Summer School 7: Trade blocks and blockages

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Speaker 2 This is Planet Money from NPR.

Speaker 4 Welcome back to Planet Money Summer School, the only economics class you can slip under your pillow and listen to as you fall asleep.

Speaker 12 Just drift away.

Speaker 4 I'll wake you for the vocabulary words.

Speaker 8 We are almost done with the summer semester and what a romp we have had through the world of government and business.

Speaker 10 We've had classes on the power of federal taxes and the dangers of federal spending.

Speaker 16 We've taught you how a country can make industrial policy work and why sometimes markets fail.

Speaker 18 But there is one big area we have not touched until today.

Speaker 12 Trade.

Speaker 18 Yes, yes, I know, as I'm sure you have noticed, trade policy, specifically tariffs, are in the news every single day.

Speaker 21 So today on Planet Money Summer School, we're going to step back a little and talk about the bigger picture of trade policy.

Speaker 25 Tariffs are, of course, the favorite tool of our current president, but there are lots of other ways that governments insert themselves into the free exchange of goods and services.

Speaker 18 Some of these trade barriers are so insidious and have been going on for so long, it may surprise you that they even exist.

Speaker 19 But in fact, we will feature two of them today that are costing you money every single day.

Speaker 26 Maybe you should wake up for this part.

Speaker 17 Our guest professor is an expert in all forms of trade shenanigans.

Speaker 2 My name is Carolyn Freund, and I'm the Dean of the School of Global Policy and Strategy at UC San Diego.

Speaker 18 Come for the policy, stay for the strategy.

Speaker 2 Oh, I like that. Maybe we can use that as a strategy.
Put that on a t-shirt.

Speaker 12 Thank you.

Speaker 18 So before we hear our case studies, I want to talk about the word protectionism.

Speaker 9 This is the policy of protecting a country's industries by keeping out foreign goods and services.

Speaker 6 And the U.S.

Speaker 12 has this long history of protectionism.

Speaker 28 The very beginning of our country, we've had tariffs, tax on imports, and that protects American industries by making other countries' goods more expensive.

Speaker 20 So that's tariffs. But there are other ways of protecting an industry.

Speaker 27 Let's just go through them now, Carolyn.

Speaker 2 There are quotas, which limits the quantity of a good coming in, because if there's only so much of a good, then there's more space for domestic industry.

Speaker 28 So in the United States, we used to have quotas on Japanese automobiles, for instance, and foreign clothing, not as common a tool anymore.

Speaker 18 How does the government know exactly how much of a certain item to let into the country?

Speaker 2 They don't. So they do it typically based on history, which isn't always a good judge because you never know what shocks, especially say in agriculture, are going to hit our own markets.

Speaker 7 And sometimes the government just makes it a hassle to import items with regulations and paperwork, even like packaging.

Speaker 28 It has to be in a certain kind of package.

Speaker 31 All these things to just make it difficult for another country to send us something and more expensive.

Speaker 2 Absolutely. And as you know, some regulations are really to protect the consumer, but some are completely there to make it harder for other countries to export.

Speaker 18 Which, again, protects American businesses who are better set up to meet those regulations.

Speaker 28 So trade is usually between a private company in one part of the world and a private company in the United States.

Speaker 18 They agree on a price. They decide to import that item.

Speaker 6 What are the dangers when the government gets involved in this transaction?

Speaker 2 The fundamental danger is about the use of resources in this world.

Speaker 2 So by getting involved in that transaction, you are effectively distorting how resources are being used. So let me give a really wild example that's kind of true.
Saudi Arabia wants to produce dairy.

Speaker 2 But as you know, Saudi Arabia is a really hot country.

Speaker 2 So to have cows in Saudi Arabia, they need to be in air-conditioned barns. Well, that's super expensive and not really the best use of resources around the world.

Speaker 2 So, if goods are produced in the places

Speaker 2 where the resources are cheaper, so labor-intensive goods in countries with lots of labor,

Speaker 2 capital-intensive goods in countries with a lot of capital, water-intensive goods in countries with lots of water, et cetera,

Speaker 2 we use less of the world's resources for actually more. We can produce more that way, and everybody can be better off.

Speaker 17 So, today in our case studies, we are going to get into the impacts of some of this protectionism on two specific products that we see all the time, but we don't really think about the source of.

Speaker 5 The first is the sugar in our candy.

Speaker 8 And the second is the car that might be in your garage right now after the break.

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Speaker 17 Okay, okay, class, listen up.

