Donald Trump's Economic Strategy... Maybe? : The Indicator from Planet Money Wall Street Journal Chief Economics Commentator Greg Ip explains President Donald Trump's emerging economic strategy.
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Donald Trump's Economic Strategy... Maybe?

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Donald Trump's Economic Strategy... Maybe?

Donald Trump's Economic Strategy... Maybe?

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CARDIFF GARCIA, HOST:

Hey, everyone. It's Cardiff. And today's INDICATOR is something a little different. I speak with Greg Ip of The Wall Street Journal, who recently finished a great piece about President Donald Trump's emerging economic policy. And I found that interesting because whatever you think of the president, he can be really hard to pin down. But Greg does manage to identify parts of a policy that set him apart from previous presidents, like the extent to which the president helps his favorite industries, the extent to which he's focused on China and how often he says that what he does is necessary for national security. This was a super-fun chat with Greg. And it is coming right up.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

GREG IP: I'm Greg Ip. I'm the chief economics commentator of The Wall Street Journal.

GARCIA: I guess one of my first questions is just, why has it been so hard to discern what President Trump's economic philosophy is?

IP: Well, I think partly because his philosophy is really kind of an amalgam or a mishmash, if you want to be a little bit more vernacular about it. We think of the Republican Party today as one that despises government intervention in all its forms. But that wasn't always true. That's really kind of a postwar vision of the Republican Party. For the first 150 to 160 years of the United States history, the Republican Party was the party of high tariffs and industrial policy. And in some sense, what you're seeing from Trump is a harkening back to those original philosophical views.

GARCIA: You used the phrase industrial policy. Define that for our listeners.

IP: So industrial policy, broadly speaking, is a use of the federal government to direct resources to say that these are the industries that we think are important to national security, national prestige or to the future. We don't think the private market recognizes those benefits. We're going to take some steps to pull strings here and make sure that they get the resources they need. The reason it seems kind of disconsonant to our ears is that, traditionally, American presidents have not done this. What I think sets Trump apart is that he is adopting this policy not just with what we would call the industry of the future but the industries of the past. There's nobody who would say that the future of any country's greatness lies in steel or coal.

GARCIA: On helping the industries of the past, it seems like there is a consensus among economists that this is a pretty bad idea. On bolstering the industries of the future, there seems to be more kind of controversy there, more arguments about whether or not it's a good idea, whether or not it can work and whether or not it's somehow justified by American history.

IP: So looking at history for a little bit, I think that there is some evidence that certain industries did benefit from government largesse. Just to give you a particular example, the Internet and the laser were both products of U.S. defense spending, which is really a form of industrial policy. To take a more contemporary example, let's look at the high-tech industries, semiconductors. It wasn't so long ago that we used to manufacture a lot of computers and semiconductors in this country as recently as the 1980s and early 1990s, for example. But by the 2000s, supply chains in the high-tech industry had completely reformed themselves. And pretty much all of that assembly takes place in East Asia or in other countries. Virtually none of it takes place in the United States today.

Now, what does this have to do with Trump? Well, Foxconn, a company that assembles a lot of the products for companies like Apple, predominantly builds its products in East Asia - Taiwan and China, to be specific. Well, Trump got behind an effort to bring a Foxconn factory to southeastern Wisconsin. And it did not come cheap. Essentially, Wisconsin taxpayers were on the hook for almost $4 billion to bring that plant here. And there are a lot of people who are skeptical that it will ever succeed. But it's still kind of markedly different from these other efforts that Trump is making to prop up coal and steel.

GARCIA: It does seem also like the particular way in which the U.S. economy interacts with the Chinese economy is driving a lot of policy right now within the U.S. and certainly within the administration.

IP: Yeah. Let me give you a good example. China, like many in the United States, believe that electric cars are the future for transportation. And the key to making a successful electric car is, really, battery technology. So in China - China is trying to create a strong domestic battery industry to have leadership in that sector for the next 10 or 20 years. So American car companies, like General Motors, that build cars in China must use Chinese-made batteries. So they are basically - as a condition of doing business in China, they are basically being conscripted into helping create a indigenous Chinese battery sector.

