How We Talk About Trade

Show Notes

Does the U.S. Need a Vigorous Industrial Policy? by Phil Levy and Christine McDaniel, Discourse Magazine, February 16, 2021

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Transcript

Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the audio before quoting in print and write yeutterinstitute@unl.edu to report any errors. Transcripts will be posted within one week of the show.

Jill O'Donnell: Welcome to Trade Matters, a podcast by the Yeutter Institute at the University of Nebraska-Lincoln. I'm Jill O'Donnell. Our guest today is Dr. Phil Levy, chief economist at Flexport, a digital freight forwarder and customs broker based in San Francisco. Phil's prior experience includes a service on the President's Council of Economic Advisors and on the policy planning staff at the State Department. Phil, thanks so much for joining us on Trade Matters today.

Phil Levy: It's great to be with you.

Jill O'Donnell: So you have been a prodigious commentator and writer on trade and trade policy for a long time so I'm excited to dive into a whole array of topics with you today, but first I want to start with what you're doing now. In the past, you've worked in the White House, you worked at the State Department and other places on trade policy. Now you're in the private sector. You're the chief economist at Flexport. Flexport has a great statement on its website that goes, "Freight forwarding is the circulatory system for global trade." I love that visual. Can you talk about that a little bit more? What's your role at Flexport and what have you learned about trade from your vantage point there?

Phil Levy: Yeah, I try to go where the action is and we've had a lot of action at Flexport. The circulatory system I think this is the idea that as the global economy shifts around and people order goods from far-flung places, it's logistics that makes that work. And that's what Flexport does. We help clients move things from point A to point B, especially when they're far apart. It's been a fascinating time to have this happen. We've had trade wars, we've had a pandemic and we've had some really big shifts in demand. Part of my job is to say what all those things mean for our company and for our clients. It's also my job to look at the data that we collect and see what lessons I can draw from all of that because part of the founding premise of the company was that we would be a very data oriented freight forwarder.

You asked what lessons. Well, that's what we're going to talk about the whole time. I'll offer you one though. And that is that if you want to keep going with imagery, there's this proverbial ocean liner that can only turn around so fast. I think that's one of the lessons I've taken at least from the last year or so, is that there's a lot of parts of the global economy that work that way. They can change, but they can only change so quickly. Last year is a great example of this. We had a whipsaw experience. So, beginning of the year, things looked pretty good. I'm talking about January here. There wasn't very much expectation that there'd be a recession. There were a few troubling rumors, maybe of a disease outbreak in Asia, but that probably wouldn't amount to anything. Then of course, by the end of the winter, all of a sudden it's looking like we're entering into a full blown major recession and everybody knew what that meant. That meant that everything slows down all at once, right? We consume fewer goods. We consume fewer services, incomes go down. It's a recession, batten down the hatches. A couple of months further on, it becomes clear, this is not that kind of recession. That this is not where everybody slows things down. And so meanwhile, freight forwarders, but especially the carriers and the clients we're working with are having to try and adjust their plans and their production. And they've done a heroic job of it, but it has been a serious strain and we've seen that strain for producers and carriers and ports and that's of course, on top of all the strains that we had with the pandemic. So to sum up, this is a long-winded, my job is to have this great vantage point and try and make sense of it all.

Jill O'Donnell: And you're helping us do that on this podcast. Let's get to more of the questions I have for you to help us make sense of it all. So you said something last year, last fall I believe it was during a webinar that has stuck with me. And what you said was that there's a gap between how we talk about trade and how trade actually happens. So, popular discourse about trade policy over the last, two, three years has been full of words like tariff or deficits. That's what we hear a lot, have heard a lot, but what did you mean by that statement and how do you think we should talk about trade differently?

Phil Levy: I think there's a big gap between people's conception of how trade works and how trade actually works. And maybe the easiest way to show this is just to say, when we have most of our policy discussions, we talk about American companies, we talk about American products, American workers, and we do all this with the presumption of American preeminence in setting trade rules. The stuff with the companies, with the products and the preeminence, all are a little bit problematic in terms of how we should really think about the world. Let's start with companies. Let's talk about automobiles, just to be specific. We have traditionally thought about the big three American auto companies, Ford Chrysler and GM. Well, hold on a second. Chrysler is an Italian company. It's Fiat-Chrysler. And even for the others, the concept of a national company gets to be difficult because they have operations in many places, they have shareholders in many places. So it's nowhere near so cut and dried, us versus them. The real difference comes in when you talk about, say American products and the problem here is that people probably listened to their econ professors too closely. When they took those classes back in college, where you had David Ricardo talking about you'll make cloth in one place and wine in another place. And then you put them on the tall masted sailing ships, and they go back and forth across the channel and you do it.