Speaker 28 This is the classic story of what happens when you try to protect an American industry and end up hurting another American industry.

Speaker 17 Professor Freund, you use this story in your classes, I know.

Speaker 7 What should our students be listening for as this story is played?

Speaker 2 They should be thinking about the unintended consequences for the users of the product.

Speaker 16 In this case, sugar.

Speaker 2 In this case, sugar, exactly.

Speaker 12 Sugar.

Speaker 28 In 2013, Zoe Chase and Jess Jang traveled to the Midwest to bring back this story about sugar protectionism.

Speaker 18 Even though the reporting is more than a decade old, The problem they talk about is still the same.

Speaker 5 The U.S. pays more than twice as much for sugar as the rest of the world.

Speaker 29 Take it away, Zoe.

Speaker 33 Everybody knows dum dums. They're those lollipops.
You've seen them at your doctor's office or your bank. Sugar, corn syrup, little wax wrapping, a bunch of different flavors, sticks.

Speaker 3 But lots of people don't know where they come from.

Speaker 34 You like orange?

Speaker 34 The warm orange dumb dumb.

Speaker 33 We're looking at thousands of these little wrapped lollipops clattering out of this big steel pipe at the Dum Dum Factory in Northwest Ohio.

Speaker 34 In a minute and a half, he's gonna make savvy blueberry. Can you wait for that?

Speaker 3 Dean Spangler is the former CEO of the Spangler Company, and he's showing us around the kitchen at the candy factory. It's a little bit willywonka.

Speaker 33 Imagine a kitchen made for giants with a couple busy little chefs running around in aprons and hairnets.

Speaker 33 They're pouring these big steel pots of sticky sugar and corn syrup into this KitchenAid that is as tall as a basketball hoop. And there's what looks like paint buckets just standing right next to it.

Speaker 3 The buckets are filled with flavors and colors. There's blueberry, cream soda, root beer, watermelon.

Speaker 33 Dum Dums is the signature product of this place, the Spangler Candy Company. The factory is several football fields big.
They need a whole separate building just for the ingredients.

Speaker 33 Well, one ingredient in particular.

Speaker 37 We use about 100,000 pounds of sugar a day.

Speaker 34 Where's the sugar?

Speaker 37 In the sugar shack.

Speaker 33 The room is basically big enough for four huge tanks of liquid sugar, eight Olympic-sized swimming pools worth.

Speaker 37 We have about enough sugar storage here for about four days. So we're receiving sugar, you know, constantly.

Speaker 36 All year long.

Speaker 37 All year long, all day long, 24 hours a day.

Speaker 3 Lots of places replace sugar with corn syrup. And there's corn syrup in these lollipops too.
But Dean says to get the true flavor of your childhood, there is no substitute.

Speaker 37 Nothing delivers flavor like sugar.

Speaker 33 The Spangler Company, they actually make this other iconic piece of candy, something even more nostalgia inspiring than a lollipop.

Speaker 3 Red and white candy canes. They used to make them here at this factory in Ohio, but about 10 years ago, they moved the red and white candy cane operation to Mexico.

Speaker 3 It had gotten too expensive to make them here.

Speaker 33 The places that buy the candy canes to sell the Targets and the Walmarts of the world, they don't care about the brand. They don't care where they come from.
They want them cheap.

Speaker 37 Candy canes are treated like a commodity by the big box stores, completely, the red and whites.

Speaker 37 And when you go to the big box retailers of the world, they leave for a quarter of a cent a cane, a half a cent a cane. I mean, they're going to the lowest price.

Speaker 33 So this story so far, a factory moving its operations from Ohio to Mexico where it could operate more cheaply. That's a typical story.
You might think you know the reasons for that.

Speaker 3 But Kirk Vashaw, the current CEO of the Spangler Company, he's pretty sure you don't know the reasons. In fact, recently he was giving a talk at the Kiwanis Club in town.

Speaker 3 It's kind of like a rotary club. And he explained he could expand his operations in a huge way right here in Ohio and not send any candy canes to Mexico at all.

Speaker 38 And I said, I just need one thing. People get excited.
And then I asked them to guess, what's the one thing that you need? And people guess

Speaker 38 all kinds of things.

Speaker 38 Hey, lower tax rates. And how about workers' comp reform? And let's get rid of OSHA.

Speaker 38 And let's repeal the Food Safety Modernization Act or pass a rate-to-work law or let's get some government development money. Those are some of the things they guess, amongst other things.

Speaker 38 And I said, no, it's not any of those.

