Marc Fasteau is a Vice Chairman of the Coalition for a Prosperous America (CPA), the nation’s premier bipartisan nonprofit organization working at the intersection of trade, jobs, tax policy, and economic growth. Early in his career, he served on the professional staffs of the U.S. Senate Majority Leader, the House Banking & Currency Committee, and the Joint Economic Committee. He later became a partner at the New York investment bank Dillon, Read & Co. He later founded a property and casualty insurance company that was sold to Progressive Insurance.

Fasteau has been involved in international trade and industrial policy for 18 years and has contributed writings on these topics to the Financial Times Economist Forum and Palladium Magazine. He is a graduate of Harvard University and Harvard Law School, where he was an editor of the Harvard Law Review. He resides in New York City.

Ian Fletcher is the author of Free Trade Doesn’t Work: What Should Replace It and Why and the co-author of The Conservative Case Against Free Trade. He was previously a Senior Economist at the Coalition for a Prosperous America and now serves on its Advisory Board.

Earlier in his career, he was a Research Fellow at the U.S. Business and Industry Council and worked as an economic analyst in private practice. His writings on trade policy have been published in The Huffington Post, Tikkun, Palladium, WorldNetDaily, The American Thinker, The Christian Science Monitor, The Real-World Economics Review, Bloomberg News, Seeking Alpha, and Morning Consult.

Together, they have authored Industrial Policy for the United States: Winning the Competition for Good Jobs and High-Value Industries, which has received praise from politicians like Secretary of State Marco Rubio, industry leaders like Dan DiMicco, the former chairman and CEO of Nucor, and scholars like Harvard’s Willy Shih.

A lightly edited transcript of that conversation follows.

Scott Douglas Jacobsen: Today, we’re diving deep into a crucial and timely subject—one explored in detail in a recent book on the economics of tariffs and their implications for national security. While this issue has global ramifications, affecting countries like China, Canada, and Mexico, it is particularly significant for the United States.

First, I’d like to draw a distinction between broad, generalized tariffs—those that may or may not be strategic in practice—and the more targeted, industry-specific tariffs designed to protect American businesses. There’s often a disconnect between how tariffs are discussed in media narratives and their actual economic or geopolitical function.

With that in mind, Marc or Ian, how would you frame this debate from a more academic and expert perspective?

Marc Fasteau: The whole idea of industrial policy is selective—that’s a key word—intervention by the government in the economy.

This intervention supports the creation, retention, and development of advantageous industries. Mid-tech industries can be advantageous if they employ a lot of people at good wages. Of course, high-tech and high-value industries are advantageous because of the revenue and good jobs they provide. Because economic development is path-dependent, it also leads to the next big thing.

You don’t want to lose out on the current high-tech, high-value industry because you’ll be out of the next three. That leads directly to what kind of tariff policy you want to support. Ideally, you would tariff or subsidize those advantageous industries you’re trying to retain against assault from competitors like China and new industries that you’re trying to develop. It’s the old infant industry protection idea that goes back to Hamilton.

The most efficient tariffs follow that mode and are selective. Tariffs were used in the early days of the United States, as we all have heard in the last six weeks or so, to generate revenue for the government. Trump has proposed across-the-board tariffs–meaning tariffs on everything–in part for this purpose. That’s an inefficient way to use tariffs because some products, like t-shirts, will not lead to investment. Just higher prices and/or lower sales for the tariffed product. Nevertheless, a 10% across-the-board tariff would also stimulate a large amount of investment, job creation, and growth in other industries.

Ian Fletcher: The root idea underlying industrial policy, which tariffs are just a part of, is that it matters what industry a country has. As the phrase goes, it matters whether we make potato chips or computer chips. Now, this is something that most Americans and Canadians instinctively understand.

You can’t be a serious, modern, developed country without having large, high-value, sophisticated industries. So when you’re in a situation like today, where above all China, but also several other countries like Korea, Japan, Germany, and several smaller ones, are successfully pushing the U.S. out of the best, most advantageous industries—the industries you want to have, which are high-wage, high-profit, highly capitalized, and generally technological but not always bleeding-edge—you start to ask how you can regain your foothold.

