Tariffs vs. Free Trade: Oren Cass Debates Larry Summers at Harvard Business School

In November, Harvard Business School hosted a debate between Oren Cass and Katherine Tai on one side, and Larry Summers and Robert Lawrence on the other, over the question: Should the United States shift from the free trade approach it has supported since World War II in favor of higher tariffs?

Cass and Tai won the debate, based on polls before and after showing that the audience had shifted slightly toward their position. A transcription of the full debate is published here with permission of Harvard University.

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Debora Spar, Jaime and Josefina Chua Tiampo Professor of Business Administration at Harvard Business School:

Now, I have to begin with a very strange caveat here. I couldn’t even get these four people to agree to the wording of the question, which speaks to the level of debate and complexity here.

We talked about having the question, “Is free trade, as implemented in the WTO-GATT system, the best way to ensure prosperity for the United States,” but that felt too vague. Then we tried to move to, “Should the United States shift from the free trade approach it supported since World War II in favor of a strategic use of tariffs.” But the folks on the far side of the stage didn’t want that one because they’ll tell you why.

So what we have now is the question, which may not be the best question, but is the question we have, “Should the United States shift from the free trade approach it has supported since World War II in favor of higher tariffs?” And our preliminary vote is 70% say no and 30% say yes, which is wonderful then because we will start with what is going to be the harder argument to make here, the argument in favor of this shift.

And Oren, please, I’ll ask you to start us out.

Oren Cass, Chief Economist at American Compass:

All right. Well, thank you very much. Thank you to Harvard for hosting this. And it’s genuinely a privilege to be on the stage with three people who have been shaping our trade policy over the past several decades. One in a very constructive direction, two in a less constructive direction, but that’s what we’re here to discuss. I will say, I think we have the much easier side of this debate, and we have it because as you noted in the discussion over the resolution, Ambassador Tai and I were fine with the first topic. We were fine with the second topic. The fact that apparently neither of those is a debate anymore tells you how far things have moved. I guess we’ll be figuring out how exactly higher tariffs are different than strategic tariffs, but essentially what was the consensus on trade up until roughly 2016 is so far gone that you can’t even stage a debate about it at Harvard University anymore.

Now, why is that? The reason is because the premises on which it was built have proven to be simply wrong. I like to quote Paul Krugman on this point. He wrote a paper in 1997 in which he said, “The economist’s case for free trade is essentially a unilateral case. A country serves its own interests by pursuing free trade regardless of what other countries may do.” Now, why would that be the case? It would be the case, first of all, because of something else he said, which is that trade deficits are self-correcting. So there was an assumption that you would not have long-term trade deficits. And it was true because of something I think Jason Furman, another Harvard Economics professor, has said recently. He said in Geneva at a WTO conference last year, “Imports are actually the good thing, that is what we enjoy. It’s the benefits we get from trade. Exports are the unfortunate thing we do just so we can get those desirable imports.”

The premise of trade was simply to get as much consumption we could at the lowest possible price. Economists would send politicians out to say this was going to be great for jobs, but, in fact, the economic case for it was not that it was going to be good for jobs. Economists did not care whether it was good for jobs. The premise was not necessarily that it would be. And there was nothing in economic theory that said it would.

And sure enough, what we have seen, because the premise that trade deficits would be self-correcting was wrong, we run large structural trade deficits now above a trillion dollars a year, driven particularly by a country, China, that simply is not interested in participating reasonably in the free trade system. That what we got was a very imbalanced system, a system where we get the imports, but not the exports. And contrary to the economic theory, that’s not a good deal. Imports and exports in balance, that’s great. Trade can absolutely benefit both sides, but it does have to be balanced. You do have to get to the other jobs. You have to get to make something else in return for the thing you’re now getting from others. And if you don’t, the model is not a good one.

And that is why, as the initial resolution that they didn’t want to debate notes, the WTO gap system is not best for prosperity. That’s why as the second resolution noted, we do need to make strategic use of tariffs. And by definition, if we are moving from a situation pre-2016 where our posture was we should never use tariffs, using strategic tariffs is going to be higher tariffs.

I think Ambassador Tai and I would both like tariffs to be as low as possible. They’re certainly not an end unto themselves, but if we’re addressing China, if we’re addressing a policy from China where they say, “We are going to attempt to dominate the global auto industry and drive American auto companies out of business,” the US policy cannot be, “Well, our best policy is free trade regardless of what other countries do.” And that’s why you should change your vote to yes when you vote at the end. Thank you.

Debora Spar:

Thank you very much. Well done. Professor Lawrence.

Robert Lawrence, Albert L. Williams Professor of International Trade and Investment at the Harvard Kennedy School:

Thank you. It’s a pleasure to be here too for me. Look, using tariffs as a way to try to correct trade imbalances is using the wrong instrument. Basically, the United States has a trade imbalance because it spends more than it earns. And to make up the difference, it has to borrow from the rest of the world. And it’s better off for doing so actually, because it allows us to invest in the United States. That’s fundamental economics, and really economic… fundamental economics. And really economic theory in a growing economy doesn’t actually predict that you’ll have balanced trade after all. If you’re growing, there’s no reason. If you were a firm, you wouldn’t say you should never borrow. A growing firm can sustain increasing amounts of borrowing as long as it doesn’t borrow too much. And that is a separate question. Now, let me turn to tariffs. Tariffs basically raise the cost of consumption. They do increase the revenue that the government earns. However, they do it in a regressive way because it is the poorer people who spend more of their money on goods while rich people consume more of their money on services. Poor people, they have to have clothes, they have to have shoes, they have a bicycle. Rich people by contrast buy services. They need a psychiatrist. They need a tax consultant. They have a personal trainer.

And we see them reflected in this pattern of demand, this profile. And so what happens is we are imposing tariffs. We’re asking poorer Americans to fund a tax cut for richer Americans. And then there’s the question of what tariffs actually do to employment. Well, it seems apparent that if you increase the tariff, you will protect an industry at home and allow it to expand. But that’s an outmoded way of looking at our international economy, which has been networked with supply chains. And what the supply chain means is that when you impose the tariff on steel, actually empirically what we’ve seen, we’ve tried it in the United States. We get a couple of thousand more jobs in steel, but steel users are penalized severely. And the result is their ability to export declines and the ability of American firms to compete with foreign firms is also made more difficult.