Speaker 8 In fact, it's not all of those put together.

Speaker 38 If I paid zero taxes and got got all those other things, which some of them don't even matter to us, it's not as important as the one thing that I need.

Speaker 38 And people are still guessing what it is. And I said, let us buy sugar on the free market.

Speaker 38 And there's this silence. And then this kind of collective, huh?

Speaker 39 Why can't you do that?

Speaker 38 And then I say, it's a story.

Speaker 29 And I'm about to tell it to you.

Speaker 33 Before we dive in, here's the most important thing you have to know to get into this story.

Speaker 33 There are two prices for sugar: the price you pay when you're in the United States and the price you pay almost everywhere else in the world.

Speaker 3 On average, over the last decade, the price you pay in the United States, it's about 15 cents more than you pay outside the country. 15 cents more per pound of sugar.

Speaker 33 15 cents extra per pound of sugar, if you're in the business of making candy, adds up to a lot of money.

Speaker 37 We're using 100,000 pounds a day.

Speaker 35 That's $15,000 a day.

Speaker 37 That's $75,000 a week. Multiply that by 52 weeks.
It's $3 to $4 million.

Speaker 3 $3 to $4 million a year. That's what these guys call the sugar penalty.
Now, who would do this? Who would impose this utterly random tax on U.S. candy makers?

Speaker 33 The U.S. Congress.
The Food Conservation and Energy Act, it is better known as the U.S. Farm Bill.
And I'm just going to read this one part that this whole story is really about.

Speaker 33 Subtitle D, Sugar, Section 156, Sugar Program, Subsection B, Sugar Beets. It says that the U.S.

Speaker 33 government will guarantee this minimum price for sugar that is not to drop below, quote, 22.9 cents per pound, end quote.

Speaker 3 That's the guarantee. No matter how low the price goes in the rest of the world, in the United States, you will be paying at least 22.9 cents per pound.

Speaker 33 And it's all in the name of these guys.

Speaker 34 We're driving into the field where we're going to plant sugar beets in 2013. And the snow is only about three inches deep at the moment right here.

Speaker 34 Looks like a barren wasteland.

Speaker 3 Blaine Benedict, he's a sugar beet farmer here in Sabin, Minnesota, and he runs a farm with his two brothers.

Speaker 3 It's a hard conversation to come out onto someone's fourth-generation farm and say, why do you get this special treatment?

Speaker 3 Why do you deserve a special line written in a bill that guarantees a minimum price for your product?

Speaker 35 There's government involvement in most developed countries at some level or another with

Speaker 35 a price control. on sugar.

Speaker 3 The U.S. sugar guys say, just look at Brazil.
The Brazilian government gives a couple billion dollars in subsidies to their sugar industry.

Speaker 3 They say the Mexican government actually owns most of its factories that make sugar.

Speaker 35 I think our biggest fear is that we're all on a fair playing, you know, competitive field.

Speaker 35 You know, when if you're competing against other government policies, you know, and

Speaker 1 I mean, that's...

Speaker 35 That's what makes us nervous as a producer.

Speaker 33 A lot of people told us there is this really big reason that sugar has a price guarantee embedded in the law. And this reason has nothing to do with Brazil or actually economics at all.

Speaker 12 The sugar lobby.

Speaker 3 It is really powerful, super well organized. Each year, it gives a lot of money to political campaigns, and it spends a lot lobbying for or against bills.

Speaker 33 A big chunk of that money goes to people like this guy. U.S.
Representative Colin Peterson. He is a Democrat from Minnesota.
And until recently, he was chair of the Agriculture Committee in the House.

Speaker 41 I've been called a communist before.

Speaker 41 I'm okay with that.

Speaker 33 That's because Colin Peterson is a big advocate of the central planning of the sugar supply and the guaranteed minimum price.

Speaker 33 We asked him if the reason he's such a champion of the sugar program is that the sugar companies like American Crystal are the biggest contributors to his campaign.

Speaker 41 If American Crystal gave me zero, I would take the same position. Really? It wouldn't make any difference.

Speaker 40 Well,

Speaker 36 how do you know?

Speaker 41 This is 25% of the economy in my district. You think I'm not going to fight for this?

Speaker 41 If you eliminate the sugar program, what will happen is we will not grow sugar in the United States.

Speaker 33 And why is that such a bad thing?

Speaker 41 Because it's a huge economic activity in many parts of this country that have created a lot of jobs and a lot of economic activity.