Since imports are an obvious cause that has driven the U.S. out of many industries, tariffs become a tool to reclaim those industries. If the U.S. were to impose a flat tariff on all imports, it would begin relocating industries back to the country. This applies to other developed nations as well. Canada is in a somewhat different situation, but a flat tariff would likely bring back industries like the manufacturing of computers and laptops to the U.S. However, it would not necessarily bring back the production of goods primarily driven by cheap labour costs, like t-shirts. Even a flat tariff has strategic effects. I would say that a flat tariff on a bumpy economy isn’t flat.

But what if that is not enough? The hope is that the administration will aim for a competitive rather than an overvalued U.S. dollar and will likely implement some form of a flat tariff—though that is not guaranteed. However, when other countries have targeted specific industries, and there is a need to restore them, like semiconductors, through the CHIPS Act, an industry-specific tariff becomes necessary. Unlike a flat tariff or currency revaluation, an industry-specific tariff allows for targeted protection and investment in key sectors.

Additionally, tariffs can be country-specific. This means they can be used to reward or penalize nations based on their trade practices. For example, the U.S. can impose tariffs on China while exempting Korea.

Fasteau: The other thing to recognize is that in the U.S., we tend to assume that other countries believe in free trade. They don’t.

Other than the U.K., maybe Australia, and New Zealand, no other economically significant country has embraced free trade in theory or practiced it consistently. Even the U.S. has not practiced free trade uniformly, though it has made more efforts to do so than other countries.

So, the real question is not whether tariffs are a good idea in the abstract. The reality is that if we don’t protect advantageous industries, they will be lost to other nations that have spent the past 40 years deliberately targeting U.S. markets. Our markets are the largest and the easiest to enter, making them prime targets for foreign subsidies and trade barriers that block American exports.

This is why tariffs are one of the three pillars of every effective industrial policy.

Jacobsen: One particularly relevant article, published on October 22, 2024, titled “The Uses and Misuses of Tariffs,” offers a compelling perspective on the nature of global trade. A key passage from that piece reads: “We now know that ‘free trade’ really amounts to a free-for-all, in which other countries practice mercantilism—a trade strategy that dates back to the days of sailing ships and treats industrial policy as a game whose object is to increase a nation’s economic power—against an unprotected America. Today, nations from China to Germany play this game, some more brutally and some more politely. But they are all chipping away at America’s best industries, from consumer electronics to steel to machine tools to commercial aircraft.”

Given this backdrop, let’s talk about the idea of a limited, strategic tariff policy. How can such an approach safeguard key sectors of the American economy—such as steel and high-tech manufacturing—without significantly driving up inflation?

Fasteau: Well, two things. First is the direct effect of increasing costs. Imports are a relatively small percentage of U.S. GDP, approximately 15%. So, a 10% across-the-board tariff would produce a price rise of 1.5% of GDP, assuming that imports did not decrease and the U.S. buyers bore the entire burden of the tariff. Neither of these assumptions is even close to realistic so that the actual price impact would be even lower. For example, the Trump steel tariffs did not result in a significant price increase.

Secondly, you get other benefits that offset any price increase from tariffs. The whole point of a tariff is to stimulate domestic investment, as seen in Trump’s steel tariffs. When those tariffs were imposed, the price of steel initially rose, but U.S. steel companies invested $16 billion in new, modern facilities and began producing steel more efficiently. Within six or seven months, the steel price returned to pre-tariff levels.

Many analyses support this: What you get in return is a trade-off. You give up slightly cheaper goods at Walmart but gain manufacturing jobs that pay real living wages instead of low-wage service jobs flipping burgers. That is the key benefit. You’re also fostering new industries and protecting them from being taken over by China and other foreign competitors.

Jacobsen: Ian, do you have anything to add?

Fletcher: Sure. There is a trade-off involved in any policy decision. We are not claiming that industrial policy or tariffs are a cost-free policy; we are also not suggesting that tariffs alone can solve all of America’s economic problems. However, we do believe they address issues that are otherwise nearly impossible to solve through any other means.