Modern trade, for the most part has supply chains. And it's not one product made in one place and another product made in another. We've achieved things we've achieved which are really sophisticated products, made at really affordable prices by divvying up the production into different places. So you may be making the chassis of a car in one place, the tires in another place, the electronics in another place. And those all have to come together. That has some serious implications for what happens when we start sticking on trade barriers and we can delve into some details.

And then the last thing I think, when we did an experiment with this over the last several years, American preeminence, hey, look, I'm the first to say that America has traditionally had a leadership role, should have a leadership role, but we should not presume that if we disengage or just threaten our trading partners, that we can get the world to do whatever we want. And we saw an example of this recently with the Trans-Pacific Partnership. There was a presumption that if we didn't like it, it would go away. So President Trump in his first week decided the U.S. would not engage. It didn't go away. It instead evolved into the comprehensive and progressive Trans-Pacific Partnership and everybody but us joined. And now you're having these alliances and trade preferences that exclude the U.S. and rules are being set where the U.S. doesn't have a say. So on each of those things, it affects what we do with policy, whether these are purely American companies, whether these are purely American products and whether we get whatever we want because of American preeminence. I think a more realistic view will get us better outcomes.

Jill O'Donnell: So let me ask you a question here to follow up on all of this. Do you think that there's a need for us to redefine some things or to be more clear, I should say about definitions, that is to say has the parlance of trade not caught up with kind of how it happens now, how it's changed? You talked about the supply chain. Of course, there's a lot of trade and intermediate inputs that didn't exist when David Ricardo was first formulating his model. So do you see a need for people talking about trade in the media elsewhere, to be more clear about their definitions. And as an example, here, I read an interview you did with Christine McDaniel at George Mason University recently, and she said, "What does industrial policy mean?" And you answered, "Essentially that it probably means different things to different people depending on who's doing the talking." So do you think that there are other trade related terms that are being used in multiple different ways because there's no consensus about what they really mean or because our terminology just hasn't caught up to the way trade happens now?

Phil Levy: Yeah. That's a good question. And I think there's a combination. I think some of it is the terminology not catching up. Some of it masks real misconceptions. I think you had mentioned earlier that we often talk about trade deficits. That's the search for a scorecard where those terms who work their way in because people really want to know who's winning and who's losing in trade. The other time you get this vagueness or this imprecision is when somebody is trying to build a consensus that you might not actually have. The industrial policy example is that. That I think for some people that means the government should be very carefully deciding which industries it backs and backing them either by offering trade protection or explicit subsidy support. For others that can mean we generally adopt the kind of policies that we think will help the country succeed. So why be vague when one can be precise? Because if you get too precise, you start showing up the disagreements. My preference as an economist is for clarity and precision. I know that may not seem like we deal in clarity and precision for people who have to listen to us and who don't particularly like Greek letters and math, but it does push one to be specific about what one's saying. And so I always let you know what's on the inside of these terms. Then again, other people are the ones trying to build a consensus and that's where that's coming from.

Jill O'Donnell: Let's talk a little about the implications of this. So do you think that the way that we talk about trade right now impacts what people, the general public, expect trade agreements in particular to accomplish? So do you think that's led in any way to unrealistic expectations and then the public about what trade agreements can do or solve in the domestic economy as opposed to other policies? How does that look to you?

Phil Levy: Radically. Yes. And it's an important point. I think the classic example of this has to do with NAFTA. NAFTA became a talking point. It did come to symbolize globalization and all the troubling trends that people were seeing around them. And I think one way to think about this is, and I don't mean to deny troubling trends. If you look and say, what share of the U.S. workforce works in manufacturing, so good unionized manufacturing jobs, I say that, but I really just mean you share the labor force of manufacturing, in the 1960s you were at somewhere in the mid 30% range, say 35%. By the time you got to about 2010, that number had dropped down to eight to ten percent. So a serious drop in the share of Americans who were working in manufacturing jobs. And that's troubling to people who saw that as a way to a middle-class lifestyle.