Speaker 3 Now, the other side of this, the candy manufacturers, they make the same argument, just in reverse. Peterson says jobs might be lost.

Speaker 3 The candy guys say jobs that might otherwise have been created weren't.

Speaker 33 That's what's so strange about this whole thing. We're not so different, you and I.
They're both these classic American industries: Minnesota farming, Ohio manufacturing.

Speaker 3 In Minnesota, there's four generations of farmers farming this land. But in Ohio, those guys are fourth generation, too.
The Spangler factory has been around since 1906, always run by a Spangler.

Speaker 10 Jess Jang and Zoe Chase from 2013. In the more than a decade since we've aired this story, many, many people have tried to get rid of the sugar protections, and they have all failed.

Speaker 19 We are still paying more than twice as much for sugar as the rest of the world.

Speaker 12 You're welcome.

Speaker 10 Let's bring back in our professor, Carolyn Freund, from UC San Diego.

Speaker 34 Hey, Carolyn.

Speaker 2 Hi, glad to be here.

Speaker 31 This sugar story blows my mind because obviously I'm eating sugar in some form every single day

Speaker 27 and I'm paying every single day a little bit more

Speaker 16 in everything I use than I have to pay, right?

Speaker 2 Absolutely. And I think we're at a point now where it's roughly twice the price of world sugar.

Speaker 7 And you know, this isn't just a recent thing.

Speaker 31 I look back.

Speaker 7 The first tariff on sugar was in 1789,

Speaker 19 mostly to raise money at that point.

Speaker 31 But almost continuously since this this nation's founding, we have supported sugar farmers in one way or another through tariffs and quotas and subsidies, at one point even mandating that excess sugar has to go to ethanol and the government has to buy it.

Speaker 10 Why is sugar so important to the government of the United States of America to make it more expensive for everybody?

Speaker 2 Well, it's because one, when you have tariffs, historically, they're very hard to get rid of.

Speaker 2 And that's a big danger because companies, farms get used to having that protection and they want to maintain it. That's the way they've built their business.
So the history really, really matters.

Speaker 2 So that's one part of it.

Speaker 31 Because there is literally no one alive in the sugar industry who has ever competed on

Speaker 19 a global stance with sugar.

Speaker 2 Yes. So they've made all their investments and designed their whole farms around

Speaker 2 assuming they have that protections, you take that protection away and many wouldn't be profitable. So they want to keep it.
So they are going to lobby super hard in Washington.

Speaker 2 So the only people who will get elected are people who will support them, who will then push their interests in Washington.

Speaker 28 There is a term in political economy called institutional path dependence, which means what?

Speaker 2 Basically, it means history matters. So if you

Speaker 2 set up this type of policy historically, everything develops around that policy being in place, and it's super hard to reverse.

Speaker 2 And I think that is one fear around the escalation in protection now, is it took us a long time for countries to slowly reduce tariffs, yet they can go up overnight.

Speaker 2 And that's, I think, one of the things I'm most worried worried about is the persistence of protection.

Speaker 2 It's much easier to raise a tariff than it is to lower it because now there's somebody who probably wants to keep it in place and is going to fight to keep it there.

Speaker 31 So I feel like we're agreeing too much here.

Speaker 10 So let me take another point of view. United States of America, greatest economy in the world.
I can't imagine a scenario under which you say the United States just can't compete on sugar.

Speaker 31 We can't have any of our own sugar. So maybe it's worth all of these problems it creates in order to just have a thriving or at least a surviving American sugar industry.

Speaker 2 I think one could make that argument for some things that are really critical, like medicines.

Speaker 1 or

Speaker 2 I guess the reason for steel is because it goes into weapons, semiconductors.

Speaker 2 But it's hard to say, given how many countries around the world make sugar and that sugar is not even good for you, that it matters that we have a thriving sugar industry.

Speaker 18 And I guess because there's no objective reason why we need to have a sugar industry, that's why there are so many lobbyists and industry associations who work so hard to keep these protections in place.

Speaker 5 It costs all of us a few extra pennies every day, but it really matters for the sugar beet farmers.

Speaker 28 May they enjoy our pennies.

Speaker 15 Coming up, our second case study, and this is a doozy.

Speaker 4 What happens when there is a trade barrier that no one really wants?

Speaker 5 We visit the New York International Auto Show after the break.

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Speaker 12 Okay, everyone, quiet down.

Speaker 28 We have a guest in the classroom and a second case study.

Speaker 30 We talked at the beginning of the class about protectionism using regulations and this is a great example.

