That’s good for metal and aluminum producer, I assume, and apparently garden furnishings, which for some cause is roofed by this as nicely. But it surely’s fairly dangerous for everyone else who’s downstream. These are usually not tariffs that appear like they’re going to attain even their ostensible targets.