So the question is why, what happened? Well, there were a number of candidates for what happened there. There was technological change, there was domestic competition, or there was foreign competition. And I think, yes, this is where trade has gotten held up as a scapegoat frequently. So you have an agreement like NAFTA, and everyone says that is where our problems come from. They came from NAFTA. And if it weren't for that, we would have all of these great unionized jobs. One of the things I used to like to do when I was teaching about this, and I could actually put up a graph, can't do it on a podcast, but if you show the graph of the decline in the U.S. workforce that's in manufacturing, NAFTA came in 1994, you don't even see a blip in the mid nineties. I would point to this essentially straight line and say, "Show me where NAFTA was." You don't even see anything there. These were trends that one, predated NAFTA when economists do studies to say, what effect did NAFTA have? It was minimal. It's hard to disentangle from the other economic things going on. So very minor effects. And yet it looms really large in the public consciousness. It was a motivating force for President Trump who was determined to renegotiate it. And also for you, it may be the discontent was behind a lot of the move to block U.S. participation in TPP. And it just as you suggest, it does then lead to unrealistic expectations, which is as soon as we do something like the USMCA and we rework a few clauses of NAFTA that somehow we're going to jump back up and we're going to have a third of the labor force back in manufacturing. This is not going to happen.

Jill O'Donnell: This leads nicely into another question I have for you. This focus on workers and jobs. As I'm sure you've seen the Biden administration release its first trade policy agenda earlier this week in early March here, one priority in the report is pursuing a quote "worker centric" unquote trade policy. And the report itself says that the administration will quote, "review past trade policies for their impacts on and unintended consequences for workers," unquote. What do you think such a review might find and to the extent that such review finds negative impacts, do you think it's trade policy that would need changing or other policies that are more closely related to workforce or training, for example?

Phil Levy: Yeah. Good question. I think some of this comes back to the oversimplification that we mentioned earlier where back in the days of David Ricardo, you made one good or the other and in the days of some later trade theorists, you had two inputs into production. You had capital or you had labor and trade could maybe help capital and it could hurt labor. In a more complicated world this answer gets more complicated. And so I think I can probably best answer this with an example. And one of the wonderful things that the Trump administration left for us was lots of examples, which can refresh our understanding of how this all works. So one of the signature policies of the Trump administration was to put tariffs on steel and aluminum. I'll focus on steel here because it's something I've looked into a little bit more.

So one might think, "Ah, this is good. We've already talked about some of these manufacturing woes. The steel industry has certainly had some, here's a way to help workers. You help workers in the steel industry by putting on protection and that will reduce foreign competition and they should be able to expand and prosper and potentially hire more workers." Okay. We can argue about whether that happened, but we also note that in the U.S. for every worker in a steel producing firm, you have something like 14 workers who are in steel consuming firms. People who, instead of making steel, they use steel to make other things, whether it's cars or machinery or whatever it might be. If you drive up the price of steel through protection, you're helping one group of workers, but you're hurting another group of workers. So that's, I think, this is the difficulty. It's not a novel concept. In fact, this was part of the rallying cry of the Trump administration that you should do something that helps workers. It's not at all clear that protection does. It depends immensely on whether you are going to focus very narrowly on one group, steelworkers, in my example, or whether you focus more broadly on something like say manufacturing workers. You can get very different answers.

Jill O'Donnell: Right. So this seems to be an example where again, I come back to terminology, the word worker is a very broad word. And here you've just given one example of different types of workers who were affected very differently by one action to put tariffs on incoming steel, right? So which workers are we talking about necessarily?

Phil Levy: Yeah. And to be clear, I worked in administrations in the sort of battle days as current critics would have it. The goal was not to stick it to workers. It was to try and increase national prosperity. And so there was this view that this was going to help workers more generally, but it was always for those who were being candid, it was always the case that that didn't mean that every single person would be helped no matter what was going on. And so one can find lots of cases where you had a change, you adopted NAFTA for example, and then there were workers who were laid off from their factories and those workers have every reason to be unhappy with what's happened to them. And they're looking for explanations. I think this is an example of the overemphasis on trade as a cause.