And so at the end of the day, you don’t actually correct. You don’t get the jobs. And in any case, even to grant the argument that the tariffs were the way to close the deficit, if we looked at that, what we’d find is that it would increase the share of employment in manufacturing in the United States from its current 8% to 9.7%. So very few of those workers who have not done well in the US economy would actually be assisted. And the consequence then would be that not only would we be creating a lot more inefficiency, but we’re doing very little to improve the lot of the people we worry about.

Debora Spar:

Thank you very much. Ambassador Tai.

Katherine Tai, former United States Trade Representative:

Yes. Thank you. It’s wonderful to be here with all of you at Harvard Business School. Oren, are you also an economist?

Oren Cass:

I call myself one.

Katherine Tai:

All right. So I’m up here flanked by three economists.

Oren Cass:

No, but we both have law degrees.

Katherine Tai:

Oh, and we both have law degrees, I was going to say. And I’ll go back even further. I was a history major in college, and I think that the history matters. And we started off with a little bit of a history, historical context about the post-World War II world order that the United States has led, which I think that’s fair to say. I think most people would agree with that. But what I would want to highlight is that in the post-World War II order in the world, in the last 80 some years, that we’ve actually had at least two different economic orders. And that matters because the role of trade and tariffs and economic policies in those two orders has been markedly different. The first part of that would be the 1940s to let’s say 1980. Some people will call that the New Deal era.

It starts with FDR in the 30s and into the 40s. It’s marked by significant large role for government. Government is part of the solution on the domestic side of the creation of a lot of the agencies that we have in our government today that are critical to our economic policy, some of which are being dismantled today as well. Internationally, I would argue that that New Deal era brought us things like the Marshall Plan, which if you think about it, is a highly significant investment directly by the US government in the economies and the societies of our enemies to rebuild their economies, to bring them into our alliances, and also the Bretton Woods system, as it was conceived in the 1940s that gave us the World Bank, the IMF, and importantly at the time, the trade pillar of the three, the International Trade Organization. I’ll come back to that in a moment.

The second world order then begins in 1980. Let’s say conveniently, we post that to the election of Ronald Reagan. And this is the era of Reaganomics. It is what a lot of people today are calling the neoliberal era. It is an era where government is not part of the solution, but part of the problem, where you want government to be as small as possible, you want it to get out of the way, you want to cut the taxes, you want to deregulate all to create room for capital and our multinational corporations to rise up and to deliver the solution. And in that neoliberal era, I think what we have is the World Trade Organization as an institution. I might argue, although it’s not really my bag, that World Bank and the IMF set up in the 1940s take a more neoliberal turn, but certainly that is the era of our free trade agreements, the era of aggressive trade liberalization.

The promise being that if you have governments get out of the way, you cut down the barriers like the tariffs, you push them aggressively to zero in our free trade agreements, that the multinationals will take us to the land of prosperity, of peace. And I think that just very, very recently in the last 17 years, we have seen two major economic catastrophes that are the result of public policy failures, the 2008-2009 great financial crisis, and then the 2020-21 COVID crisis, which is an economic crisis, a supply chain crisis, which I think that we are all living through right now. My last point is, take away the data, take away the economic theory, ask yourself and others, how did you experience those two crises? And do you feel like the promise of the neoliberal era, that trickle-down economics will bring us all peace and prosperity is delivering the results that it was supposed to? Thank you.

Debora Spar:

Final opening argument, President Summers.

Larry Summers, former Treasury Secretary and President of Harvard University:

Katherine, my friend. I do not speak for Reaganomics. I spent ten years working in Democratic administrations. I don’t recognize what I’m advocating here as having anything to do with the deregulation that you described, and we differ in another way. My history classes included Smoot-Hawley and all the damage that it did, and that’s also educational for thinking about the future. Four minutes, four points.

One, last night’s election showed what should have been obvious for a very, very long time. The American people care vastly about affordability. Tariffs are sales taxes. They reduce affordability. Example, $10,000 is the extra cost of a new home because of the tariffs that have been imposed this year. Example, the Peterson Institute has estimated that the various reductions in tariffs associated with the WTO, NAFTA, and all of that are worth an extra trillion dollars a year to consumers. Lower prices, higher incomes, higher real wages, it’s important.

Second, observation. The US trade policy, as it’s been practiced, has been good marketism. Lower priced inputs mean more competitive exports. Take, for example, the steel tariffs that my friends here favor. A hundred times as many people work in industries that use steel as work in the steel industry. When we protect steel, we reduce our competitiveness. What was good about NAFTA? What was good about NAFTA was that in a world where Europe could partner with Eastern Europe, in a world where Japan could partner with lower wage Asian countries, the United States could partner with Mexico so that North America would be more globally competitive. But here’s the simplest point about all these trade agreements. Look at them. In every one of them, the reduction in trade barriers achieved in other countries was three to five times as large as any reduction that took place in US trade barriers.

So if you believe in a mercantilist view, we basically had eliminated most of our trade barriers in what I imagine you approve of, the Kennedy round brought to you by President Kennedy. And so there weren’t these kinds of tariff barriers. We disproportionately reduced their tariffs.

Third observation. I don’t know about all of you. I would rather live in a country that capital is trying to get into than a country that capital is trying to get out of. And that means as a matter of arithmetic that if capital is on net coming in, that means you’re buying more than you’re selling. So our trade deficit in many ways is a sign of our strength. China has to impose controls on capital to keep all the capital in. So yes, I’d rather have the economics of Arizona than have the economics of Maine. Be a place that everybody wants to invest in and in many ways it’s a sign of strength.

Finally, China is a big threat and we need allies and that’s what our trade agreements have been about. Trade agreements to strengthen North America, attempted trade agreements with the whole world, attempted trade agreements in Asia, trade agreements with Singapore and Australia and with New Zealand. This is a way of fostering alliances and being more secure. Trade is a good idea.

Debora Spar:

Thank you. And everyone kept to time. All right. I’m going to ask Team Cass and Tai together to respond to the arguments that have been put forth.