Jacobsen: You provided an industrial policy toolkit in the book. You emphasize that it is not about individual policies being singularly beneficial—the panacea point, as tools—but rather about the cumulative benefits of coordinated policies. So, what policies as tools does the American economy need now? You highlight many, but can you give us the greatest hits of that album?

Fletcher: We do have a list of industrial policies. I’ll list them to give an idea of the scope of industrial policy as a concept, and then I’ll focus specifically on the ones we need most right now.

We listed infant industry protection, local content rules, stage differential tariffs, import substitution, selective importation, export subsidies and targets, incentives for foreign firms, export processing zones, regulatory competition, credit allocation, forced savings policies, sovereign wealth funds, government procurement, state entrepreneurship, national champions, imposing competitive industry structure, fostering clusters, supporting private research, supporting public research, intellectual property policy, standard setting, technology mapping, combining policies, and picking winners.

So, what does the U.S. need from that list? First, we need a currency policy. We need a competitive dollar. Right now, we do not have one—it is significantly overvalued. Marc will likely want to talk about that in a moment. Second, we need selective tariffs for key industries and to address economically hostile nations.

The third area, which we have not touched on much, is state-supported technology development. For decades, the prevailing idea in the U.S. has been that the government should fund pure science while technologies develop in corporate labs or someone’s garage in Palo Alto. That is a charming idea, but the problem is that when you examine the history of technological development, critical technologies often undergo long gestation periods where conducting the necessary development, engineering, testing, and prototyping for profit is impossible.

This is why private corporations or individuals did not develop many of the most important technologies of the post-war era—transistors, semiconductors, computer chips, jet engines, jet aircraft, pharmaceuticals, etc. The government developed them, often for public health or national defence, and then commercialized them later. Joe Biden has expanded that model to include state-supported development for environmental protection.

Now, we have three key categories where the government is actively involved in technology development: national defense, public health, and environmental protection. In other words, the government develops technologies to protect us from external threats, deadly diseases, and natural disasters. However, we argue that the U.S. government should also support technology development purely for economic reasons—that is, simply for the sake of national prosperity.

Jacobsen: When discussing strategic tariffs, it’s important to consider the risks of disregarding expert recommendations in favor of a blanket, one-size-fits-all tariff approach. What are the broader consequences of implementing flat tariffs, particularly when it comes to retaliatory measures from other nations?

Beyond the macroeconomic effects, how do these policies impact ordinary Americans and their standard of living—especially if such tariffs remain in place for an extended period rather than serving as a temporary economic adjustment?

Fasteau: Industrial policy is a long game, and that includes tariffs. If you are a U.S. steel manufacturer and China is dumping cheap steel into the market, and the U.S. responds by imposing a 25% tariff, that tariff must be known to be stable.

If it is only in place for a year, businesses will hesitate to make significant investments because they fear being driven out of business once the tariff is lifted. This is particularly critical for industries with long lead times and large capital investments. Other countries may retaliate with new or higher tariffs on U.S. imports. One way to ameliorate this is to reinvest our tariff revenues back into the economy in a targeted way to offset some of these effects.

Jacobsen: What about the impacts on global supply chains? Could there be disruptions resulting from flat tariffs?

Fasteau: First, the U.S. has leverage in tariff competition because we have a huge trade deficit. We import much more than we export. So, let’s say both countries impose a 10% tariff on each other’s imports. That would have a much greater impact on the surplus-exporting countries than on us.

Secondly, as Ian likes to say, there has never been a cataclysmic, spiraling trade war that got out of control in modern history. We have already been through nearly eight years of significantly higher tariffs than ever before. Yes, China retaliated with tariffs on agricultural exports, which hurt our farmers. But what did the Trump administration do? They bailed them out. Was it worth it? Yes, that step was necessary to reclaim industries critical for long-term productivity and economic growth.

But these pieces intersect, and you must consider what you are doing with the tariff revenue. For example, the now discredited traditional models predict that the cost per job saved because of a tariff is almost always unaffordably high. However, these analyses make a number of inaccurate assumptions.

