Chad Bown interviews Paul Krugman at the Trade Talks podcast on a range of subject related to trade and industrial policy (Trade Talks, March 16, 2025, “Paul Krugman talks trade, industrial policy, and Trump”). Here are a few comments that caught my eye:
If you are worried about dependence of the US economy on foreign supply chains for certain products, the appropriate answer might be industrial policy, but not tariffs.
Max Corden’s 1974 book Trade Policy and Economic Welfare remains relevant. And what Corden and others said was, if there’s something that you think you need to be producing, then encourage production. The answer is industrial policy. The answer is to subsidize or otherwise promote. In general, a tariff has side effects that may not be what you want. If you were worried that too many of the world’s semiconductors are being produced within striking range of China, then you want to subsidize production of high-end semiconductors in the United States. But that’s not a good reason to raise the cost of semiconductors to the U.S. downstream industry. So, there’s a really pretty strong case for industrial policy here. That’s the generic principle.
Now actually implementing it is tricky, by the way. The thing about these agglomeration economies is that, once they’re well established, they’re really hard to break. … And so if you want to develop rival agglomerations to the existing agglomerations that you think are in the wrong place, it’s going to be expensive and hard, which doesn’t mean you shouldn’t do it, but you should realize that it’s not something you do by throwing a few dollars at the problem.
On Europe’s competitiveness problem:
I would suspect that the Europeans would be feeling relatively okay about their economic performance if it weren’t for the comparison with the United States. The old Eurosclerosis of persistent high unemployment is gone. In general, prime age workers are more likely to be working in Europe than they are in the U.S. In a lot of ways, the quality of life is decent. Their life expectancy is several years longer than ours. So Europe looks pretty good, except that they have clearly fallen behind in some advanced technologies and a significant productivity gap has opened up. …
A significant part of that gap in productivity between the U.S. and Europe is really very localized. It’s a reasonable guess that roughly half of the U.S.-European productivity differential reflects very high value-added per worker in Silicon Valley and also Seattle, which operates in somewhat the same way, on one side of the continent, and greater New York on the other. That it’s really the agglomerations of the tech industry in Silicon Valley and the agglomeration of the financial industry, on the East Coast, that are the difference.
On why tariffs aren’t the answer to reducing the US trade deficit:
It’s also probably not the case that tariffs will do much to reduce the trade deficit. There are some subtleties there, but the basic point in textbook economics says that the trade deficit is really determined by the capital account. It is the fact that foreigners want to invest in the United States – so there’s a net inflow of capital – and just as a matter of accounting that means that we have to have a trade deficit on the other side.
If you ask, “So what happens if you put on tariffs?” The answer is, even if other countries don’t retaliate, what happens is that the dollar rises. And we have lower imports, but we also have lower exports because we have a stronger dollar. And of course, if other countries do retaliate we don’t need as strong a dollar. But one way or another, exports fall to pretty much offset the effect on imports. …
Within the range that we’re talking about, tariffs are really unlikely to have an impact on the trade deficit. At the same time, they will raise costs. What’s really striking … was this disproportionate concentration of tariffs on intermediate goods rather than consumer goods, which meant that even manufacturing was probably not benefiting. You were probably actually reducing manufacturing employment. And we’re doing it again. As we’re holding this conversation, the tariffs that have already gone into effect are on steel and aluminum. That’s good for steel and aluminum manufacturer, I guess, and apparently lawn furniture, which for some reason is covered by this as well. But it’s pretty bad for everybody else who’s downstream. These are not tariffs that look like they’re going to achieve even their ostensible goals.