Oren Cass:

All right. I think I will take the rebuttal. She will take our conclusion in a little bit. I guess I will try to make three points. The first is that I’m very pleased to hear Professor Summers describe China as an enemy or an adversary that we need strong trade alliances to combat. I agree entirely. Of course, in the year 2000, it was said that asking five economists a question will generate ten different answers. On this issue, there has been only one answer: that welcoming China into the global economic system is right for the American economy and for the global economy. That was the unanimous view of economists as expressed by Professor Summers in testimony before Congress. To my point that we don’t want higher tariffs everywhere, that higher tariffs are not an end to itself. I certainly believe, I think Ambassador Tai does too, that we should be working toward agreements that keep tariffs as low as possible on our allies with whom we can have effective and balanced trade.

But the commitment of the pre-2016 system, the post-World War II system was tariffs as low as possible on China as well. If you’re going to vote for them at the end of this debate, you need to believe we should be keeping tariffs as low as possible in China as well. If you agree that that is a bizarre policy at this point, that we should not be achieving it, that we should in fact be working with our allies to confront Chinese practices, as I think Professor Summers just implied, then you are in fact supporting a move toward higher tariffs than we saw in the WTO-GATT model. And it’s frankly the only rational perspective I think that you can take at this point, particularly when you consider where China wants to go next. China continues to invest in expanding its exports, running the largest surpluses it can, attempting to dominate now sectors like autos.

There are only two options: Allow China to dominate the auto sector such that we lose US auto manufacturers or confront China. And if there’s a better policy than tariffs to do that, I would be open to hearing it from the other side, but we have not and we won’t because there isn’t. And so we do need higher tariffs in those contexts because the idea that Paul Krugman expressed that we always benefit from zeroing out tariffs is simply not true. The idea that Jason Furman expressed that imports, for instance, of cheap EVs are the good thing and exports like cars that we make are the bad thing is simply not good economics.

Two other points I want to make fairly quickly. One is on this point about investment. If the rest of the world were actually investing in the United States if, as Professor Lawrence said, we were like a business investing and growing, that could be terrific. That’s not what the investment is. In fact, very little of the investment is foreign direct investment. Most of it is just buying stocks, bonds, real estate. And even of what is foreign direct investment, about 95% of it is acquiring existing assets, actually taking control of our companies. So what we are getting is not investment.

What we are getting is buying up American assets. We are engaging in a trade where the rest of the world sends us stuff and we simultaneously hollow out our current capacity and hand back claims on our future prosperity. Again, that’s not something that was even conceived in the free trade economic model. Krugman said trade deficits are self-correcting. In an event I did with him earlier this year as a podcast, he acknowledged that view was naive. And so the question is, are we going to admit that all of the economics that actually were the basis of this theory were wrong, but we have to stick to the theory anyway, or are we going to admit that we need to change course?

Last point very quickly. It’s very important to keep in mind that what we are trying to do with tariffs is not boost our ability to sell more exports. It is to return investment to the United States to build things in the United States. And in that case, we don’t just want the final assembly. We want to be making everything along the way. We still want to be trading, but we want to bring supply chains back. We want to be producing things here. We want to be serving our market, and we have a trillion dollar trade deficit we could make up before we ran out of opportunities to do that.

Debora Spar:

Thank you very much. Robert or Larry?

Larry Summers:

So first, we seem to have shifted from higher tariffs on the whole world to higher tariffs on China. Second, with respect to China, you know how many tariffs we reduced in that 2000 agreement? Do you how many tariffs in the United States were reduced as a consequence of that agreement? None at all, because for 20 years, the United States had previously given so-called MFN to China and the only thing that agreement did was cause China to reduce a variety of trade barriers to the United States. No response on the question of affordability, which the American people seem to think of as being their central kind of concern. I’m not here to defend every statement that Paul Krugman made 20 years ago, and Robert isn’t either. The question would be like, what’s happened? Has something good happened because of all the tariffs that with Oren and Katherine’s enthusiasm we’ve imposed in the last nine months?

Do we have a stronger manufacturing sector? Do we have a stronger manufacturing trade surplus? Do we have more allies in the rest of the world? Does China feel somehow more urged to be responsive to us? What’s remarkable is that the intellectual architect, that’s what Oren is often called, of this aspect of Trumponomics has had nothing in two shots to say about any benefit that has resulted from this policy experiment. Robert?

Robert Lawrence:

Yes. I guess firstly, this idea that the money flowing in to the United States is simply going to buy existing assets and stocks displays an incredible ignorance of national income accounting because by definition, under national income accounts, the trade balance which we’re talking about and you were talking about is equal to the difference between national saving and national investment. So at the end of the day, the investment is increased by the trade deficit. It’s physical investment. It is planned. It is equipment. So I’m sorry, but that’s just a definition. Now, I don’t believe that we should be obsessed with making everything in the United States. In fact, the secret of international trade is we make the things that we can make comparatively better and we should not make the things we’re not good at making, which we can obtain more cheaply from the rest of the world.

A basic insight of Adam Smith. So what we should be trying to do therefore is not to make everything, but to excel in the things we are best at. And that way, by trading them for the things others can make cheaply, we’re going to raise our living standards and bring prosperity to the United States. That’s the fundamental insight of the great thinkers about international trade, and it’s as true when they said it as it is today.

Debora Spar:

So let me start. We’re now going to move to sort of an interactive conversation here, and then we’ll open it up for audience questions in about another 20 minutes. But let me pick up on this point that Robert Lawrence just ended us on. We teach free trade here, teach Adam Smith, we teach David Ricardo, and we seem to sort of worship the basic principle of comparative advantage. Is that principle still true today, or are there reasons or circumstances under which we need to prioritize having secure supply chains here at home? And would you make any exceptions for some things we should produce at home rather than letting comparative advantage take care of? You guys want to start and then you’ll respond?

Larry Summers:

Of course. No one has ever suggested otherwise. If you look at the WTO, it has explicit provisions for doing things for national security. Of course, we have invested in the CHIPS Act, for example, directed at producing self-sufficiency. There’s no… I mean, you can read about the importance of security and such issues in Smith and Ricardo.

