American consumers will start paying more at the cash register due to recently announced tariffs on Chinese products.
The Trump administration announced that a 25 percent tariff on up to $34 billion worth of Chinese goods will be imposed on July 6 on the grounds that Beijing has participated in intellectual copyright theft. The White House will seek an additional $16 billion in tariffs to be applied at a later date. China has already pledged retaliatory tariffs covering over 600 U.S. goods worth $50 billion.
Along with intensifying tensions with Beijing, these tariffs could derail plans for China to purchase more U.S. agricultural and energy products. If the tariffs are implemented, American consumers and business owners will see prices rise as the tariffs get added to intermediate goods like aircraft tires, turbines, and cell phone components. The expense will work its way through to retail prices for goods like cars, dishwashers, and cell phones. And, ultimately, it won’t be Chinese companies who pay the price, but rather American manufacturers, who will pass the cost through to their customers and shareholders.
While these tariffs are touted as protecting American businesses and workers, in reality they are protecting some workers at the expense of others. Moreover, they protect sunset industries where our comparative advantage has dwindled, trapping labor and capital resources that would otherwise be devoted to innovating new products and industries. This is how America prospers: we innovate, change the rules of the game, produce something new, and make others run to keep up.
In addition to the effects on the domestic economy, these tariffs have embarked us on a confrontation with China that is going to be increasingly difficult for either party to back down from. The U.S. has legitimate grievances and our objectives are appropriate, but there is strong reason to ask whether the tactical approach we are using is the best possible way to carry out the confrontation.
China is a manufacturing power, and there is no doubt that China has taken advantage of World Trade Organization (WTO) rules to access global markets, while keeping its own market closed. This neo-mercantilist policy, combined with China’s state-led development model, has flooded the global market with subsidized Chinese products.
These abuses of the WTO rules by China demand a response, and strong American leadership can and should play a central role. An actionable response would be:
- Use the tools of the WTO to call China out on its failures to make good on its commitments to curb subsidies and reduce barriers to foreign goods and services. In this effort, we would have many potential allies: the European Union, Japan, and Canada, to name a few. In contrast, our current approach, which violates commitments we have made to our WTO partners, has aligned the Europeans, Canadians, and Japanese with the Chinese against us.
- Give ourselves new tools to discipline Chinese behavior, by negotiating commitments with China’s neighbors and other major trading partners that would further limit the possibility of mischief through state-owned enterprises, currency manipulation, forced transfer of IPR, and interference in e-commerce and other services where the U.S. has a clear competitive advantage. Staying in the Trans-Pacific Partnership would have been a huge step toward accomplishing this.
- Focus Chinese attention on the urgent need to address its free-ridership by levying tariffs on Chinese products targeted to hit Chinese leaders in the pocketbook.
A strategy like this would certainly succeed. After all, by any objective measure, China is hardly a strong competitor of the United States. The George W. Bush Institute’s analysis of global competitiveness shows that China is nowhere near the U.S. by any measure: business environment, legal system, investment environment, macroeconomic stability, trade policy, even health, and education.
At the end of the day, China appears to be a redoubtable competitor only because it has a very large population. Our playbook of an open economy, driven by consumer choice, buttressed by broad capital markets and focused on innovation, quite frankly works better– if we can only follow our own plays.
By imposing tariffs and escalating tensions with China we are only raising prices for American families and are unlikely to produce a real change in Chinese behavior.
