Trade policies shape everything from the price of goods to the stability of global economies, but how do they actually work? In part one of this two-part series, host Lauren Lavin sits down with Dr. Anne Villamil, professor of economics at the University of Iowa Tippie College of Business, to unpack the history and complexity of international trade.

The views and opinions expressed in this podcast are solely those of the student hosts, guests, and contributors, and do not necessarily reflect the views or opinions of the University of Iowa or the College of Public Health.

Lauren Lavin:

Hello, everyone, and welcome back to Plugged Into Public Health. I’m Lauren Lavin, and today I am joined with Dr. Anne Villamil. And if it’s your first time with us, welcome. We’re a student-run podcast that explores major issues in public health and how they connect to the world around us.

Today we’re talking to Dr. Villamil, professor of economics in the Tippie College of Business at the University of Iowa. Dr. Villamil’s research focuses on international trade and economic policy, and she brings a fascinating perspective on how trade decisions made in Washington ripple through industries, communities, and our everyday life.

In part one of this two-part conversation, Dr. Villamil walks us through the history of trade policy in the US, how institutions like the World Bank and the World Trade Organization came to be, and how tariffs have shaped global relationships and domestic industries. Be sure to tune in next week for part two, when we take a deeper look at tariffs in the US and what they really mean for consumers, businesses, and the economy as a whole. So let’s get plugged into public health.

Plugged Into Public Health is produced and edited by the students of the University of Iowa College of Public Health, and the views and opinions expressed in this podcast are solely those of the student hosts, guests, and contributors. They do not necessarily reflect the views or opinions of the University of Iowa or the College of Public Health.

Thank you, Dr. Villamil, for joining me on the podcast today. I appreciate you taking time to chat. Could you start by introducing yourself and sharing what drew you to study international trade and economics?

Anne Villamil:

Yes. It’s a great pleasure to be here. So thank you for the invitation. My name is Anne Villamil. I am a professor of economics in the Tippie College of Business. I grew up originally in the Hudson Valley in New York. I was an undergraduate at the University of Rochester, which is in upstate New York. I did my PhD at the University of Minnesota, and I was on the faculty at the University of Illinois at Urbana-Champaign for many years, and then came to the University of Iowa in 2014.

So between my undergraduate degree and going to graduate school, I got a summer internship at the US Trade Representative’s office, which is part of the Executive Office, or the White House in Washington DC. And so I was just going to spend the summer there, but for a variety of reasons, I ended up spending a year there. So it’s given me a good sense of how trade usually works, how in my view it should work, and what is happening right now, which is extremely unusual.

Lauren Lavin:

Well, that’s exactly why I wanted to chat with you. When did you do that internship?

Anne Villamil:

Oh, 1981, I think it was. So a very, very long time ago.

Lauren Lavin:

Would you say that trade … Besides what’s happening right now, was trade in 1981 different than trade in, I don’t know, 2019?

Anne Villamil:

It was different. I’ll walk you through a little bit about trade. We had a very unpleasant trade war called the Smoot-Hawley trade war, which was very bad and people understood that it destroyed a lot of value. And so some of what happened was … It was related to the Midwest. And trade wars get started, and this happened with Smoot-Hawley in the ’30s, when people say, “Oh, negotiations aren’t going well. Let’s shoot a shot across the bow of this other country, and it’ll be very, very limited. We’re just trying to get their attention.” And that spiraled into a very, very big trade war.

And so economists, like any profession, tend to have different views on things, but when the trade war started in the ’30s, a thousand economists, and that was a lot at the time … Virtually all economists said, “Don’t do this. This is going to be very, very destructive.”

And it went ahead because politically it just got out of hand. The US imposes a tariff, a country responds, there’s another tariff, the country responds. And it was a bad thing, and it was understood to be a bad thing. And so particularly from the ’30s on, there was a lot of leadership from the US to say, “One, we don’t want to do that again because it was not a good thing. And two, if we reduce trade barriers, we can grow the economic pie. And if we have a bigger world pie, then everybody can get a bigger slice.” So that was a good thing about it.

