Biden’s Get-Tough-on-China Tariffs May Backfire

"The tide of globalization is receding, at least from American shores. Two successive presidents have come down firmly on the side of tariffs rather than trade agreements as the preferred mechanism for managing international commerce.

History shows that we should proceed with caution. While there are political and security reasons for tariffs, America’s new protectionist stance will raise prices, limit consumer choices and risk our future growth.

The past aggressive and widespread imposition of levies of this sort has made clear that restraining trade brings with it serious risks to economic prosperity, both for the United States and other affected countries.

Last week, after laying low on this front for most of his term, President Biden announced a raft of new tariffs on selected Chinese imports including electric cars and solar panels as well as steel and aluminum. While the tariffs cover only $18 billion of imports, they are by design meant to keep Chinese products, like electric vehicles, from entering the U.S. market. 

 In doing so, he has in large measure aligned his trade policy with that of his predecessor, Donald Trump.

It’s not hard to understand the reasons for this. While the U.S. economy continues to grow (albeit a bit slowly) and create jobs (at a fast pace), Americans are dissatisfied; polls show that a majority of voters say the state of the economy is “poor.”

In a search for culprits, eyes often turn to the growing number of inexpensive imports, particularly from China. No doubt decades of increased trade have caused some losers. Entire domestic manufacturing industries — from furniture to electronics to toys to bicycles — have essentially disappeared. And now our ability to compete in new sectors, like electric vehicles and solar panels, is in grave doubt.

Moreover, as political tensions with China have grown, so have concerns about the national security implications of trade. China is a major source of critical minerals such as lithium and cobalt, essential ingredients in many batteries. And the increase in tariffs on Chinese semiconductors is only the latest in a string of policies intended to support domestic manufacturing of chips, which are key components in everything from autos to military equipment.

In that context, at least some of Mr. Biden’s new array of tariffs targeted at China make sense. But others — like the increase in the duties on certain aluminum and steel products to 25 percent from between zero and 7.5 percent — seem motivated by Mr. Biden’s desire to outflank his opponent in Rust Belt swing states. They will increase the cost of these materials for American industry, hampering efforts to rebuild our manufacturing strength.

In addition, the Biden administration announced that it would be extending Trump-era tariffs on $300 billion of Chinese imports, including consumer electronics, furniture, clothing and shoes, among other goods.

While Mr. Biden’s relatively surgical attack on specific Chinese products is far more defensible than Mr. Trump’s wildly broad-brush approach, the sharp reversal in U.S. trade policy over the past seven years brings with it legitimate worries about growth, inflation and the overall number of American jobs.

Every student in an introductory economics course learns about David Ricardo’s 200-year-old theory of comparative advantage: the idea that by specializing in the products that they can produce most efficiently and then trading with others, nations can be better off.

In the wake of the 1929 stock market crash, Congress passed the Smoot-Hawley tariffs. Though pitched as a means of protecting workers and farmers during a downturn, the tariffs triggered a wave of global protectionism that exacerbated the Great Depression and contributed to an estimated two-thirds decline in global trade.

Lesson learned, trade liberalization began, and successive accords brought tariffs down sharply, often to minimal levels. That culminated with the North American Free Trade Agreement, which went into effect in 1994, and the admission of China to the World Trade Organization in 2001.

As macroeconomists had argued, the resulting increase in trade brought consumers in the United States and elsewhere less expensive and often superior goods, helping fuel strong economic growth and moderate inflation.

What macroeconomists missed were the microeconomic effects. While trade aided overall prosperity, significant pockets of American workers — particularly in manufacturing — lost their jobs or found their wages cut. One study, on which the Massachusetts Institute of Technology economist David Autor was a co-author, found that the “China shock” cost us nearly one million manufacturing jobs and 2.4 million jobs in total. Little was done to assist affected workers.

Without a doubt, Mr. Trump’s full-throated opposition to free trade contributed to his 2016 election, and he lost no time in carrying out his agenda, even on some imports from allies like Japan and Europe, including steel and aluminum, washing machines and solar panels.

The general problem with tariffs is that study after study has shown that they raise prices for consumers and probably cost more jobs than they save, particularly as affected countries retaliate.

Mr. Trump declared victory when China promised to purchase an additional $200 billion of American products — a promise it didn’t keep.

Mr. Trump is now making a far more aggressive package of tariffs the centerpiece of his campaign. He has proposed imposing at least a 60 percent levy on all imports from China and a 10 percent tariff on imports from everywhere else. This month, he added a 200 percent duty on vehicles made in Mexico by Chinese companies to his laundry list of protectionist policies.

While I’m not predicting another Great Depression, Mr. Trump’s trade agenda, were it put in place, would have a far worse impact on the global economy than Mr. Biden’s more tailored approach.

The new protectionism has already put the prospect of further trade agreements on ice. Washington insiders joke that the position of United States trade representative should be retitled United States anti-trade representative. The current trade representative, Katherine Tai, said falsely last week that the evidence of tariffs leading to higher prices had been “largely debunked.”

Not so. Mr. Biden was correct in 2019, when he criticized Mr. Trump for this quixotic trade war. “President Trump may think he’s being tough on China,” Mr. Biden said in a campaign speech. “All that he’s delivered as a consequence of that is American farmers, manufacturers and consumers losing and paying more.” (Ms. Tai later walked back her recent comment.)

A Goldman Sachs analysis found that from the start of 2018 to the start of 2020, prices of tariff-targeted goods rose by about 4 percent while the prices of nontargeted goods fell 1 percent. Numerous studies have found that those higher prices were borne almost entirely by American companies and consumers — not by Chinese exporters. A Tax Foundation analysis concluded that the Trump tariffs cost 166,000 jobs.

Retaliation, the inevitable result of tariff imposition, has already begun. The “buy American” provisions of the Inflation Reduction Act helped spur Europe to add its own “buy European” requirements to its new green infrastructure bill. All told, the number of worldwide protectionist trade interventions roughly doubled in 2020 and has remained elevated, according to Global Trade Alert.

We need a better approach. Tariffs can be used to temporarily shelter nascent domestic industries — much as Alexander Hamilton proposed when he served as our first Treasury secretary. They can be used judiciously to address unfair trading practices. And they can be used when national security is genuinely at risk.

However, we also need to resume removing trade barriers, not increase them. Among other things, we need the World Trade Organization to function, but the Trump and Biden administrations have blocked all candidates for its appellate body and chosen to act unilaterally, rather than through the W.T.O.

I’m hoping that when the election dust settles, we can get back to what David Ricardo explained so clearly two centuries ago." [1]

Funny bunny. Mr. Rattner does not understand that you need to let in catfish to make your own fish to swim faster. Without Chinese competition American companies are becoming lazy and start losing in global markets. They will never recover from such a hit. America is risking to be left without any car producers, any battery producers, and any solar panel producers. 

1. Biden’s Get-Tough-on-China Tariffs May Backfire: guest essay. Rattner, Steven; New York Times (Online) New York Times Company. May 21, 2024.