Speaker 24 We in the United States are not getting all the cool cars from around the world.

Speaker 10 There are regulations in place that make it too expensive to bring some international cars here and that keep some cool US cars from being affordable in the rest of the world.

Speaker 30 All of this in the name of safety.

Speaker 17 Professor Freind, what should the students be listening for in this story?

Speaker 2 I think they should think about whether they feel safer in U.S. cars than in cars elsewhere if they've been abroad and rented a car.

Speaker 40 Great.

Speaker 5 This next story comes from 2014 when Zoe Chase and I went to the New York International Auto Show.

Speaker 24 And it was a scene, I tell you.

Speaker 28 Cars on those big rotating stages, fashion models pointing out the different features of the cars.

Speaker 30 There was even this place where you could test drive big SUVs right in front of the convention center.

Speaker 25 We definitely wanted to do that, and we approached the Jeep representative.

Speaker 34 Would you like to ride in the Cherokee, the Wrangler, or the Grand Cherokee?

Speaker 43 We'll get into anything.

Speaker 27 Okay?

Speaker 33 We're getting a test drive. Since this is Manhattan, we can't really take it off-road, but Jeep has built a driving track.
A bunch of fake hills and bumps all set up right in the middle of the city.

Speaker 43 Well, welcome to Camp Jeep, you guys.

Speaker 19 My name is Steve, and I'll be your operator.

Speaker 43 And we are going to slide around the track here in our Jeep Wrangler. This is the Unlimited, so it has the four-door.

Speaker 14 And all of a sudden, the Jeep takes off and we are going up this incline. And I swear, I swear the car is about to tip over.

Speaker 40 Whoa, this is crazy! This thing's on the side.

Speaker 34 Okay, so.

Speaker 33 And then we whip around the corner and we start bouncing up and down over a bunch of stumps in the road.

Speaker 40 There's one, there's two, down, three, four,

Speaker 40 are you okay? Ah!

Speaker 12 Jeez, you're gonna destroy this thing.

Speaker 40 All right.

Speaker 36 So, made it.

Speaker 29 Could you drive this Jeep off-road?

Speaker 34 You can drive it on dirt roads?

Speaker 43 Yeah, absolutely. That's what this, this particular Jeep, this is the iconic Jeep brand, the Wrangler.

Speaker 29 Could you drive it through a river?

Speaker 39 You can water forward with it. That's one of the things that makes Jeep a trail-rated vehicle is waterfording.

Speaker 19 So can you drive this thing anywhere?

Speaker 43 You can drive it a lot of places.

Speaker 17 You can't drive your Cadillac.

Speaker 14 But you cannot drive this car anywhere because Steve doesn't mention one very large place that will not allow this car on their roads.

Speaker 40 Europe.

Speaker 14 This particular Jeep would be illegal in Paris.

Speaker 33 It would be illegal in Milan.

Speaker 26 It would be breaking the law in Berlin because of a technicality.

Speaker 14 All of the safety features on this Jeep, the airbags, the bumper, they're built to U.S. safety standards.
And there is an entirely different set of standards in Europe.

Speaker 14 And so in order to sell this particular Jeep in Europe, Jeep will have to replace a bunch of parts, redesign other parts.

Speaker 33 And the Europeans have the same issue. Each country develops their own regulations.
They have their own laws, their own testing standards.

Speaker 33 And sometimes even the expert car guys, which admittedly is not us, even they cannot figure out some rationale for the standards being different.

Speaker 14 That's why we met up with Dave Shepardson. He covers cars for the Detroit News.
And we met him at the Fiat section of the auto show. And he points to this beautiful car, I think, anyway, the Fiat 500.

Speaker 14 So cute. And in order to bring this from Italy, where you can drive it all over the place, to America, they had to change a bunch of things, including the windshield wipers.

Speaker 44 American regulations require that the windshield wipers capture a larger part part of the windshield versus European ones.

Speaker 18 But I mean, what is the even logic behind that?

Speaker 34 You know,

Speaker 44 I guess Americans might be taller on average, therefore they would be looking at a different part. I mean, I'm struggling here.
I agree with you to come up with a rationalization.

Speaker 33 Yeah, some of the regulations seem totally arbitrary.

Speaker 33 Like, the very fact that a rule exists at all for this thing seems kind of crazy, let alone that there are two different rules in different countries.

Speaker 33 Like, we found these two brand new Porsches on the show floor, one Porsche for the US and one for Europe. And they had two different colored turn signals.