Jill O'Donnell: Okay. So switching gears a bit here, I wanted to talk to you a little bit about China as well, and specifically how easy or hard it is to work with allies on this really complex challenge at this time. I mean, a lot has been said over the last few years, about the importance of the U.S. working with allies, especially when it comes to addressing challenges stemming from China and China's economic model of state directed capitalism, the Trump administration approach was fairly unilateral towards China. Many said a multilateral response would have been better and that is what the new Biden administration is saying, it will look to do. But my question for you is how easy is it really to work with allies who have their own interests and their own agendas, of course, to pursue? The EU, for example, has a new investment agreement with China, so pursuing its interest there. Do you think there's enough consensus among traditional U.S. allies about the problem China poses to agree on and implement some kind of effective response?

Phil Levy: Yeah, that's a rich question. There's a lot there. It's not easy to work with allies and that happens for a couple reasons. First is you got to treat them like allies. So if you slap somebody they're not usually then ready to say, "All right, great, let's take on this challenge together." And that was a bit of what we did over the last four years. So things that didn't really have anything to do with Chinese challenges, if you are say going after European countries on large passenger aircraft or on digital taxation or actually you just stuck national security tariffs on them saying that they were a security threat on things like steel and aluminum, that did not make for a very cooperative atmosphere. So that's step one. Then we get to the kind of questions you asked, which are, "Is there agreement on the challenges China poses and what we ought to do about them?" I'll take each of those separately. I think there is growing agreement on some of the challenges posed by trade relations with China. And these have a lot to do with whether there's a sense of fair play, whether there's broader rules that are being followed, whether it's market forces that are driving things or state subsidies and state interventions, are people doing things for economic reasons or are they doing them for political reasons? Is China actually committed to reform and to being a market-driven economy? Or has there been a significant turn away from that? So on those kinds of questions, I think there's a growing consensus between the U.S. and important allies. I don't think we have a consensus on what one then does about it on whether one has... Does one engage with China and try and provide incentives or agree upon rules or work cooperatively, or does one declare China a strategic competitor or even a threat, and try to isolate China? There is not agreement on this. And in fact, the U.S. started to see this at the end of the Obama administration with the TPP. So the TPP did not include China.

For many of its proponents, including the Obama administration, it was seen as an effective way of pushing China to behave better by their [inaudible 00:21:51]. And it would do this by setting new norms and then China, if it wanted to come in, would have to adapt to those norms. Whenever the Obama administration would make statements that would say, this is an effective measure against China, those things would play very, very well on Capitol Hill and they'd play very badly in Southeast Asia, where that was not their goal at all, was to sort of isolate or exclude China or to take measures that were seen as being a gift because they wanted to do business with China. Around that same time, we saw this with notably the UK and the Asian Infrastructure Investment Bank, which the Chinese had been pushing. The Obama administration had urged allies not to engage in this. They wanted to do the kind of investment agreements, other things that you mentioned. And so they broke ranks and that just got that much worse under the Trump administration. So growing consensus on causes of concern, serious work to be done on coming together on what would a good and effective policy would be.

Jill O'Donnell: Okay, switching gears a bit then to the World Trade Organization. The WTO has a new leader, as you know, and Ngozi Okonjo-Iweala began March 1st as the first female, first African leader of the WTO and gave her first public remarks earlier this week as well in her capacity as director general. And she seemed to be managing expectations a bit in those remarks, just arguing for three or four clear deliverables that the WTO can achieve before the end of the year, when there will be another ministerial held. Some observers, as you I'm sure have heard as well, declared the WTO to be essentially dead because of the collapse of the appellate body and the fact that the negotiation function at the WTO has been stalled out for quite some time. Do you agree with that assessment? Do you think the WTO is dead at the moment or is there enough energy and momentum around the new director general that there could be a path forward or to a breakthrough on some of these really tough issues?

Phil Levy: Yeah, this is important. I don't think the WTO is dead. I desperately don't want it to be dead. I think it was one of the great achievements of the post-war era and we need it. It's one of the things that if it weren't there, we would have to be inventing it. It's got lots of problems though. I break it into two parts because there's really two main functions of what the WTO does. One is it agrees upon new rules and the other is it enforces existing rules. Those are interconnected and they're having real trouble with each. Let me first get with the enforcement. They've had an impasse over whether you can even appoint people to sit as appellate body judges. And without that, the whole system grinds to a halt. I think there has been discontent, not just by the United States, but by other countries as well, but how that appellate body functions at some points but whether that doesn't necessarily mean that its fixation is the answer. That's actually linked to the inability to negotiate new rules.

