Podcast Episode Summary

Podcast: Pitchfork Economics with Nick Hanauer

Episode: You Can't Tariff Knowledge (with César Hidalgo)
Date: September 30, 2025

Episode Overview

In this episode, hosts Nick Hanauer and David Goldstein (“Goldie”) dive deep into the true nature of economic growth, trade, and prosperity with guest César Hidalgo, Director of the Center for Collective Learning and author of Why Information Grows. The conversation centers on the paradigm shift from outdated “trickle-down” economics to a more dynamic, knowledge-based, and “middle-out” approach, exploring why tariffs misunderstand the sources of prosperity, how knowledge and know-how really drive economies, how modern trade statistics fail to capture the U.S.’s real economic strength, and what effective policy could look like amid global competition—especially with China.

Key Discussion Points and Insights

1. The Foundation of Prosperity: Distributed Knowledge and Know-How

• Knowledge Accumulation: Hidalgo explains that economic activity is fundamentally a process of accumulating and combining knowledge, which is inherently distributed and non-interchangeable ([03:36]).
• Distributed Expertise: “The world works not because a few people know a lot, but because a lot of people know very little. And that knowledge is distributed. And the magic of the markets is that the knowledge is put together.” (César Hidalgo, [04:32])
• Knowledge vs. Know-How:
  • Knowledge = statements of fact (e.g., “Washington, D.C. is the capital”).
  • Know-How = practical ability to do (e.g., play the guitar).
  • Know-how is harder to transmit—it requires experience and practice ([05:16]).

Notable Example

• Tom Twaits’ Toaster: The failed quest to build a toaster from scratch underscores how no single person can possess all required know-how—illustrating how complex products need distributed expertise ([04:09]).

2. Complexity and Economic Evolution—Breaking Out of Static Theories

• Limits of Comparative Advantage: Traditional trade theory sees a nation’s capabilities as static; Hidalgo’s work shows they’re dynamic, evolving over time ([06:57]).
• Path Dependence: Countries expand production into “adjacent product spaces” based on what they can already do—a process that isn’t random but shaped by know-how accumulation ([10:53]).

On Strategy

• Economic Strategy Needs Direction: “You need to find ways to make more things, not less. And ideally more complicated things, not less complicated things.” (Nick Hanauer, [08:42])

• Quality and Specialization: The goal isn’t just diversity but high specialization in knowledge-intensive activities that deliver high productivity and exportability (examples: Switzerland, Singapore, parts of the U.S.) ([09:07], [10:53]).

3. Hidalgo’s Four-Part Heuristic: “What, Where, When, Who?”

• What: Set strategic targets for productive capacities appropriate for your country’s abilities ([14:42]).
• When: Time “risky jumps” into sophisticated sectors just before hitting a middle-income trap—pointing to India’s opportunity versus Latin America’s missed window ([14:42]–[17:22]).
• Where: Acquire knowledge through networks—geographic, cultural, “diasporas”—and related industries.
• Who: Identify the change agents willing to take risks to develop new sectors ([17:40]).

4. The Real Story on Trade Balances & Tariffs

The Hidden Surplus: Digital Exports

• Trade Data Blind Spots: U.S. digital exports (e.g., software, cloud services) are vastly undercounted because they’re booked through overseas subsidiaries for tax reasons ([19:16]).
  • “The U.S. runs a surplus of about $700 billion a year in digital products… That’s like the total exports of France.” (Hidalgo, [20:38])
• Physical vs. Digital: California runs physical trade deficits but a huge digital surplus—reflecting the modern, knowledge-intensive economy ([23:00]).
• Tax Distortions: Much of this is due to tax strategies—explains similar patterns for Chinese tech firms operating via the Cayman Islands ([21:56]).