And the other thing was if we trade with each other, then you don’t literally want to blow up your export market because that will hurt you. And we saw more of that after World War II.

So there are these waves of policy. I think all academics know that lots of policy doesn’t get done by people sitting in their offices, working very hard and thinking great thoughts, though they certainly do this every day. There’s often a crisis. And during a crisis, we say, “Okay, we’ve really got to fix whatever this is.”

And so that started in the ’30s, in terms of waves of reducing global tariffs. And right now … I’ll come back to this, but right now, tariffs are roughly as high as they were in the ’30s under Smoot-Hawley. And we spent decades getting them down to very, very low levels. So that was the ’30s, during the trade war.

Then, of course, we had the crisis of World War I and World War II, and especially during World War II, where we used atomic weapons and there was massive destruction. The world looked at this and said, “There’s got to be a better way.” So we built institutions. And the US was very influential in building three institutions. The first was the UN, which I think we all look at and say it doesn’t work so well, but we built economic institutions, the World Bank and the International Monetary Fund, because there was a great understanding that part of the roots of World War I and World War II were economic. And the World Bank was designed to deal with long-term reconstruction and development because, again, if countries are prospering economically, they are less likely to want to literally blow up the world. So that was another wave.

And then there were periods. Sometimes the ’50s, ’60s, and ’70s were referred as golden periods in the US, because it was post-war and we had a lot of economic growth. And then in the ’80s, which was actually when I worked in DC, there was a sense … This was a long time ago, so that I was actually there for the changeover of the Jimmy Carter and the Ronald Reagan administrations. So that was very, very interesting to see. And so there was still a sense of trying to grow the economic pie. That was a good thing.

And then I went to graduate school, but working for the US Trade Representative’s office was a very, very interesting experience because I saw firsthand … It’s a small office. It’s part of the Executive Office. In other words, the White House. And actually, what it does is oversee many other offices because trade is actually very complex. And it was very interesting to see as a young person because you come in with this mindset of … If we could expand the economic pie, that would be a great thing because then everybody could get a bigger slice of that pie.

And of course, that’s all true, but USTR oversees many government agencies. So for example, when you do a trade deal, there are many, many dimensions. So at that meeting, the Department of Commerce that you might expect is there, the Department of Agriculture, many other relevant departments, but so is the Department of Defense because countries have strategic importance. And I was there during the period when we literally de-recognized Taiwan in order to start having relations with China. The State Department is there because geopolitical considerations are important now, and they have always been important. And just the Department of Labor, because you worry about people becoming unemployed. And so many agencies come and weigh in. If we do this trade policy with this country, what are the implications for economic growth for workers’ opportunities, for geopolitical considerations, for security considerations? So it was really quite an interesting thing to do.

And I started talking about post-World War II. Let me circle back. The UN was created, two economic institutions, the World Bank and the International Monetary Fund. The third institution was the World Trade Organization. And in the ’30s there was, again, this idea that trade is important. So there was something called the GATT, the General Agreement on Tariffs and Trade, which was spearheaded by the US. It’s both a treaty and an institution. A treaty that signatories would sign and say, “We want, and we’re going to do.” We have certain rights and obligations under any treaty to get tariffs down.

And later on, that turned into the World Trade Organization. And the idea was to have further reductions in tariffs and enforcement mechanisms, to be sure if countries say that they are going to do what they do, they in fact do it, because life lesson 101, sometimes countries and people lie and cheat. And when they don’t uphold what they said they were going to do, there have to be mechanisms to resolve disputes. So disputes are just part of the way this works, and they have been baked into the system.

So fast-forward, what has been interesting about this is that our own United States Trade Representative’s office, which has an office in DC and also has an office in Geneva, which is where often lots of trade negotiations are negotiated, but these days they’re negotiated everywhere. So there are a lot of technical issues that come up. So these important trade negotiations can take two years to negotiate.

And what is interesting now is that the whole process is flipped. Typically, firms or others in the US will come into the US Trade Representative’s office and saying, “We are being injured by international trade.” And then a case will be opened, and there’ll be a lot of work done to look at this to see what is the best thing to do, but USTR spearheads it until we get to the end.