Speaker 45 This is a Porsche Panamera. Look at the US version, we have the amber turn signal indicator, whereas here on the German version, we've got the clear.

Speaker 14 That is actually a law. That is a rule.
We don't care if your car is worth a million dollars, and this car is worth a million dollars.

Speaker 14 You have to have an amber turn signal in America, and you have to swap out this little piece of plastic if you're in Europe.

Speaker 33 And this may sound kind of silly, but the rules go from the very small to the very big. Because a car can be a very big and very serious thing.

Speaker 33 Because cars can kill you, which is why the government feels like they have a compelling interest to get all up in how you make your car and tell you what you can and cannot do.

Speaker 33 Cars are one of the leading causes of death in this country.

Speaker 14 Yeah, and different countries have different assumptions about exactly how these cars are going to kill you.

Speaker 40 Take crash tests.

Speaker 14 In Europe, you have to put crash test dummies into a car and you drive that car into a wall head-on.

Speaker 33 But the U.S. also looks at what it'll be like if the crash happens at a slight angle.

Speaker 14 A small difference, but a big deal for designers, because this presents them with a problem. Now, a car company could design a car that will withstand both kinds of tests.

Speaker 14 A car that would be legal in both the United States and Europe. And a lot of super luxury cars do this, but it can be really expensive expensive to make the frame that way.

Speaker 14 And so what a lot of other car companies do is they do the sort of second most expensive thing. They just redesign the car.

Speaker 14 They say, this one's for U.S., this one's for Europe, and then they re-crash it and they retest it.

Speaker 33 And you might think I did, at first, I just assumed that Europe is just a safer place to drive. And in the U.S., they are more lax.
I figured in Europe, they're more strict.

Speaker 33 So in Europe, they're probably safer.

Speaker 5 But this is not the case.

Speaker 20 No.

Speaker 14 Everyone tells us, and studies back this up, that in general, when you take take all the regulations of both Europe and the U.S., both places are pretty safe.

Speaker 33 They're just different.

Speaker 14 The U.S. may require a certain test like this at a certain higher speed, and Europe may require more kinds of tests, but it doesn't result in significant differences in the number of deaths.

Speaker 14 The difference is almost a philosophical one. What does it mean to make a car safe?

Speaker 33 Well, here's one big philosophical difference, which is who are the rules designed to protect?

Speaker 33 So in the U.S., cars are tested to make sure the people inside the car are protected, the driver and the passenger.

Speaker 25 In Europe, cars are also tested to see if they protect pedestrians, people walking in front of the car.

Speaker 14 Cities are denser, they drive less, so European regulators want the front of their cars to be basically softer.

Speaker 14 And there's this test that Europe requires.

Speaker 45 The baby head test. Okay, all the European cars have to meet this test.

Speaker 14 The babyhead test. They don't use actual baby heads, but they roll a ball about the size of a baby head all over the car to make sure there are no sharp edges.

Speaker 14 It's all done by computer, so the cars look smoother than they used to.

Speaker 33 Now, maybe the baby head test makes sense and having smoother cars is a safer thing to do. But is an amber turn signal really better than a clear one or vice versa?

Speaker 33 The question is, why haven't at this point all the regulators just come into a room and sort of just voted, looked at all the data, decided what works best, what's the safest thing to do, and then just picked one and then enforce the same set of standards all over the world.

Speaker 14 Now, normally when we encounter something like this, a trade barrier, we look for the person who is pushing for it.

Speaker 14 There's usually some industry or some farmer wants to be protected and they go to their government and they demand a rule, a set of regulations that keeps out foreign competition.

Speaker 22 But this difference in car regulations, it is hated by all of the car companies equally.

Speaker 14 We couldn't find anyone who wants these differences. It protects no one in particular.
And the car companies say it actually hurts them all. But it's not up to them.

Speaker 14 If it were, we would have one simple list for everyone. That's what a global engineer Cadillac told us.

Speaker 33 Do you think if all the companies in the auto show right now, they're set together, you guys could just come up with what the list would be?

Speaker 45 We would love to.

Speaker 33 Really? Yeah. Everybody feels this way, huh?

Speaker 44 We could.

Speaker 45 No, absolutely.

Speaker 45 It would make life so much simpler. And I could use the same part around the world without all the unique testing and certification requirement and design.

Speaker 45 And it gets to exhaust systems and it gets to seat belts and it gets to glass and it gets to mirrors and tires and it's millions.

