Politics & Policy

Tariffs Beget Tariffs

Shipping containers are seen at the Yangshan Deep Water Port, part of the Shanghai Free Trade Zone, in Shanghai, China. (Aly Song/Reuters)
The White House’s trade policy will hurt American producers most.

There is a certain irony in the fact that the Trump administration’s tariff-based approach to tackling unfairness in global markets, presumably centered on Chinese actions, is not only ineffective per se, but also likely to sabotage the coalition that could make a productive stand against Chinese misconduct possible.

Last week saw China imposing retaliatory tariffs on U.S. goods, after the Trump administration put a 25 percent tariff on $34 billion in Chinese products (per year) that is set to go into effect on July 6. The administration hopes to tax an additional $16 billion in Chinese products a little later. The Chinese tariffs, also at a 25 percent rate, hit a broad spectrum of American exports, including farm products, seafood, and automobiles.

The price impact of a 25 percent tax on Chinese imports will hit family budgets hard to begin with. It will be even worse for Americans whose products will now become more expensive to foreign buyers. They will experience both the rise in living costs and a drop in their own production. This combination will seriously affect their real income, and in some cases it is likely to be catastrophic.

The White House has been using a 1962 tariff-cutting statute (the Trade Expansion Act) and spurious “national security” justifications, neither of which apply, to enact these tariffs. But even if they did, tariffs as a strategy to counteract Chinese cheating and fraud will not work. This cheating, in the form of billions of dollars in stolen intellectual property, is significant — but it requires a far more targeted approach.

Tariffs on Chinese imports target products irrespective of intellectual-property theft. They make no distinction between good and bad actors in China, and in the process may turn away the former. National economies aren’t giant blocs, but the combined actions of myriad individuals pursuing their own goals. We should harness the market power of businessmen in China who do not engage in cheating, which would incentivize them to continue on that path and encourage greater innovation. This, combined with a WTO action led by the United States with its European and Asian allies to target China’s intellectual-property theft specifically, would have a real chance of addressing the issue.

If the U.S. is to do this, it cannot afford to alienate its allies and China’s rivals, but as we have seen with the EU, this has already been coming about. Most recently, India, which is poised to be China’s regional economic competitor, has imposed taxes on American agricultural produce and vehicles in response to the steel tariffs. The amount ($240 million) is small, compared with the U.S.–China tit-for-tat, but it deserves attention. (The Indian government claims that this is meant to match the cost of U.S. tariffs.) If fraud in China is to be tackled, the cooperation of India is essential. I am no fan of Narendra Modi’s Hindu nationalist regime, with its repression of India’s Christians and Muslims, but India is more than its government. In it is a thriving economy engaged in both low-cost and specialist labor, and an essential trading partner of the United States. Just as in China, there are countless economic actors in the country who would have their own incentives for being part of the effort. Smaller countries in South Asia tend to have competing lobbies of those who prefer trade with China and those who prefer trade with India.

Trade restrictions, though imposed by governments, punish voluntary exchange between individuals. They are too often viewed as barriers set between unitary states, but this view would have been simplistic even in the mercantilist era. “America” and “China” are not having a face-off in the abstract. Certain groups and individuals in China are stealing intellectual property from Americans.

A real, lasting solution to the problem of Chinese cheating will have to include a respect for the economic rights of individuals both in the U.S. and China, rather than casting a broad net in which cheaters are a minority of those caught.

In an age where an American can email a factory in Lahore for a sports uniform or someone in China can have American cosmetics drop-shipped over, the notion of trade as something that happens between people should be more obvious than ever. And tariffs prevent this, without regard for whether the target was engaged in cheating or not. They mean I must pay more to get something from someone who is getting no more money for it than before. The tax inhibits my own ability to buy, by making everything more expensive. And the higher price does nothing to encourage selling, because the tax authority pockets the difference. Now imagine this process repeating itself millions of times, across wide swathes of both the American and Chinese economies, the two largest in the world. Many more people will be hurt, besides the actual cheaters.

Now add India, a largely English-speaking country with vibrant tech, manufacturing, and service industries that has historically had close ties to the West — ties that have been reinforced by trade since the country’s abandonment of central planning. The total amount of India’s tariffs is smaller than those of China or the U.S., but it is targeted in a way that is likely to affect key U.S. industries. Motorcycles remain a popular means of transport in India, but because of the tariffs, buyers who were looking to buy a Harley Davidson might buy an English Triumph or Japanese Honda instead. Legumes, such as lentils, are a massive part of the Indian diet, and the U.S. exports about $800 million of legumes per year — a big part of the economy of the Northwestern states. The rise in cost might price American legumes out of the market there. Here again, the cycle repeats. American legume farmers will see their incomes fall, just as import tariffs make their living costs rise. How will any of this help tackle intellectual-property fraud?

These tariffs are marketed as a way to protect American producers and to tackle bad actors. But they will punish American producers and consumers alike, while making no real dent in dishonest trade practices. A real, lasting solution to the problem of Chinese cheating will have to include a respect for the economic rights of individuals both in the U.S. and China, rather than casting a broad net in which cheaters are a minority of those caught. It must harness the power and leadership of the U.S., through the WTO, to make China honor its own Article 39 commitment to intellectual-property rights. The tariff regime showcases the danger of ceding major areas of policy to a unilateral and unaccountable executive branch. The president simply does not understand trade, and never has, but the current political arrangement has allowed him to put his instincts into practice with no checks. It’s the rest of us who will be stuck with the bill.

NOW WATCH: ‘Trump Offers Fresh Tariff Threat To China’

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