The question is whether the doctrine that Oren put forth that more self-sufficiency is always better than less, which yes, is the economic policy of North Korea and is the economic policy of Juan Peron and Argentina, that’s not right. Yes, we should be focused on security and resilience, but by the way, protection is often the wrong way to get there. Most of you know about the Jones Act. That’s the thing that says all our merchant marine has to be produced in the United States. It’s the thing that adds a dime a gallon to heating oil prices in New England. It’s the thing that screwed up the response to the hurricane in Puerto Rico. It was the self-sufficiency policy of the 1920s that has lasted for a subsequent century. Most of you remember that there was a big crisis because we didn’t have enough infant formula. That was because we had some set of laws that said we couldn’t import infant formula from Europe so we could be self-sufficient.

So multiple supplies—what you teach in any course you have about supply—is the importance of multiple suppliers as a way of having secure supply. And that’s what we’re for. That’s not the same thing as saying you should simply ignore resilience, but it’s not an argument for sort of naïve, self-sufficiency economics focused on job-creating in one particular sector, macroeconomics, which is what our friends on the other side seem to be advocating.

Oren Cass:

Well, just to say, I didn’t say that more self-sufficiency is always better. That is obviously a bad faith characterization of what we were just discussing and not useful to the debate at all. What I said is that balance is important. And what’s interesting about Robert’s comment a moment ago is that you noticed he slipped at the end there when he was describing how it should work. He said, “We should make the things we can make best and trade them for the other things that others can make best.” Oh, trade things for other things. And that’s the interesting thing about comparative advantage. Go back to when you took Econ 101, you learned comparative advantage. Was there a bunch of debt and assets flying around? No. In fact, comparative advantage requires you trade things for other things. This is what Adam Smith said. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry. David Ricardo explaining comparative advantage said, “England purchases wine by the exportation of cloth.” And John Stewart Mill in Principles of Political Economy said, “We will for simplicity begin by supposing the international trade to be in form what it always is in reality, an actual trucking of one commodity against another.”

So to be clear, I don’t think that self-sufficiency in everything is ideal. As I’ve said a couple of times up here already, I would like to see tariffs as low as possible with our allies who are in fact interested in balanced trade. I think trade is a very good thing. But once again, we have a problem where what the economists sold us, what they told us was a good idea is not what we now have, and yet we’re told to just assume it’s a good idea anyway as if it is the same thing. And these distinctions matter.

Katherine Tai:

Can I? Can I? Because you guys have each had two turns now. Thank you, my friend. All right. There’s a lot I want to respond to, and so you’ve got to pick your moments here. In an economic conversation, I’m surprised that we’re spending so much time debating David Ricardo with such a sophisticated audience when there’s something else that is staring us in the face that no one has mentioned yet, that I would like to introduce into the conversation, which is this talk about affordability, this talk about imports, this talk about the power of the American economy, how well things have been working.

Let’s look at the study of economics and the concept of the economy, and let’s separate it from the data, let’s separate it from the ledgers, and let’s think about when we are talking about an economy, what are we talking about? And I would say to all of you, when we are talking about the economy, we are talking about the people in the economy. Without the people, there is no economy. There’s no point to having economics, in my view, and I’m not the economist up here. So let’s look at all of the justifications that have been made so far about the benefits of the way that we have been doing trade. It has been all about the value of these policies to the people in our economy as consumers.

Every consumer that is spending money at the market, maybe not every one of them, most of them, ordinary consumers, are workers who have to have a job, who have to get paid a wage, who ought to have the rights to advocate for themselves and bargain in the marketplace of the workplace to better those wages, to better their conditions over time. And what has the system of free, free, free trade, liberalization, no tariffs, let capital go where it may, let the M&Cs decide what’s best for us, what’s that done to workers and wages here in America. Larry, you have, I think, also written about this, which is that the productivity of American workers has gone up, but their wages have not kept pace. In the context of NAFTA, we see that even more with Mexican workers, as their productivity has gone up, their wages have not kept pace either.

What is the point of having all of these dollar stores offer so many goods for a dollar if you need to have the dollar stores in the first place, because most of your people and your workforce are making less and less over time that they have to go shopping at the dollar store?

Debora Spar:

Larry, I know you want to come in, but maybe include as well this question of jobs. Is free trade the best way to get the kind of jobs that Katherine argued for?

Larry Summers:

So look, in economics, we measure wages by talking about real wages. We take a fraction, wage divided by price. The evidence that somehow protection raises real wages is roughly non-existent. And that’s the comparison that you have to do to make a judgment. And the case that real wages are systematically reduced by trade requires making that comparison, and I don’t think that that is the right reading of the evidence. And even the people who believe it most believe it because they think that the low wage workers like in Mexico are having their real wages go up. So the idea that this is systematically reducing wages everywhere seems to be an unlikely one.

But I just want to see, because we may have an important point of agreement here. Oren has said a number of times that he thinks on our allies, we should have as low tariffs as possible. So my question is, we have substantially raised tariffs in the last nine months on Mexico and Canada, on Europe, on India, on the countries of ASEAN. They haven’t raised their tariffs on us at all, except possibly in retaliation. So my question is, are they not our allies? Do you really mean we should have low tariffs on our things, or can we agree that whatever might be right with respect to China that the raising of tariffs on Canada, Mexico, Europe, Latin America, ASEAN was a mistake?

Debora Spar:

You guys want to take that? And then I know Robert wants to get in as well.

Katherine Tai:

Oren, that was very directed at you, but I would reserve just a little bit to come in at the end.

Oren Cass:

Sure. I’ll answer quickly. I think the answer is that it depends significantly on the particular country that you’re talking about.

Larry Summers:

Okay. Canada and Mexico.

Debora Spar:

How about Canada? Yeah.

Oren Cass:

So Canada and Mexico, I think it’s very clear that what we were targeting was a renegotiating of USMCA, which we’ve now moved up the review of by a year. The administration has made clear it wants to reach a new USMCA, and I hope that’s what they do. I will plug a piece I have coming out tomorrow in the Financial Times on that matter because I think absolutely the goal should be we need a new USMCA that fosters as open a market as possible, but we need different terms than we’ve traditionally had in trade agreements. We need a commitment to balance and we need a commitment to keeping China out.