One of the things to remember with the WTO, the last really big agreement they had on what countries agreed on with trade policy was in the mid 1990s. This is getting to be a long time ago and that means that you're getting a bunch of these rules that are getting long in the tooth, outdated, rickety. And so what ends up happening is when you have a judicial body, a dispute settlement body, it's being asked to fill in the blank. So it might get asked questions for example, about e-commerce or online gambling, when you didn't really have agreements that covered that because that wasn't a big deal in the mid or early 1990s. And so then that increases the chance that they overreach and they try to fill in the blanks themselves that's been part of what the U.S. complaint has been.

So this gets us to, well, what about as a negotiating body? Can they just do some negotiations, get these deliverables and really make some progress? That's hard. They tried. There was an agreement that launched right after 9/11. There was an agreement that they were trying to reach the Doha Development Agenda. It came to an impasse. They could not reach an agreement. They tried for about a decade. And now you're getting into this difficult situation where if people don't come together to try to reach agreements very often, then when they do, everybody wants their issue to be taken up. They don't want to wait for the next time because they don't know if there's going to be a next time. If you have any agreements every 20 or 30 years, telling me to wait my turn and get it on the next one is not very satisfying. And then that makes it really hard for someone like the new Director General of the WTO to say, "Let's just get some quick results. We'll get this agreement through," because everyone says, "Fine. As long as all of my concerns are addressed."

Phil Levy:

I think there's hope. I think she might be able to do some stuff. It's important to keep in mind, the Director General of the WTO is really a position from which you might be able to persuade people. It doesn't come with a lot of inherent powers. You don't get to dictate outcomes. You are essentially a moderator. You can bring countries together, you can make suggestions, you can propose. You don't really get to knock heads very much so I hope she does well. She's certainly very well-qualified and we definitely need the WTO.

Jill O'Donnell: Great. Thank you, Phil. So last question and bringing it back to Flexport and kind of the future of trade and new technologies, Flexport also described itself as a digital freight forwarder. So I wanted to ask you what you think new digital technologies might portend for managing the movement of goods or resolving issues or bottlenecks at ports. What does the port of the future look like from your vantage point right now?

Phil Levy: I think it's a really exciting time and we've got all kinds of engineers and makers as we call them, innovating on this. I think one thing that Flexport has brought to this, which is helping adapt to these really difficult times that we started out talking about, is just visibility. That if you have good visibility into your supply chain, it helps enormously. If you're in a very tranquil time where everything runs like clockwork and there're no surprises, then visibility, knowing where your containers are, it's cute, it's nice, but maybe not essential. If you get everything tossed up into the air and you've got new orders and things are going wild, it does become essential. And it's a way to address some of the problems we've seen such as badly congested ports with ships lining up, a lack of containers, where they're getting stranded in various places. So I think having the visibility into where deliveries are, it let's company's plan better, it lets companies function better. There's some of this where you have a degree of innovation and efficiency, which can lower costs. So I'll give you one example of something we do, which is, let's suppose that you've got a bunch of stuff you want to ship across the ocean, but maybe not enough to fill a container. We have this thing called Ocean Match where, how does one work it to share a container and let everybody essentially divvy up the costs so that overall costs are reduced. So those are just a couple of examples, visibility, matching, routing, where having better information can make things better for both the people who are producing and shipping things and ultimately for consumers.

Jill O'Donnell: Thank you, Phil, for that explanation. And thank you so much for all of your time on this podcast today. We've run through a lot of issues. We could run through a lot more so that we'll have to do that at another time, but I want to thank you again for being on Trade Matters today.

Phil Levy: It's been a pleasure. Thank you for having me.

Jill O'Donnell: That's it for this episode of Trade Matters. Thanks for listening and a big thank you to Alex Voichoskie and Jacy Thoman for helping produce this podcast. Opinions expressed on Trade Matters are solely those of the guest or host and not the Yeutter Institute or University of Nebraska-Lincoln.