Should Biden Lift the Tariffs on China?

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Should Biden Lift the Tariffs on China?

I can almost hear the shock and disbelief of the China Hawks.  “What are you, an idiot?  Why even ask that question?  Remove the tariffs on China?  Of course not.  Don’t be stupid.”

 

Don’t remove the tariffs, yet

Perhaps this will calm the China Hawks—I agree. I don’t think the China tariffs should be removed.  At least, not immediately.  Not because the tariffs were a good idea.  They weren’t.  Not because the tariffs worked.  They didn’t.  But because we are where we are and we need to take the best path forward.  Let me explain.

 

Tariffs did not help the US trade deficit

During the period of the tariffs on China, US imports from China decreased, but overall US imports did not.  China’s overall exports also did not decline.  In other words, trade shifted to other countries but it didn’t decrease much.

 

Except for US farmers, which had trouble finding alternative markets and ended up with a massive decrease in exports.  This in turn induced the Trump Administration to sign a “Phase One Agreement” with China, in order to ease pressure on US farmers.

 

China did not make large concessions

The US received some decent concessions in the Phase One Agreement, particularly relative to Intellectual Property protection.  But the fact that a Phase One Agreement was necessary exposes one of the major shortcomings of the tariff-first approach—collateral damage.  A successful strategy should create more pain for the adversary than for yourself.  It isn’t clear the tariff strategy meets that criterion.

 

Plus, the tariffs did not induce much change from China.  For most of the major issues—opening markets in China, decreasing subsidies to Chinese companies—China has yet to agree to any serious change.

 

Trump’s goal was correct.  His strategy was flawed.

Donald Trump’s goal of pressuring China to eliminate unfair trade practices is the right goal.  But his tactics were flawed. To understand why, you have to start by understanding why the tariffs did not decrease America’s overall imports.

 

As any low income, emerging market, China grew initially by exporting items that were low value added and have high labor content—shoes, apparel, toys, fireworks, garden tools, etc.  Putting tariffs on these products didn’t change the trade deficit because the US does not and will not make these products anymore.  Instead the US just buys them from other low cost countries.

 

On the other hand, China’s unfair trade practices mostly relate to products that are mid to high value and which are the new areas where China is trying to compete as its economy enters the next stage of development.  As the US competes in these markets it is right to protect its interests.

 

Targeted and unified is better than shotgun and unilateral

Given the above, we could call Trump’s strategy a “shotgun” approach—put tariffs on everything to try to induce China to change the right things.  As mentioned above, this approach produced much collateral damage and didn’t motivate China to change.  Another approach would be to apply targeted restrictions on China, impacting those areas that are of direct concern to the US but ignoring the low cost items that the US would import anyway.  In addition to taking a more targeted approach, the Biden Administration has said it will coordinate its strategy with its allies among the advanced economies so as to pressure China via a unified front.  This is wise.

 

Don’t lift tariffs until new strategy is in place

The Biden Administration should refrain from lifting the China tariffs until all other aspects of its China strategy on in place.  Targeted restrictions should be identified and enacted.  Agreement with allies on these key measures should be reached and announced.

 

Obtain concessions if possible

Once these measures are in place, the Biden Administration can consider removing tariffs based on two criterion.  First, can any of the tariffs be traded for concessions from China?  Tariff supporters would say that is the main reason for the tariffs in the first place, but for the most part it hasn’t happened yet.  But the Biden administration could potentially still use them as bargaining chips and should do so if possible.

 

Relieve US economic pain as necessary

Secondly, are the tariffs hurting US companies and consumers?  Farmers weren’t the only collateral damage victims.  Higher costs hurt companies and consumers as well.  If cost-competitive alternatives aren’t available, as will be true with most products, then tariff relief is advisable, even if direct concessions are not obtained.

 

Focus on the future and prepare for long term conflict

The main flaw of the Trump approach was to try to fix the supposed problems of the past quickly, i.e., to think that the US trade deficit with China in the past was unfair and to hit China hard to force a quick fix.  As described above, most of China’s unfair trade practices relate to industries of the future for China.  That is where the emphasis should be and getting China to change will likely take time.  The US needs an approach that protects US interests in the short term and wins against China over the long term.  The Biden Administration needs to put that strategy in place, and then consider how to best remove tariffs.

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