And I think we’re seeing in a lot of cases the Trump administration making that demand. I think we had an old system, and this is what this debate is about that was broken. And we had a model that said, “Well, if you can never use tariffs as leverage, then you must simply sort of ask nicely and then just shrug and say thank you for the cheap stuff.” And what the Trump administration I think has done that is constructive is saying, “No, the old system was broken. We do need to get to better agreements and tariffs are a legitimate tool to use in pushing that process forward.”

Katherine Tai:

Great. What I’d like to add to this part of the conversation, because there are a lot of things that have been said that I don’t quite agree with, is this: on this point, I think we have agreement. I just want to put my stake in the ground and say, don’t get there too quickly. Which is this: I think it depends. And the way we’ve framed this debate is actually not about tariffs. And I know it was very important to our friends and opponents here to get the higher tariffs framing in because that’s advantageous because everybody is anxious, grouchy, angry, scared about the higher tariffs, right? So that puts us on the back foot.

But I think that the real point is the tariffs are just a policy tool. It’s neither good nor bad in itself. Whether it’s high or low is a matter of relative experience, right?

The real question we should be asking is, what are you using those tariffs for? What are you trying to accomplish and for whose benefit? And I think that in this framing, I want to emphasize that this flag of the higher tariffs is really just an example of, do we need to be doing things differently? And this is my interpretation. For example, by raising tariffs in inappropriate places. I’m not even sure I would completely agree with you, Oren, in terms of lowest tariffs on allies. I think it depends. I think it depends on the particular market, the particular conditions, and the particular relationship. And it may be that you have a very good ally who has practices that are a real problem for you, see softwood lumber in the relationship between the United States and Canada.

Debora Spar:

So I want to end on that point.

Oren Cass:

And I agree with that point.

Debora Spar:

Let me get Robert in though who’s been well-behaved here.

Robert Lawrence:

Yeah.

Oren Cass:

We’re all behaving well.

Robert Lawrence:

Very unusual. So Oren is obsessed by something called balance, but actually the deepest insight, yes, you wanted a free trade agreement, but it should be balanced. I believe a free trade agreement should be balanced to the degree that we get rid of the trade barriers. Yes, that’s a free trade balance, but the outcome must not be determined or predetermined. In fact, there’s only one condition that leads to balance and that is when you have barter. When there’s a double coincidence of wants, we get balanced trade, but we’ve moved beyond Stone Age economics and we’ve invented money. And what money allows us to do is to specialize and to sell certain things to some people.

If you’re Saudi Arabia, you’ve got a lot of oil and you sell the oil, but if you sell it to Japan, you may not want to buy Japanese goods. So that’s great because you can turn around with what you earned in selling your oil and you can buy the goods from someone else. So that’s how basic economics works in systems that actually have money. And so there is nothing that’s going to guarantee balance.

Now, you would have thought this was obvious, but in fact, let’s not forget that this has been the basis of the Trump administration’s policies. And I’m sorry, you can’t have a discussion today and talk about the purposes of tariffs without actually thinking about the tariff policies we have and not the ones we wished we had. And what we’ve got is an obsession with balance bilaterally, assuming that if a country runs a surplus with us, they must be doing something unfair and ignoring all of the other determinants of what drives their trade, as my example of Saudi Arabia and Japan would indicate.

So I really think that what we need to do is… And I don’t see that you can talk about tariffs, by the way, as an efficient instrument. Aside from an esoteric argument called the optimal tariff, tariffs are a bad instrument for any other purpose. And the reason is that they distort consumption and they distort production. If you want more jobs, it’s more efficient to subsidize production. If you want to raise revenue, it’s more efficient to have a broadly based sales tax than to use a tariff. And I could go on, but the fact is every purpose that people talk about using tariffs for is what we call a second-best purpose, because it is like shooting at a target not with an arrow but with a pitchfork. You always create collateral damage.

Debora Spar:

We are nearly done with our interactive piece here. Oren has asked to respond to Robert’s point. Then, we’re going to open it up for audience questions. You’ll notice their mics strategically positioned. If you’re interested in asking a question, please congregate around the mics and we’ll turn to you in just a moment. But please, Oren first.

Oren Cass:

I just wanted to ask, going back to the Chinese auto example, do you think that we should allow cheap subsidized Chinese EVs to wipe out the US auto industry? And if not, what tool would you use seeing as tariffs are second best and never appropriate?

Robert Lawrence:

Well, I do think that under certain circumstances, you might resort to tariffs when they happened to be second best.

Oren Cass:

Second best to what?

Robert Lawrence:

Far better if you must insist on having such an industry or for that matter, production facilities for national defense, you should use subsidies. They are more efficient because you’re trying to increase production. If you wanted a bigger steel industry and you subsidized it, you’d increase production. If you wanted a bigger steel industry and you protect it, you actually make it more expensive to buy steel, which reduces consumption.

Oren Cass:

I’m sorry, you’ve switched the industry. So we should massively subsidize the US auto industry?

Robert Lawrence:

Well, I wasn’t suggesting we do any of this.

Oren Cass:

So we should let China wipe out our auto industry?

Robert Lawrence:

Well, you said they would. Now, we do have rules and I believe in adhering to them. We have rules for unfair trade and actually that’s the traditional system which the Trump administration, and I guess you guys under Biden assisting with, undermining that old system. We have these rules and they used to be enforceable and they deal with unfair trade not as perfectly as we would like. So we should work on improving them and not undermining them by breaking the agreements that we signed historically. And I don’t see how we’re ever going to convince foreigners to sign new trade agreements when we are the world’s biggest scofflaw when it comes to agreements. This talk about renegotiating the USMCA, which aren’t made, as a Canadian, would you have any confidence in an agreement that you signed after the way you’ve seen the United States violate its commitments? I don’t think it’s worth the paper it’s written on.

Debora Spar:

All right. All right. Let me go ahead then.

Larry Summers:

I agree with everything Robert said, but it was kind of very erudite and slightly complicated.

Robert Lawrence:

He always explains this to our [inaudible].

Debora Spar:

Guys, you supposed to be on the same team.

Larry Summers:

So I’m just going to say, if they have heavily subsidized their industry, then the law is crystal clear that we are entitled to respond by, yes, putting tariffs on the specific area that they have subsidized or to retaliate. That is part of the existing system that has been in the law for 60 years that we absolutely support as part of a system. But that is a quite different thing than the things we have heard from our opponents, which are we’ve decided it’s inconvenient. We don’t like this agreement, so we’ve got some objective that we want to achieve, so we’re going to slap a big tariff on another country and then try to renegotiate an agreement. But yes, should we live within a law that for reasons both political and economic with respect to predatory pricing provides for countervailing in the face of major subsidies?