Tariffs are Outmoded and Ineffective

• Tariffs Miss the Point:
  • “Tariffs are not the way to go… Digital flows are much harder to trace—even though they are digital!” (Hidalgo, [19:16], [22:53])
  • U.S. imports from China may drop, but imports from Taiwan, Vietnam, and Mexico rise dramatically—much is relabeled. “Trade can be very slippery.” ([24:45])
• Mercantilism & Industrial Subsidies: Recognizes China’s aggressive strategy, and the difficulty of competing with state-backed industries. “You either have to be fine abandoning your industries, or you have to find a way to reasonably push back.” (Nick Hanauer, [26:25])

5. Policy Prescriptions: What Actually Works?

• **Not Tariffs **– focus on...
  • Supercharging research (NIH, universities).
  • Attracting and welcoming global talent.
  • Investing federal resources into innovation, education, and research infrastructure ([30:04]–[31:32]).
    • “I would use some of that firepower…doing the opposite of what [the US government] is doing in terms of funding research…bet on research and let the market figure out who buys it.” (Hidalgo, [30:04]/[31:37])
• Cautions Against Isolation: Emphasizes the U.S. is still big enough to compete globally and should avoid protectionism, instead investing in capacities.
• On Industrial Policy: Skeptical of the effectiveness and scale of Biden-era initiatives—calls for bigger, bolder, more decisive action ([32:36]).

6. Hidalgo’s “Why” & Final Reflections

Motivation

• Roots in Inequality & Opportunity: Hidalgo grew up in Chile and became obsessed with why talent doesn’t develop everywhere equally.
  • “Talent might be everywhere, but opportunity is not. And I’ve dedicated my life to understand why talent doesn’t develop everywhere equally.” (César Hidalgo, [33:34])

The Big Takeaways

• The U.S. trade "deficit" is misrepresented—real economic strength is in digital and intangible exports ([36:36]–[37:54]).
• America’s true edge comes from drawing talent and investing in knowledge—“know-how is heavy,” hard to move, which is why attracting skilled people is paramount ([38:22]).
• Current U.S. policy is doing the opposite: instead of investing in research and attracting talent, it’s pushing people away and undermining its own institutions.

Memorable Quotes & Moments

• On the Knowledge Economy:
  “The world works not because a few people know a lot, but because a lot of people know very little. And that knowledge is distributed. And the magic of the markets is that the knowledge is put together.”
  — César Hidalgo, [04:32]
• On Comparative Advantage’s Limits:
  “Capacities are not static, they are dynamic… Once we're able to measure not only what you're able to do, but what you could be good at doing… the laggards can become sometimes leaders.”
  — César Hidalgo, [08:34]
• On U.S. Digital Exports:
  “The US runs a surplus of about 700 billion a year in digital products. That's like the total exports of France.”
  — César Hidalgo, [20:38]
• On Policy Directions:
  “I would superpower the NIH. I would superpower the universities. I would superpower all of that innovative capacity that the US has.”
  — César Hidalgo, [30:58]
• On America’s Declining Magnet for Talent:
  “I wouldn't count on our ability to attract people from all over the world anymore.”
  — David Goldstein, [29:36]
• On Tariff Futility:
  “We're focusing on tariffs, which don't work, because China's getting around that through Vietnam and Mexico and wherever… we're telling smart and talented people not to come here…”
  — David Goldstein, [39:30]

Timestamps for Key Segments

• 03:36 — Hidalgo explains the distributed nature of economic knowledge
• 05:16 — Discussion of the distinction between knowledge and know-how
• 08:34 — How countries can evolve their capacities and move into higher-value activities
• 10:53 — Path-dependence and the role of the textile industry in economic evolution
• 14:42 — Hidalgo introduces the “What, Where, When, Who” framework
• 19:16–21:56 — The mismeasurement of U.S. digital exports and the effect of tax strategies
• 24:45 — The slipperiness of trade and the shifting of imports across countries
• 26:25–27:48 — Deliberate Chinese industrial policy and the need for a strategic U.S. response
• 30:04 — Hidalgo’s trade policy advice: invest in knowledge, not tariffs
• 32:36 — Reflections on recent industrial policy efforts
• 33:34–34:46 — Hidalgo’s personal motivation and commitment to understanding economic development
• 36:36–40:47 — Takeaways on trade deficits, the U.S. as a magnet for know-how, and misguided policy directions

Final Thoughts

This episode powerfully debunks the mythology that tariffs and simple trade accounting can safeguard America’s prosperity. Instead, Hidalgo insists, economic strategy in the 21st century must center on the capacity to produce, combine, and apply know-how—which means investing in research, education, and immigrant talent. The hosts are both inspired and sobered by the extent to which current policies undermine these real sources of economic power, rather than strengthen them.