Speaker 45 It's not thousands, it's millions of dollars that we spend annually to make sure that our vehicles meet the requirements of the global market. We sell Cadillacs in over 40 countries around the world.

Speaker 33 Just imagine rolling a Cadillac off the production line in the U.S. and just sending it out anywhere in the world, just testing it once and then selling it to whoever wants to buy it.

Speaker 33 And that could save tens of millions of dollars.

Speaker 33 Cars might be cheaper for us because complying with these two sets of rules gets baked into the price and there'd be a bigger selection of cars to choose from.

Speaker 25 You know, it was hard at first for us to just puzzle out, like, why do these two different sets of rules persist?

Speaker 14 And we asked everyone at the car show. No one had a good answer.
And when it came right down to it, it seemed ridiculous. We have the same human bodies.

Speaker 14 We have the same size baby heads on both sides of the Atlantic. And we we couldn't quite figure it out until this one moment when we suddenly understood.

Speaker 14 Now, we may all be physiologically the same, but culturally, we're different.

Speaker 32 So, in America and Europe, we actually drive differently.

Speaker 33 Take a very basic example. Seatbelts.
In every car, you're required to wear them in Europe. You are required to wear them in the United States.

Speaker 33 But in the United States, Let's be honest, people do not always wear their seatbelt.

Speaker 14 Now, try and run this by a European.

Speaker 33 I found a German person.

Speaker 39 Do you wear your seatbelt?

Speaker 46 Yes, of course. Every time.
It's more safety.

Speaker 2 You don't get that feeling like, I just don't really want to bother.

Speaker 46 Oh, no, no way. Never.

Speaker 2 Can you understand how some of us might feel that way?

Speaker 46 We have a lot of roots in Germany and it's kind of mentality, so everybody puts on the seatbelt and...

Speaker 13 The mentality is to follow the rules?

Speaker 46 Yes.

Speaker 1 Yes.

Speaker 14 Philip Clanett, who is one of the car cleaners here, he just looked at us like we were crazy. Now, look at this through the eyes of a regulator.

Speaker 14 They see that Americans sometimes don't wear their seatbelts, that Germans, like Philip, always wear theirs.

Speaker 14 So when they get together, when the Germans get together to design their airbags, they assume everyone's wearing a seatbelt. Their airbags can be smaller, more targeted.

Speaker 14 They know where the head of a person is going to go in a crash because a German is wearing his seatbelt.

Speaker 33 In America, we assume that people will break the law and we want those people to live as well. So our airbags are bigger for some idiot who is not wearing a seatbelt who goes flying around the car.

Speaker 26 So you can see the problem here, right?

Speaker 14 In theory, all regulations should be the same.

Speaker 14 But if you have two different kinds of people and you have two different kinds of airbags, that means that car manufacturers have to manufacture a different kind of dashboard for Europe and the U.S.

Speaker 18 And two different dashboards means essentially two different cars.

Speaker 33 So it's a trade barrier, but it's an emotional trade barrier, which is possibly why it is taking so long to straighten this out.

Speaker 13 That was Zoe Chase and I back in the good old days of 2014.

Speaker 5 It's more than 10 years later, and guess what?

Speaker 6 Institutional path dependence, we have still not fixed the regulatory differences in cars between Europe and the United States.

Speaker 17 We'll be back with our professor in a minute to explain why.

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Speaker 28 We are almost at the end of class, everyone, but I wanted to bring back in Carolyn Freund from UC San Diego for just a moment.

Speaker 12 Hey, Carolyn.

Speaker 2 Thank you.

Speaker 25 So in the auto show story, there was a mystery.

Speaker 10 These safety regulations act as a trade barrier. They make European cars more expensive in the U.S.

Speaker 19 and probably keep out some great cheap cars from Europe.

Speaker 7 But no one in the car industry supports this.

Speaker 18 It seems like a collective action problem, but it acts like it is a regular trade barrier.

Speaker 22 So how did these regulations come about in the first place?

Speaker 2 Part of it was actually protecting the car industries from having to compete with car companies from abroad, because if there are regulatory differences, it creates increased costs for a foreign producer to produce its type of car and sell it in your market.

Speaker 28 So back in the old days, a European car manufacturer might have gone to their government and said, you know, we really like our turn signals better.

Speaker 24 Why don't we put a law in place that says that our turn signals are better?

Speaker 31 And then the United States has to replace the color of their turn signals for us.

Speaker 2 Yeah, the car companies would work with the regulators to come up with differences. And some of it for sure is safety.