Yes, absolutely. That is what we should do, but that is entirely consistent with the paradigm of US trade policy that has existed. The difference is that we used to be able to get global support to respond when a country was subsidizing in a major way until we decided to declare trade war on the whole world and therefore reduced very substantially our leverage.

Debora Spar:

So let’s go to the first question, Willie, and just again, please keep the question concise.

Questioner 1:

Yes. First of all, thank you for this very engaging debate. One thing I haven’t heard tonight and I’d like to hear your views on is exchange rate.

Debora Spar:

For or against?

Oren Cass:

Well, look, exchange rate was supposed to be one of the mechanisms that ensured that trade deficits would be self-correcting because countries like China aggressively manage and manipulate their currency, they are not self-correcting. And so as a result, the system does not work. I’d like to yield my time to Ambassador Tai though to talk about why the WTO system is in fact entirely inadequate to addressing either that problem or the one that Larry was talking about.

Katherine Tai:

Well, thank you for that set and for me to hit the ball. I guess two responses. One, Professor Lawrence responding to subsidization with more subsidization or different subsidization is actually technically not in line with WTO rules. And so just one point of order there. The second piece of it is yes, countervail was supposed to be the one tool that we had under WTO rules to counteract subsidies that are so distortive as we’ve seen in our trading relationships, especially with China. And it is actually the appellate body that ruled that a subsidy in the Chinese system has to be coming from the Chinese state or a parastatal entity acting as the state in order to be countervailable. What that means practically is that the WTO, in one of its most seminal decisions at the appellate level actually took away a really important part of the only tool that we have to counteract the kinds of subsidies that we have to compete with from China.

So I’ll just close out by saying I think everything is not okay. And at a time when everything is not okay, the answer cannot be let’s keep doing things the way we have been before, because I think that that is literally the definition of insanity that you keep doing the same thing and you expect for a different outcome. We need different outcomes in this country today. We need different outcomes around the world. What the economics of free trade has done to politics and geopolitics has taken us to a place that is tremendously dangerous. And I think that we have to respond and we have to think big. And that means also coming off of the orthodoxy of an economic order that has clearly run out of steam.

Larry Summers:

So first of all, we have laws in the United States that provide for the designation and then response to manipulation of exchange rates. Those are reasonable things to do. I think you have to be careful to understand what constitutes a manipulated exchange rate. It doesn’t just mean a market exchange rate that you wish was different. And I think we get immense advantages from having a strong currency, including the ability to borrow money at lower costs, lower mortgage rates for American families and the like. But yeah, we absolutely should respond when there are manipulated exchange rates. I kind of look at there’s a lot that could be different or could be better in this country.

But if you look at what’s happened to the middle class in Europe, if you look at what’s happened to the Japanese economy over the last 35 years, this apocalyptic talk about how terrible it all is in America, I don’t know, I’m sure glad I grew up here and got to spend my career here and maybe we could have pushed it better and no doubt there have been some mistakes that are made. But this idea that America is somehow a big failure over the last 30 years doesn’t, Katherine, correspond to my interpretation of reality.

Katherine Tai:

Larry, I guess it’s because I’m not a former Treasury Secretary, not a former president of Harvard University, and I’m not even the most ordinary of Americans. My level of economic insecurity and anxiety today is high. And I think that I’m just the tip of the iceberg for most Americans. Things are not okay. People are not experiencing the hope that the American dream can be theirs. I am glad that you were able to have your American dream.

Debora Spar:

All right, that’s a shot across the bow.

Larry Summers:

If you think that making the cost of lumber higher from Canada, so that every house in America that gets built is more expensive is somehow going to bring back the American dream and doing 10 more things like that is somehow going to bring back the American dream, we’re going to have to respectfully disagree.

Katherine Tai:

Well, that’s not what I said.

Oren Cass:

Larry’s going back and forth a lot.

Debora Spar:

All right. We will get to our questions. Yes.

Oren Cass:

I want to pick up one more point because I think this is an interesting habit generally in these economic debates is that if you’ll recall when we embraced China and said free trade is wonderful and all of the factories were shutting down, economists lectured us very seriously that it’s completely unsophisticated and irrational to look narrowly at the immediate effect. We need to think broadly about the big picture, general equilibrium and what will eventually happen in the economy. There’s a very famous quote from Richard Trumka saying… somebody told him, “Maybe it’ll take three to five generations, but that’s fine.” And yet when we turn around the other way and we say, we actually think we should make some structural changes here. We should have policies that make it relatively more attractive to invest in the US, to rebuild industry here. That’ll create some jobs in factories, but it’ll also make it mean a lot more for the communities where these things locate.

That’s not going to happen instantly. It’s certainly not going to happen in the first nine months, but we think that’s actually a positive trajectory for a country that has been suffering under very challenging economic circumstances in a lot of ways.

Then we’re told, “Oh, no, no, no. Look at what happened to soft lumber in the last two months. It doesn’t fly.” If you can say, “We like the decisions we made in 2000, that was the right trade-off, hollow out industry, cheaper stuff,” and most Americans are rightly looking at that trade-off and say, “You know what? That was the wrong one. We’re ready for something different.”

Robert Lawrence:

When we wrote an agreement with China to enter the WTO, we were aware, those who looked at that agreement were aware that there could be problems that would arise because of China’s unusual political system. And, in fact, there was a special safeguard put in that if imports from China caused disruption, just simply market disruption in the United States, we would be entitled to protect it.

And, in fact, four American industries applied, and they went to our International Trade Commission, and they actually proved that there had been this market disruption. However, the response of the Bush administration was to turn down their applications.

So the problem wasn’t that we allowed China to enter. It was that we didn’t enforce our own provisions. We have to think about adjustments and not ignore dislocation that occurs when workers are hurt.

Now, we have an imperfect trade adjustment assistance program. We had it. Actually, when Katherine Tai was the special trade representative in 2022, this program was disbanded. So do we really care about the people who are dislocated or not? How have we helped those who are hurt?