Now, that would be one thing if everybody had to play by those rules. But Chinese carmakers don't have to play by those rules. They get to buy batteries from Korea, which are much better. And therefore, you have this kind of odd situation where China compels foreign companies to buy inferior batteries from China but allows Chinese companies to buy superior batteries from Korea. The unifying factor to both those theories - that China is very focused on achieving supremacy for the Chinese battery-maker and the Chinese carmaker and disadvantaging foreign companies. It's that kind of treatment that really riles up American companies and has soured them on the China market in the last 10 years.

GARCIA: Yeah. I want to hit on one last point, Greg, because you talk about it a little bit in your piece. It has to do with the approach taken by the Committee on Foreign Investment in the U.S., which is like a panel or a body that screens foreign investment, has the power to block foreign investment in some cases - or make recommendations to block foreign investment. Where does that fit into all of this?

IP: So I think the reform of CFIUS, as we call it, is actually one of the most important stories that has really not gotten the attention it deserves. Essentially, CFIUS has been around for a long time. It says, like, if a foreign company in a hostile power, like Russia, buys a U.S. company that's really important to national security, we need to take a look to make sure national security is not being compromised. Not a big deal. A lot of countries do this.

But what has happened now is that because of the awareness that, in China, there really isn't the difference between the state and the private sector that you have in other countries, you really need to tighten this screen to make sure that if a Chinese company buys, like, an artificial intelligence startup in Silicon Valley, that does not, you know, create the beachhead by which China eventually absconds with all of American know-how and expertise in that area. And you have, essentially, created a whole, you know, much more powerful bureaucracy that is not very transparent and really not accountable to Congress to do a lot of very invasive stuff, like blocking transactions.

GARCIA: I would add an additional point to that. So in addition to the point of a newly empowered or a reinvigorated bureaucracy that doesn't have a ton of accountability or transparency, there's also the potential that using national security as a rationale to fight a fundamentally economic war could potentially end up diluting the rationale itself because if you're just saying everything is national security, including, like, the ability to make steel in your own country, then nothing is about national security. It's a very strange - it's a strange thing that has sort of built up over the last 18 months.

IP: Absolutely. Now, if everything's national security, nothing's national security. And the willingness of this administration to invoke national security to do things, like doubling tariffs on Turkish imports of steel, aluminum, you know, hit Canada and Mexico with tariffs on imports and so forth, I really think does represent a very serious kind of, like, shot at the foundation of the global trading system. I mean, the idea that, essentially, we can come up with any pretext we wish to impose tariffs on any country that we wish I think really does shatter the spirit and the foundational principles by which we've sort of, like, moved the international trading system the last 40 or 50 years.

If I could, there was a good example from just a few years ago. China is one of the world's largest producers of elements called rare earths, which are special metals that are vital to very - a lot of high-tech applications. And a few years ago, they started blocking exports of a lot of rare earths for the very, you know, obvious reason that they were trying to, like, hoard them for their own producers and create a competitive advantage there. This was clearly a protectionist action. It's precisely the sort of thing that American businesses have been complaining about. So the U.S. teamed up with Japan and the European Union and brought a case against China at the World Trade Organization. And two years later, they won. And China lifted the restrictions. We do suffer from our failure to preserve and promote and strengthen the mechanisms that already exist, like the World Trade Organization.

GARCIA: So the use of national security, the explicit use of industrial policy and - all of which is put together in a kind of incoherent mishmash with unclear goals. That's the economic philosophy of President Donald Trump.

IP: Well, you certainly put it in a very concise, crisp way, Cardiff.

(LAUGHTER)

GARCIA: Thank you. Greg Ip, thanks, man. This was so much fun.

IP: Cardiff, it was a pleasure. Let's do it again sometime.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

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