And then at the end, even though it’s part of the Executive Office, and of course the president is updated … But at the end, the president comes in after advice. And then a decision is made on what are we going to do here? And when you’re negotiating a new treaty … In fact, the authority for treaties is vested in Congress, not the president. So civics lesson 101, the US has three branches of government, the Executive, the Legislative/Congressional, and the Judicial. Co-equal branches of government. And so it is the purview of Congress to pass these laws regarding trade, but it is not practical to have 435 members of Congress and 100 senators running around trying to negotiate treaties. And so Congress has delegated that authority to the president, but when a trade agreement is negotiated, it is then ratified by Congress.

So the US is a democracy, and Congress should weigh in on this. It can and it does and it must, but the one thing that happens is because these agreements are so complex, the Congress has to have a yea or no vote, right? At that point, you’re not going to be making additional changes, and that is why [inaudible 00:13:37].

So in the ’80s, for example, when there were problems in the auto industry, there was a very, very close consultation with Michigan where the big three automakers were located, to find out … Are you going to support this? And it was, of course, more than where the cars themselves were made at the time, because the auto parts industry is very important and it’s literally all over the country. And so those are the types of things that USTR would be seeking advice on.

Lauren Lavin:

Wow. That was such a thorough background for anyone, myself included, that doesn’t know about trade in the US. I knew it was complicated, but I think you did a great job pointing out how there’s so many different moving parts and how all three pieces of the government should be utilized in order to make these decisions.

Today, we have heard a lot about tariffs in the last year or so, but I don’t necessarily think that they’re well understood. So you provided us good background, but now turning to tariffs more specifically, what are tariffs, how do they work, and how have they been utilized in the past? You kind of covered that with the Smoot-Hawley, but then what happened after that with tariffs? And what do they mean for the American people?

Anne Villamil:

So the first thing to understand is that a tariff is a tax. It is a tax that the US levies on imports of foreign goods, and so it raises the price of that foreign good. The thing is that the US or a country levies a tax on a trading partner, and that raises some revenue for the United States, but not that much. Tariffs are never going to be a way to generate a lot of revenue in the United States.

In the United States, if you look at the revenue pie, 51% of tax revenue is generated by the individual income tax. About 33% is generated by FICA. So those social security and healthcare taxes that are split between the employer and individuals. About 10% are paid by corporations. And then 2% for excise taxes at the federal level. Those are sales taxes. 2% from tariffs. They’re going up a little bit now, but 2%. And the remaining 2% is everything else, other. So tariffs are not a way to generate a lot of tax revenue, right? That’s the first thing, but they do have some fiscal implications.

So the US would impose a tariff or a tax on the imports of foreign goods. And I’ll probably confine my conversation to Canada, Mexico, and China, because those are in fact our biggest trading partners. Many people are surprised to hear that our biggest trading partners are in fact China and Mexico. And you said, “How do we get these trade agreements?” Interestingly, under the Trump one administration in 2018, Trump one administration led the renegotiation of what formerly had been the North American Free Trade Agreement. So the free trade agreement, among the United States, Canada, and Mexico. 2018, under the Trump administration, and negotiated under the auspices of USTR.

Lauren Lavin:

Within that, did they dramatically change NAFTA at that time?

Anne Villamil:

So the world is a very, very dynamic place and things change. And so periodically, you have to update treaties. So there were certain changes that were made. My main point in raising this is 2018 is, one, not that long ago and, two, negotiated by the Trump administration and, three, we talked to each other then and we negotiated. What is very different this time is this very aggressive … Freedom Day is here. Country X, you’re getting this percentage a tariff. And if you object to it, I’m going to raise it. That is not the way that things typically happen.

And particularly with Canada and Mexico … With Mexico, there have been issues of drugs and fentanyl and immigration issues. Canada is our peaceful northern neighbor that we don’t have drug problems with. In fact, there are two parts of trade, trades in goods and trades in services. So one of the statements of the Trump administration was that we have a trade deficit with Canada. If you look only at the narrow measure of goods, it’s a true statement. If you look at goods and services … And services are things that the US is particularly good at, financial insurance services, the entertainment industry, software, really good-paying types of jobs. We actually have not a trade deficit, a trade surplus with Canada. So we send them more than we get from them. So just that is kind of an interesting fact.