Trade does create winners and losers, and we have to have more, better programs for the losers. I’ve been writing about this since 1980. The best program is what I call wage insurance. So we do need to improve our adjustment programs in the United States for those who are hurt. Then we have to take care of those losers, otherwise we will see the political response.

But the laws we had anticipated that there would be problems. They provided provisions, and it took the election of Barack Obama before we actually invoked the safeguard to preserve tires, an industry that was then suffering severe disruption.

Oren Cass:

I know you want to get to the question, but after he attacked my partner like that-

Katherine Tai:

Yeah, thank you. Thank you. You go ahead and I have some-

Oren Cass:

I agree with Robert that there were some safeguards put in principle. The problem is that we had virtually every economists saying, “Don’t use them.” Like Robert Lawrence, who wrote in 2006, “China’s trade policies are broadly supportive of a rules-based multilateral trading order and his behavior at the WTO is that of a [inaudible] power-“

Robert Lawrence:

That’s not a comment on the safeguard.

Oren Cass:

… and essentially said what China was doing was terrific and people like the Bush administration should certainly not respond because, of course, cheap stuff from China was good.

Katherine Tai:

I do need to correct for the record because this is being recorded and that is, literally, the record that I need to correct, which is TAA lapsed in 2022 because the United States Congress could not see their way to renewing it.

Why could they not see their way to renewing it? Because the Republicans in Congress are used to renewing it only, only in exchange for passing a massive liberalizing free trade agreement, which is really not in the cards anymore. And so the response from the Congress and the Republicans in particular was, “You know what? Anybody who’s displaced by trade, tough luck. Moreover, TAA in itself was never enough.”

And I’ll just go back to the classical economics training. There are going to be winners and losers from trade. We’ll make it okay because the winners and the winnings will have to be shared with the losers to compensate them for losing.

At the end of the day, when you lose your job, studies have shown that the impact of losing a job can be as significant as the emotional, social impact of losing a spouse. How do you compensate someone for that? You cannot, we did not.

And I think that is a large part of the reason why the disruption that has been wrought since NAFTA, since the WTO, since the accession of China into the WTO, which I think that I will agree with you, Professor Lawrence, that there is a lot of responsibility to go around in terms of why we are where we are today.

But that goes a long way to explaining what has happened here, such that the disruption is still ongoing 30 years since NAFTA was implemented. And the disruption is no longer limited to what is happening in the United States, but the disruption has come for everyone in the world.

Debora Spar:

And I think, oddly, there’s a fair amount of agreement here about the need to compensate the inevitable losers from trade and the political inability or unwillingness or difficulties of actually implementing those policies.

Oren Cass:

No. Sorry, that’s not what she said.

Debora Spar:

But no, I’ve got to get one more student in here. Kung is going to ask one more question and then you can all keep fighting.

Katherine Tai:

Okay. Thank you.

Kung (the questioner):

Certainly more fighting material here.

This question might get me some hate in this audience here, but Ambassador Tai, I want to build on your historical lesson here very briefly. Ronald Reagan, to put in technical terms, took a chainsaw to FDR’s tax policies. And so the question I want to ask you all is, how much do you attribute the state of our economy to trade policy versus a taxation system that enabled the disproportionate capture of the gains of trade by the investor and managerial class and our also failure to invest in education, workforce training, and our social safety net?

Katherine Tai:

It turns out it’s all connected. And you are absolutely right to ask that question because while we’re up here debating tariffs, the real question is what is happening to our economy and what are the solutions that are being presented, right?

This conversation is really only about whether or not we should change the way we’re doing things. I think that the answer is obviously yes, but even once you get there and you bring along others to “we need to change the way we’re doing things,” which I think they are moving toward, right, therefore the fight over how we frame this debate—then the question is: what are we going to replace this system with? If this system replaced what FDR put in place, and this system is now running out of steam, what do we replace it with?

And I think that speaking as the former Biden official here, I think that you have between Trump and Biden, two administrations that agreed that we need something different. We were allied in being change agents.

Where you have differences and increasing distinctions between the Biden and the Trump trade and economic policies is Biden was willing to pursue trade policies that were working in concert with the other economic and social policies to create a middle-out economics.

What I’m seeing more and more from the Trump administration, especially in the second iteration, is the use of terrorists sometimes to contradict, but increasingly to enhance a pro-oligarchy Gilded Age 2.0 on steroids kind of agenda. And I think that that is the real debate.

Larry Summers:

Should we have a more progressive tax system? Yes. Should the Harvard Business School, when it talks about social responsibility of business, condemn corporations who abuse tax shelters much more than it does? Yes. Should there be much more investments in the education of every American on equal terms? Yes. Should we be doing much more to have satisfactory infrastructure that leads firms from all over the world to want to invest here? Yes. Should there be more support for labor union organizing rights so that workers can get their fair share? Yes. Yes.

Have we lost our way in important respects since 1980 on all of those things? Yes. Do we make it better by deciding to raise the prices of most things, by imposing tariffs on the rest of the world, by compromising the ability to cooperate with other countries to have integrated production to sell to the rest of the world, by missing opportunities to engage in reciprocal trade reduction where they cut their trade barriers five times as much as we do? No, I don’t think that is the key to making any of this better.

So let’s not frame this as who’s satisfied with the world as it is. Let’s frame this in terms of whether policies of putting substantial taxes on Americans who buy things at lower cost from people who produce them efficiently, like toys, like lumber, like steel as an input through automobiles, whether that’s a good idea or not. And I don’t think a willy-nilly change towards all of that is a good idea.

Oren Cass:

One more. After that, that’s fine.

Robert Lawrence:

Yeah.

Debora Spar:

All right. We are at the end of our question period. I am going to ask the two sides to take four minutes to summarize, which I will say sounds like an impossible goal at the moment.

But Professors Lawrence and Summers, do you want to make your last closing argument in favor of the free trade system?

Larry Summers:

Yeah. I mean, in a way, I just made some of the key arguments.

We are for lower prices for Americans because they’ve made clear that that is the central priority of the American middle class. Yes, we’re for that, and we think that’s very important.

No, we do not think that balance year by year or country by country makes any sense at all.