First, they assume that the tariff revenue collected just gets sequestered and doesn’t get injected back into the economy through tax rebates or government spending. Second, these models assume the situation would be stable if we didn’t have a tariff, but if we don’t put on a tariff when we’re losing industries—the situation isn’t stable, it’s getting worse. Third, they don’t consider the effect tariffs have in stimulating investment and reducing the trade deficit so that we have more good jobs. Or the long-term benefits of retaining or regaining the protected industries.

Jacobsen: You gave the steel industry as an example, which had a six-to-seven-month timeline for building new facilities and increasing productivity. Considering a range of industries, what does it take to boost domestic capacity and investment when these tariffs are implemented?

Fasteau: There is no universal answer, but we can divide the question into two categories. The process is relatively quick for existing industries, such as the U.S. steel industry. These companies already know how to make marketable products, demand is proven, and they can raise capital, train workers, and scale up quickly. Many of these industries can stand up to new capacity in about a year, sometimes even less.

However, the timeline for developing entirely new industries or entering markets with technologies the U.S. does not currently produce is much longer. That is a different category altogether. In those cases, we must consider staged tariffs that gradually increase over time to allow domestic industries to ramp up production and innovation. We must also support pure research and new product development to the point where the private sector can take over.

We don’t currently make the chips that Taiwan Semiconductor Manufacturing Company Limited (TMSC) makes, so we need them. If it goes into effect immediately, a big tariff on them right now is probably not productive. It might be better to phase it in over three or four years or do what Trump and Biden have been trying to do, which is to get TMSC to come over here and make those advanced chips in the U.S. This way, we don’t lag, and they have to employ a lot of U.S. citizens so they learn how to do it. That’s what China does, except they strong-arm U.S. companies to transfer their technology.

This example highlights how industrial policy must be both industry-specific and competitive-context-specific. It is not a one-size-fits-all approach. Ian read a list of about 15 or 16 different tools, but they do not apply to every situation. Policymakers must select the appropriate tool depending on the specific technology, where the U.S. stands with it, where our competitors are, and other contextual factors.

Jacobsen: Are many of the tools in this industrial policy toolkit meant to be used almost à la carte, depending on the industry?

Fletcher: You’ve touched on something important. The kind of economics we believe in is very industry-specific. In fact, that’s one of the root differences between our way of thinking and the economic mainstream, which generally likes to discuss the economy in terms of high-level aggregate, like growth is X percent, unemployment is Y percent, and so forth. They think money is money, profit is profit. It doesn’t matter whether you make it from selling computer chips or potato chips.

We think that the way industries work internally, which is what actually goes on Monday morning when people show up for work, is often very, very different. So, the economics of the computer chip industry and the economics of the potato chip industry are very, very different. And this is ultimately due to a very deep-seated difference in the mathematics of how we approach the world. We acknowledge the importance of something called increasing returns. So for you math geeks out there and you engineers, this means that anything you do in economics is going to show what’s called multiple equilibria, which is a way of saying that what happens is going to depend on contingent circumstances and choices. And you can’t abstract away like most contemporary economics wants to do.

Now, the interesting thing that follows from that is that economic history becomes a lot more important than most economists in America today think it is. You can get a PhD in economics in most universities that have the program without even studying economic history because they don’t think it’s that important. We think economic history is your friend for a couple of reasons. One, above all, it’s empirical. This is the actual hard data of how nations succeed, how industries succeed and grow, and where technologies come from. There’s a factual record of all this stuff. We should not be approaching this with mathematical abstractions as our fundamental tool.

The second thing is economic history has a consistent way of telling you the things they don’t want you to know. For example, Marc mentioned a minute ago that I like to say that in modern times there’s been no such thing as a major trade war. Well, I actually go beyond that and I say history does not give any example of a trade war ever. I’ve been saying this since my first book, Free Trade Doesn’t Work, came out in 2010, which was 14 years ago, and I have yet to have anyone respond to my challenge.

The way free traders worry about trade wars, you’d think that history would be full of them, like history is full of military wars. But if you look at history, there is no such thing as the Argentine-Brazilian trade war of 1853, or the Franco-Spanish trade war of 1971, or the Japanese-Korean trade war of 1352. It’s not there. It’s not what happens.

