Leibowitz on Trade: Are Section 301 Tariffs on China Here to Stay?

The decision, announced on Sept. 3, does not mean a final decision has been made. That’s because of Section 301 statute: USTR may continue the tariffs pending a review if domestic parties express an interest in keeping the tariffs in place. This interim continuation of the tariffs is what the White House announced.

In the meantime, rumors abound about the possible direction of the tariff decision. But little hard information is available. There are many questions other questions about the future of China trade policy other than whether tariffs are eliminated. Let’s explore a few.

Proponents of the tariffs argue that their continuation is essential to achieve the goal of moving Western companies out of China. This is an important part of the effort to frustrate China’s ambitions to achieve global success and supplant the United States as the world’s largest economy. Groups such as the Reshoring Initiative would like the movement out of China to be matched by movement into the US. But those two goals are quite different.

The US policy regarding “friend-shoring” is unclear at the moment. An index of reshoring statistics published this summer indicates that US manufacturers rely significantly less on China than in the past. However, the share of imported manufactured goods to US gross domestic product (GDP) continues to increase. In 2008, the US ratio of manufactured goods imports to GDP was a bit over 9%. In 2021, the ratio was about 14.5%. The trend in manufacturing is clear—the share of US GDP represented by manufacturing is declining.

The tariffs should be judged on whether they have reduced US manufacturers’ dependence on China, for manufactured goods and particularly for manufacturing inputs. Drilling down on these figures is important. More analysis needs to be done.

Looking only at import levels from China, the figures do not appear to show progress in reducing reliance on China. Imports from China in 2022 will likely exceed levels in 2018. In 2021, imports totaled almost $500 billion, only $43 billion lower than 2018, the year the China Section 301 tariffs were first imposed. Imports from China in 2022 are outpacing 2021 imports year to date by 17.5%. At that rate, the value of imports from China will eclipse the 2018 import levels that triggered the tariff barrage. While imports sagged in 2019 and 2020 due largely to the tariff shocks in 2019 and the pandemic in 2020, the return of vigorous economic activity in 2021 and 2022 has erased the effects of the China tariffs.

Steel imports in 2022 (Chapter 72 of the Tariff Schedule) are running at nearly triple the 2021 rate at $636 million through July. Articles of steel (Chapter 73) are also up, 23% higher than 2021 levels at about $13.5 billion, which were already well above the levels of 2018—and this despite the Section 232 tariffs and numerous antidumping and countervailing duty cases.

Considering that track record, many domestic interests wonder why the tariffs on China should continue. After all, there is an undeniable connection between the tariffs and the inflation we are experiencing now. If reducing the world’s reliance on Chinese exports is a strategic necessity, the tariffs hardly matter—the rest of the world is not affected by US tariffs. US exports to the rest of the world are not helped by US import tariffs.

Yet US workers are decidedly in favor of keeping the tariffs as support for US jobs. The record is murky as far as the impact of the tariffs on US employment. With unemployment in this country at historic lows (3.7% at last report), getting people to work is proving a challenge. US manufacturing is, in output terms, at an all-time high. But manufacturing employment is down, due as much or more, according to economists, to technology replacing people in US manufacturing companies. Men and women are not likely to replace machines in manufacturing plants any time soon.

Another key argument is that the tariffs are needed as leverage in negotiations with the government of China. It seems to me that the burden of proving that argument should be on its proponents, especially the US Trade Representative. China surely knows that the tariffs on its exports are a source of friction within the US, and it will not change its position based on harm to its position. As noted above, the harm to China’s economic interests from the tariffs is not truly measurable.

All in all, the tariffs on China are controversial because they do as much or more harm than good for the United States economy. It is Americans vs. Americans that the Biden administration needs to attend to.

Finally, there is the issue of politics. It is unrealistic to expect the administration to make any announcement about China policy before Nov. 8, election day this year. If an announcement is made before election day, there will be howls of protest from some quarters – and the election’s results could be affected.

A more likely outcome, after the election, would be changes in China tariffs to ease the harm to US companies without making obvious changes in the tariffs that would offend organized labor and progressive Democrats. Look for some modification in the China exclusion process, with more exclusions in the offing. That would give companies that are truly harmed by the tariffs a safety valve to relieve at least some of the burden.

Lewis Leibowitz

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