Although, what many economists would say, and I agree with this position, is there’s no need to be sending back and forth exactly the same amount of goods and services. And so a good example of that is the US auto industry. That has become very integrated among the United States, Mexico, and Canada. And that’s a good thing because Canada in particular, most of Canada is within a hundred miles of the US border, and we have great infrastructure, bridges and tunnels. And again, we are very peaceful and generally cooperative. So it has been a good thing to have these imports and exports.

And again, with Mexico, there have been problems with regard to immigration, with regard to drugs. And those certainly needed to be addressed, but it remains interesting to me that we still don’t have an agreement with Canada, on an agreement that was written largely by … I mean, obviously by the three countries, but spearheaded by the Trump administration as recently as 20-

Lauren Lavin:

Yeah. So I have two follow-ups. First one, a lot of the rhetoric, especially when tariffs were first being proposed, was that the American people wouldn’t pay for the tariff, that it was someone else going to pay for that. Can you clarify who’s paying for a tariff when we institute them as Americans?

Anne Villamil:

So that is a great question. And I can clarify the concept, but I can’t tell you the outcome yet because it’s too soon. Okay? So the concept is … I don’t want to get too wonky here, but a tariff is a tax, and the economic concept is who bears the incidence of that tax, which means what you just asked me. Who pays for it?

And there are three possible parties. The first is that the country that is exporting to the United States could say, for good reasons, “This is a very important relationship, and I think maybe things are unusual now. I am just going to eat that tariff because I want to preserve this relationship.” A more nefarious view would be, “I’m going to eat this temporarily, but maybe I am going to do things which are going to hurt American producers. Those guys will get knocked out, and then later on I’ll come in and do things.”

So it is true that countries that we trade with do, as I said at the outset, lie and not enforce. And I mean, this is human nature, and it happens. And that’s why you need … Every country has an entity like the US’s USTR to make sure that … So you might have to initially negotiate a treaty, but even if you’ve negotiated a treaty, to make sure that all parties’ rights and obligations under that treaty are enforced. That is a big deal.

So the country itself, in principle, could eat the tariff. The second thing is that a foreign country is exporting to a producer. The producer itself could say, a US producer, a US firm, could say, “I’m not happy, but I’m going to eat this tariff.” Now, some companies right now are saying this, “We really need this, and it’s raising our costs. We have no alternative if we really need this input, but to pay that.”

And then the third entity that could bear the burden of this tariff is consumers. And so that’s known as the incident. Is it the exporting country, the importing US producer, or is it the end consumer? In principle, all three could take a part of it. One could pay all of it. And we need data to know who is bearing the incidence, as it is called.

Now, I can tell you in general, it takes about six months until we start seeing effects. And that’s for a lot of reasons. Some of it is simple. The tariff is raised on a particular product, and I’m in the US, and either I’m a firm or I am a consumer, and I have that product in my inventory. If I’m a firm, it could be … If I like Canadian maple syrup, I have it in my pantry. So again, I’m from the Northeast, so I think Northeast maple syrup is pretty good too. But my point is that I may have that in inventory. And what am I going to do? The first thing I’m going to do is run that down and hope that this gets resolved. And so that’s why it typically takes about six months.

So we have been in this for about six months. The first announcement was February, then Freedom Day was in April. So we’ve been at this for a while, but this is very unusual because what happens is the president literally makes announcements on social media and says, “Country X is going to get a tariff on these goods of …” Let me stick with Canada because I want to make a point. Canada is going to get a tariff of 25% on steel and aluminum. And I’m going to throw potash in eventually so that I can talk about Iowa. So what does that do? It raises the cost of those inputs to American firms of 25%.