Think about you, Debora, every year, you are in a massive trade surplus with Harvard. Harvard pays you a lot of money-

Robert Lawrence:

Gigantic.

Larry Summers:

-and you don’t buy anything from Harvard. You are in a massive deficit with the grocery store near you. You buy a lot from them, and they never buy a lot from you. You could conceptualize that as exploitation, or you could conceptualize that as common sense.

The same thing exists in a world with many countries. And so this idea that we should somehow be striving for balanced trade country-by-country makes no sense. The idea that we should be striving for balanced trade everywhere, that doesn’t make sense, either, in an economy that grows.

Think about an individual, an individual whose income grows every year and their debt grows every year, too, but their debt doesn’t grow that much faster than their income. Maybe it grows slower than their income, but their debt grows every year. Is there something wrong with that? I don’t think that’s what they teach in finance at the Harvard Business School.

And there’s just other things that are being said here that, to my mind, bear no resemblance to what they teach at the Harvard Business School.

I see my pal Robin Greenwood over here. Robin, what grade do you get in finance at the Harvard Business School if you say, “Making a direct investment counts. Buying a bond or a stock doesn’t count. That’s not really contributing to the economy?” I don’t think you could get a good grade if that’s your way of understanding the relationship between finance and the broader economy.

So let’s not be satisfied with the status quo. There are lots of things, I went through them a moment ago, that we can do that will make things better, but let’s not also just fall victim to sort of caricatures of alternative theories.

Robert has something he wants to add, so I’m going to give him my last minute here. Go take it away, Robert.

Robert Lawrence:

Okay. No. And let’s just for a moment think about what we’re doing to America’s position in the world. We led the world towards freer trade, and the world thrived. We reduced poverty in the world from a point where 40% of the people were at the poverty level to 10%.

This was the neoliberal system that Katherine is all against. I think when people perceived the United States as a benevolent hegemon, true, we made mistakes, but they felt we had their interests at heart. The thrust of raising tariffs in the way we are doing it, indeed the premise behind much of the discussion, is it’s only about America. We’re self-obsessed.

But even if we were, we should be wise enough to realize that extorting from others is not going to advance our long-term interests. We may make some short-term gains, but in the long run, resentment will build up. They will not simply accede to our extortion. And eventually, we’re going to find it very difficult to conduct not only foreign policy, but other policies that are in our economic interest.

Debora Spar:

Thank you. And the final word, you will all have an opportunity momentarily to vote so you actually get the final, final word, but first, the closing arguments from Team Cass and Tai.

Katherine Tai:

Thank you so much. The New Deal Order, Roosevelt, Keynes, the Neoliberal Order, Reagan and Friedman.

Larry, I think in 2007, you wrote an op-ed that said, “We are all Friedmanites now,” and it was including you. And so if you now agree that there is a lot that is suboptimal in today’s American economy and possibly in the world economy, then I feel like you have moved. You’ve moved since you wrote that, and you’ve also moved over the course of this debate, that we do need change, and we need change in our trading regime.

It continues to astound me the incredible privilege to be in rooms like this. This room is beautiful, for those of you who can’t see. I understand this is usually used as a classroom. It actually looks like a concert hall, and the acoustics are incredibly good. What incredible privilege we have to be in community with each other here to debate these questions in a kind of cartoonish, good-humored wrestling, professional wrestling kind of way.

I do hope that we walk away from this still friends and that we’ve all taken it in that spirit.

Katherine Tai:

But this is a privileged room. And I think that it is important to consider that, if in order to get a good grade at Harvard Business School requires you to close your eyes to the facts that you can see all around yourself in your lives, in the lives of your families, in the lives of the villages and towns where you come from in America and the rest of the world, then I hope that you all do very poorly at Harvard Business School so that you can go out there and change the world for the better.

Thank you. Oren.

Oren Cass:

Yes. Okay. It may be foolish to close on a more technical point, but it connects exactly back to what Ambassador Tai just said. From both Professors Lawrence and Summers, there’s been this bizarrely condescending idea that if you don’t understand that all investment is good, productive investment, you’ll fail at Harvard, you’re ignorant.

I’m genuinely shocked by that. And the reason I’m shocked is because they know, and in fact, Professor Lawrence raised at the very start, what’s one of the main drivers of these imbalances? It’s the US federal budget deficit. The fact that the US is borrowing $2 trillion a year is unquestionably a big part of this problem. But what that means is that we have $2 trillion of bonds being purchased, that our economists will call investment, that the United States is not investing. It’s mailing out as entitlements.

And so this actually is the gravamen of the problem. What is actually happening in the world is an exchange in which the rest of the world sends us stuff and we send back a piece of paper saying, “Thank you. I owe you for this stuff.” And a lot of that lands in, if you’re tracking these dollars, which are a much better way to measure things apparently than the stuff, the dollars run through the federal government and go out to people as entitlements, often for people living in places that have been decimated by this exact policy.

And then the economists have the nerve to come back and say, “You ignorant people, you don’t understand that this is productive investment and an effective system that works for everybody.” And I do hope we’re friends at the end of all this, but I have to say I’m genuinely disgusted by that argument.

It is not true. It is not the way our economic system is working. And if you can’t get your mind from the abstract national accounts to the way our economy is actually functioning, then, as Professor Tai said, I hope you do very poorly here at Harvard Business School. Thank you.

Debora Spar:

So I am going to take the advantage of the mic here. We’re going to put the vote up again. Please vote.

And I will, as the only person on this stage who actually does teach at the Harvard Business School, I will say that I think the presence of so many students in the room today is tribute to the fact that our students are concerned about these issues. They’re concerned about the state of the world. They’re concerned about the state and the fate of the American worker and the American economy.

So I hope despite the very interesting debates here we have given, you all have given lots of food for thought to our students who want to understand and reshape this world, as I know you all do, to try and make it work better for not only the people in this room, but the people outside this room as well.

So thank you very much. The votes will be coming in momentarily. I will remind you, we started with a 70/30, 70s with the No and 30s with the Yes.

Oren Cass:

I see victory.

Katherine Tai:

We have moved one percentage point.

Debora Spar:

And we have thus far moved 2% to 68-32.

Robert Lawrence:

Congratulations.

Oren Cass:

What we have here is a mandate.