Speaker 2 And it's just that the regulatory agencies worked independently and did what they thought was right. But some are so clearly absurd that there had to be more than that involved and

Speaker 2 maybe even at a higher level just saying we don't want regulatory cooperation so that our regulations are different, then

Speaker 2 we have our market for ourselves, they have their market, and then we can all go around to the rest of the world saying our regulations are better and if we get Mexico on our regulations, it's easier for us to compete in Mexico than for Europe because now Mexico is on our regulation.

Speaker 2 So there was also this race around the world to get countries on to either European regulations or U.S. regulations.

Speaker 31 Interesting. Now,

Speaker 16 back when those regulations came in, U.S.

Speaker 31 cars were mostly in the United States. European cars were mostly in Europe.

Speaker 23 But the industry changed now.

Speaker 30 The car industry is far more global.

Speaker 27 So when I talked to people at this car show, they threw up their hands.

Speaker 12 They're just like, why can't we have free trade in cars?

Speaker 18 Why can't we harmonize these differences?

Speaker 2 So it's a real interesting case of global supply chains completely changing the political economy of the industry. And frankly, the U.S.
industry becoming more competitive.

Speaker 2 Let's remember when I was a kid in the 70s, U.S. cars weren't that great.

Speaker 2 We'd get in in the morning in my mom's Dodge Dart in Chicago in a cold winter and pray that it would start, whereas the Toyota was starting right away. The competition actually helped U.S.

Speaker 2 cars become more competitive, which was a good thing.

Speaker 2 And now that they're more competitive, and parts and components are being produced all over the world, and they have factories in different places, they all want to sell everywhere.

Speaker 2 So now the car industry would actually like to have a single standard, but for all these historical reasons, both protecting the industry and the views of the regulators and protecting people and how they developed independently, we don't have that.

Speaker 2 We have these different color little taillights, these different windshield thicknesses, different paddings here and there, et cetera, et cetera.

Speaker 31 But going forward, how do we just get rid of the differences in these regulations so I can drive more cool cars here in the United States of America?

Speaker 2 Well, there's one really easy way to do it quickly, which is mutual recognition. So we both say, okay, we have different standards, but they're both safe.

Speaker 2 So I'm going to recognize European standards, Europeans will recognize U.S. standards, and our goods can be traded.

Speaker 2 Over time, that would likely lead to one standard because industry would have the incentive over time to just have to produce one car

Speaker 2 rather than two Ford fusions and

Speaker 2 so forth.

Speaker 10 That's such a beautiful concept where it essentially says, I trust my trading partner. to make something safe and they trust us to make something safe.

Speaker 22 And yes, we're different, but maybe difference is fine.

Speaker 28 So Carolyn, before you leave, we wanted to do some vocabulary words, some concepts that people can take with them out into the world when they see an unfair price for sugar.

Speaker 17 Protectionism. What is protectionism?

Speaker 2 It's different government interventions to protect our industry, whether tariffs or quotas or such.

Speaker 23 We should probably define the word quotas.

Speaker 12 What's a quota?

Speaker 2 A quota is a quantity restraint on incoming products. So say the number of cars or the pounds of sugar that are allowed in.

Speaker 28 We talked about how once a tariff is in place, it often stays, and the term path dependence.

Speaker 31 What does path dependence mean?

Speaker 2 That history matters. So, because you put something in in the past, it changes how things are in the future.
So, the sugar example was a perfect example of that.

Speaker 2 The historical protection has been so hard to get rid of.

Speaker 23 Thank you so much, Carolyn, for coming in and doing this.

Speaker 22 I appreciate it.

Speaker 2 Thank you. My pleasure.

Speaker 28 Carolyn Freund is the Dean of the School of Global Policy and Strategy at UC San Diego.

Speaker 6 Next week on summer school, oh, this is very exciting, our commencement ceremony recorded live at the Bell House in Brooklyn.

Speaker 16 If you could not make it in the audience, you can still be involved in the fun.

Speaker 10 Nothing says you can't listen to the final episode while wearing your own graduation robe.

Speaker 8 Do it. Send us a photo.

Speaker 28 Plus, there will be a final online quiz.

Speaker 15 And if you pass, a souvenir diploma suitable for display on LinkedIn and in the back of your Zoom calls.

Speaker 29 Everyone will love it and respect you.

Speaker 13 Summer School is produced by Eric Metal and edited by Alex Goldmark.

Speaker 29 It was fact-checked by Emily Crawford.

Speaker 13 Devin Meller is our project manager. I'm Robert Smith.

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