Leibowitz on Trade: Reconsidering Trump-Era Tariffs on China

Those interested in maintaining the tariffs because they benefit from them make mostly self-serving arguments. Think unions, domestic producers under pressure from China, and politicians allied with them. They all want to keep the tariffs, arguing that reducing pressure on China will make it harder to change Beijing’s behavior.

Those interested in ending the “trade war” argue that the tariffs hurt them. Think retailers, those whose exports have been hit with retaliatory measures from China, consumers, and manufacturers that depend on Chinese suppliers. They also argue, correctly, that these tariffs are inflationary and that inflation is more pressing issue right now than pressuring China – especially when there are no guarantees that the pressure will achieve the desired results.

What’s a president to do? Should the tariffs stay or go?

There are too few discussions of a middle path that might strike a balance between trade policy objectives, geopolitics, international law, and US economic interests. I have no doubt that these discussions take place daily within the administration, in business circles, and at dinner tables. But publicly, each interest group is reading from its own playbook without giving any consideration to the other side’s points.

These are complicated issues. Much has changed since 2018 to warrant reevaluation of tariffs on Chinese goods.

One big change is a decided swing in US public opinion against China. In a recent poll conducted by the Pew Research Center, 82% of Americans said they viewed China unfavorably, compared with 47% in 2018. Any change in tariff policy viewed as lenient toward China will probably be viewed unfavorably by most Americans.

A second trend, which started during the so-called trade war with China and which has intensified during the war in Ukraine, is the discussion about “re-shoring.” There are obvious limits to bringing manufacturing back to the United States. In addition to the US economy developing more toward technology and services rather than manufacturing, the trade war itself has hurt US exports. One example is BMW. The German automaker used to produce all its SUVs in Spartanburg, S.C. The trade war caused a shift of some production to China to escape the retaliatory tariffs on US exports imposed by China. Tariffs are a two-edged sword, and the edges get sharper with time.

A third change is inflation. The tariffs on China (and the related Section 232 and safeguard tariffs on steel, aluminum, washing machines, and solar panels) did not immediately cause inflation in 2018. But the continued use of such measures in these inflationary times will make it harder to rein in runaway prices.

Currently, there is more talk about “friend-shoring,” a term that would divide the world’s economies into “democratic” and “authoritarian” camps, undoubtedly to the detriment of both. Until the current conflicts are resolved, the pressure will grow to treat friends better than adversaries.

Another question is whether the tariffs (and I will focus on the China tariffs for now) have accomplished their objectives. Some of the important stated objectives when the tariffs were put in place included: (1) changing China’s behavior regarding intellectual property and trade secret theft, (2) human rights and democracy in Hong Kong, (3) encouraging investors in China to shift to other countries for manufacturing; and (4) encouraging other countries, especially in the Asia-Pacific region, to establish closer ties to the United States. Those are not the only objectives, of course, but they will do for now.

There are indications that the tariffs have made progress on issues (3) and (4). There is no evidence of progress on changing Beijing’s behavior.

A quick check on trade flows reveals the changing landscape. In 2021, Asian countries other than China have grown as exporters to the United States. Vietnam, Taiwan, South Korea, and Malaysia have grown dramatically. They exported $544 billion of goods to the US in 2021, an increase of $135 billion, or more than one-third, from 2018. This increase is three times more than the amount by which Chinese exports to the US diminished over the same period. Vietnam and Taiwan vaulted into the top 10 list for exporters to the US by 2021, replacing Italy and the United Kingdom. Pivot to Asia, indeed. And US imports overall continue to grow as well. In 2021, total US imports were about $2.8 trillion, up about 11% from 2018.

The trade war with China has not produced total victory. China has used tariffs of its own as a weapon against the US, with some success, and shows no sign of shifting its priorities. A recent USTR report on foreign trade barriers and unfair practices reads almost identically to the critique of China in a 2018 report.

Clearly, it is time for a reevaluation of trade policy toward China. But the answer is not necessarily to dispense with all tariffs or to double down on a policy that has not resulted in progress on US objectives. During the next several months, the Biden administration will ask for public comment on the tariffs (including not only those on China but also Section 232 tariffs on steel and aluminum). The administration needs help to see what is working and what is not.

A good place to start might be to develop metrics to gauge which tariffs have done the most to change China’s policies – it’s probably a short list – and which tariffs have resulted in the greatest damage to US consumers and businesses through supply chain disruption and inflation. It’s better to reserve tariffs for those products that send a clear message to China and that hurt Americans the least. There is no single answer to those questions, and no clear evidence to show which tariffs hurt Americans the most and the least.

It is easier to determine who has benefited the most from tariffs on China. Based on import figures, the winners are Vietnam (up 98% from 2018-2021), Malaysia (up 40%), and Taiwan (up 68%). The Biden administration hopes to convince these trade partners that its Indo-Pacific Economic Framework will work. The jury is still out on that.

Lewis Leibowitz

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