Fasteau: I always get amused when people start tearing their hair out about the next trade war. “Oh, America’s going to start a trade war,” then we’re going to have these horrible tariffs going up, putting every economy in the world out of sorts.

Well, take a step back and look at the ground here. The ground situation is that most of our significant economic competitors have been waging a trade war against us for 40 years, with very few exceptions. For us to pretend that if we push back, we are responsible for a trade war—rather than recognizing that pushing and shoving is the natural order of things in trade—is misguided. What we need to do is wake up.

We don’t even have to get mad. We just have to wake up and play the game. And that’s what we’re finally starting to do.

Fletcher: Yes, we just contradicted ourselves there, saying there’s no such thing as a trade war while also claiming the world has been in a trade war with us forever. I know what you mean. I would prefer to call what they’re doing mercantilism. But anyway, the point stands that even with someone as volatile as Donald Trump in the White House, we thought we were going to have a massive trade war between the U.S., Canada, and Mexico.

It was supposed to be a terrible disaster. Lo and behold, it got stood down, and they’re going to work it out. There’s always commercial conflict. There’s always trade conflict. But the nightmare scenario where things spiral out of control—where I tariff you, you tariff me, I hit back harder, you hit back harder, and before you know it, we’re in total isolation—has never actually happened.

Fasteau: There are some industries where the stakes are much higher, mostly involving money and wealth. Not that those aren’t important, but some conflicts are existential. For example, at least for the United States, ensuring that we are not outdone in a major way in AI by China may be existential. We just can’t let that happen.

The other stuff? You can compromise on it. It’s like disputes over money—there’s always a compromise. There’s always a way to set up a deal that lasts for a while, at least long enough for tempers to cool or technologies to change. So, the incentive on each side is to not let things get out of control.

And you can see this. Trump has a way of making his claims and stating his cases in the most irritating and insulting way possible. Despite that, everybody is still trying to make a deal because the economics say we’ve got to make a deal. And in the end, Trump wants to make a deal. The U.S. does too.

Jacobsen: Marc, you opened by noting how sometimes the United States can look excessively inward rather than, maybe, outward. What lessons can the Trump administration learn from countries like Japan, China, or Germany in building a coordinated policy framework? Even if you’re taking an à la carte approach with individual tools from that toolkit per industry, how do you assemble that à la carte method as a menu of options?

Fasteau: Well, there are a bunch of things. We have a set of general guidelines for industrial policy, and they have to suit the politics of the country. We’re never going to have the kind of top-down direction you see in other countries like China or even Japan. Political power is much more dispersed in our country. So, you need to recognize those limitations and opportunities.

Then, you need to think broadly and consider the three pillars of industrial policy: the currency, the trade policy that protects what you want to protect, and the domestic support of both important existing industries and new high-value industries for the future. If you do two out of the three, you may succeed, but you won’t do nearly as well as if you integrate all three. Every country that has succeeded has done all three. They integrate them. They coordinate them.

The second challenge, particularly for the United States, is that this is a long game. Building a new industry takes a long time. It’s a bit faster if you’re putting tariffs on to encourage more investment in an existing industry because the facilities are already there. The timeframe is much longer and more capital-intensive for supporting not just pure science but also the development of a new materials industry. So, the support programs have to be tailored to those differences.

You also want to migrate toward indirect methods, like setting quality standards, rather than brute force—just pushing money toward an industry. There are times when you have to do that, but as the economy matures, expertise should increasingly come from the private sector.

Jacobsen: Ian, any final thoughts?

Fletcher: Yes. One of the things you learn from economic history is that every developed country got that way by using protective tariffs and proactive industrial policy, going back to the Renaissance. This game has been played for hundreds of years, and the idea that free markets are everything is just a historical blip that recurs occasionally. The British had it at their peak, the United States had it at its peak, but it’s never been the norm in economics. It never has been.

Jacobsen: Ian, Marc, I appreciate your time today and your expertise. It was nice to meet both of you.

Fletcher: It is a pleasure to meet you, too.

Fasteau: Thank you very much.