So there are three important pillars of the Iowa economy. There are others. Education is one of them. Three important pillars are agriculture, manufacturing, and finance and insurance. And manufacturing is something that the president says repeatedly he wants to support. So let’s think about two big firms in Iowa, John Deere, great firm, Collins Aerospace, also great firm. Innovative, right? There are really wonderful countries that operate and produce around the world, but when we raise the price of inputs like steel and particularly aluminum, more than 80% of aluminum that is used in the United States comes from Canada. Why? Because Canada is our neighbor, we have very good infrastructure, and because Canada is so cold as you go north, most of the population is within a hundred miles of our border.

So let’s think about … Let me focus on aluminum, just to give one example. Everybody remembers during COVID, where we had ships coming from China backed up off the West Coast. Big problem. So close, good infrastructure, roads, bridges, free trade area. So there are no delays in getting things into the country. And this is part of what trade is about. Why does Canada produce a lot of aluminum? Because Canada has a lot of hydropower, and producing aluminum is a very energy-intensive activity. So Canada has what’s known as a comparative advantage in producing that product. It can produce that product more cheaply than other countries, and the transaction cost to come into the US is low because Canada is our neighbor and all of that good … Bridges and roads and systems set up to get it in at a good price and efficiently. So that’s why we do it.

And all of a sudden, American firms … And let’s stick with Iowa firms. John Deere and Collins have an increase of this particular input of 25%. And so the question we’re asking here is then what happens? What do John Deere and Collins do when they have this increase in their input prices?

So they’re going to do two things. First, they’re going to try and they’re going to hope … Oh, we hope this gets better. And because it’s been this ebb and flow on days when … Oh, we said we were going to have a tariff, now we’re going to take it off. There’s going to be a big rush to bring things in when the tariff is off.

So that part of it is easy to understand, but they’re going to do two things. They’re going to say, “We could pass this on to our customers,” and that’s where prices would go up. They could also say, “Maybe we could get more efficient by cutting some of our other input costs, like labor, because labor is an input, and maybe we should build some John Deere equipment in Mexico, which has lower labor costs.”

So that’s my point where the incidence take some time to work out. So we’re going to need more data to look at this, but we’re not getting the stated goal, which is to encourage US manufacturing. Why? Because we’re raising input costs. And again, I just focused on aluminum. So it is one thing to wrap your head around. And the second is that firms will try and cut other … Could end up sending other jobs to other countries to lower their costs, and that’s why the incidence isn’t clear.

And then the last big point that I want to make about this is the uncertainty. There has been so much uncertainty about US trade policy, but other policies. Healthcare policy. We need to know, as firms that are producing and as consumers in terms of what we’re buying or what kind of insurance work we’re going to have, what these policies are so that we can make our plans.

And that has been very difficult. That has been difficult for American auto manufacturers. They have said, “Sure, we can bring jobs back because they aren’t producing in the US and around the world, but before we do this, we need to know what the rules of the game are.” The nature of investment is that it is a long-term policy. I invest today, and it may take me two years, three years, five years to have my plant up and running. So I need to know what the policies are going to be, and that there is going to be stability in these policies. And that’s why … The tariff is this number. Oh, no, no. We’re not doing it. We’re going to wait 30 days or 60 days or 90 days. Now we’re doing it again. That is a very big problem because it makes it difficult for any firm to undertake long-term investment.

Lauren Lavin:

That’s it for part one of our conversation with Dr. Anne Villamil. Today we explored the foundations of international trade policy, how history shapes today’s trade decisions, and why tariffs have been a central and often controversial tool in economic policy. Join us next week for part two, where we dive deeper into tariffs in the US. We’ll discuss how they work, who really pays for them, and what their long-term impact might be on industries, consumers, and communities.

This episode was hosted and written by Lauren Lavin, and edited and produced by Lauren Lavin. You can learn more about the University of Iowa College of Public Health on Facebook. Our podcast is available on Spotify, Apple Podcasts, and SoundCloud. If you enjoyed this episode, please share it with your friends, colleagues, or anyone interested in how economics and policy shape public health. Have a suggestion for a future topic? You can reach us at cph-gradambassador@uiowa.edu. This episode is brought to you by the University of Iowa College of Public Health. Until next week, stay healthy, stay curious, and take care.