But that isn’t stopping China doves and free-trade absolutists from calling for their repeal.
But that isn’t stopping China doves and free-trade absolutists from calling for their repeal.
F or some in the Biden administration, skyrocketing inflation has a silver lining: It supplies a pretext for removing American tariffs on Chinese goods. In late April, Treasury secretary Janet Yellen stated that it was “worth considering” cutting the tariffs because of the “desirable effects” it would have on lowering inflation. Shortly thereafter, White House press secretary Jen Psaki confirmed that high inflation is a factor in ongoing deliberations within the administration over whether to keep the tariffs. “This is an ongoing process, and we’re certainly looking at where we see costs being raised and, at a time where we’re seeing heightened inflation, certainly that’s on our minds,” Psaki said.
These signals have given momentum to free-trade absolutists in the Republican Party seeking to roll back the tariffs, which were originally levied by the Trump administration after an investigation determined that Chinese practices relating to forced technology transfer and intellectual-property theft were unreasonable and discriminatory. On the same day that Psaki made her comments, Senator Tom Cotton (R., Ark.) spoke out against members of his own party who “blame these tariffs for inflation.”
The claim that China tariffs need to be cut because they’re inflationary isn’t serious. In the trade-policy world, there is close to a bipartisan consensus that the tariffs are not responsible for inflation and that cutting them would do nothing to stop its rise. The labor-aligned Economic Policy Institute concluded that cutting the tariffs would yield only a onetime 0.3 percent reduction in consumer prices. Meanwhile, the Peterson Institute, famously supportive of free-trade policies, published its own finding that the tariffs “only marginally contributed to inflation.” The tariffs don’t affect enough goods and don’t impact consumer prices directly enough to make a meaningful contribution to inflation.
Ultimately, it doesn’t take a think-tank white paper to arrive at that conclusion. The tariffs were in place by 2019, well before the recent inflation spike, and prices on many tariffed goods had already come back down to pre-tariff levels by 2020. As Senator Cotton pointed out, blaming these tariffs for inflation is a little like blaming “Putin’s price hike” for rising gas prices. It’s a politically convenient pretext.
To gut the China tariffs now would be to take us down a familiar road. In the late 1970s, the Carter administration made a fateful decision to view trade policy through the lens of inflation. When Europe and Japan began dumping heavily subsidized steel and cars into the U.S. market for less than the cost of production, President Carter feared that blocking these goods would raise consumer prices and stymie his efforts to halt then-soaring inflation. In her classic book Pivotal Decade, Judith Stein recounts how “the Fed and Carter at every turn weighed the financial market’s concern with inflation more than they considered the real economy. Every time Carter confronted an industrial question, he saw only its implications for inflation.”
The result was that subsidized and dumped manufactured goods were allowed to enter the country, where they sparked a deindustrialization trend from which the United States has never truly recovered. Stein quotes the reaction of a Carter-administration trade negotiator after the president and his economic advisers refused to take action to limit the entry of underpriced Japanese autos: “God, the Japanese could not believe it,” he said. Economists “had lost all touch with reality; it’s heart surgery handled by a biologist.” Ultimately, “the unspoken rule of global trade policy was that the United States would look the other way when American goods were discriminated against” — all in the name of fighting inflation. It sounds terribly familiar.
Committing this same mistake again would likely make inflation worse over the long term, not better. The primary drivers of present inflation have been massive stimulus combined with supply-chain constraints, which have created demand that the global economy hasn’t been able to meet. The solution is supply-chain resilience: investing in the domestic economy so that international bottlenecks, like China’s bizarre “zero Covid” lockdown policy, can’t throttle supply. More domestic investment means higher productivity, which ultimately means lower inflation. Unfortunately, U.S. productivity growth has been unprecedentedly low since the 2000s. To reverse that trend, we need to increase capital formation and commercialization of innovation in the U.S., but free trade with China’s heavily subsidized manufacturing sector discourages this. It instead creates more dependence on an erratic adversary, breeding instability and supply shocks that could raise prices over the long term.
More fundamentally, the China tariffs were enforced by the Trump administration not out of a bare desire to harm China: They were designed to balance an unfair competitive advantage that the country had gained for its goods by breaking the rules of the global-trading system. The litany of China’s offenses was carefully laid out in a report by then–U.S. trade representative Robert Lighthizer, who recently warned that rolling back the tariffs would be “a betrayal of the American people.”
That’s because allowing imports of Chinese goods that benefit from government subsidies, currency manipulation, forced technology transfer, and other illegal practices badly distorts the American free market. China uses trade barriers and financial repression of its domestic consumption to block American exports, subjecting American workers to unfair competition at home while depriving them of demand for their labor abroad. The result, cumulated across decades of disastrous trade policy, has been a trillion-dollar trade deficit, a U.S. asset sell-off to finance that deficit, the loss of 5 million manufacturing jobs, and the devastation of the American middle class.
The pundit class likes to claim that manufacturing-job loss was the inevitable result of automation. But as long as output increases along with automation, it need not create net job loss — and certainly not the unprecedented cliff-dive that U.S. manufacturing employment took after China joined the World Trade Organization in 2001. Indeed, plenty of industrial economies, like Germany and Japan, have manufacturing sectors that are more automated than that of the U.S. yet never went through deindustrialization and employ a far larger share of their populations than the U.S. sector does. The real cause of American deindustrialization is that beginning in the 2000s, our manufacturing output suddenly stopped growing. From 2007 to 2016, it even declined.
No law of economics mandated that outcome. Instead, deindustrialization was the result of bad policies that made our goods less competitive than those of other countries. Unlike continental Europe and East Asia, we pursued unilateral free trade: opening our market to artificially cheap foreign goods without demanding reciprocal market access for our own goods. Returning to those policies in the name of fighting inflation would be a colossal mistake.
One faction of the Biden administration, led by U.S. trade representative Katherine Tai, gets this. Another faction, to which Janet Yellen apparently belongs, doesn’t. For some in the latter faction, inflation may only serve as a pretext to accomplishing their real goal of rapprochement with China. Deputy national-security adviser Daleep Singh recently stated that the tariffs “serve no strategic purpose” and that the U.S. should instead pursue a “tactical opportunity” to “cooperate with China in areas of mutual interest” such as “climate” and “trade.” Singh thinks such cooperation could place “limits” on China’s partnership with Russia.
It is difficult to imagine a more misguided policy than opening our market to more Chinese distortions in exchange for Beijing’s promises of foreign-policy cooperation. This too would replay the lowest moments of the Cold War, when the United States unilaterally opened its market to unfairly traded goods, putting pressure on American workers in exchange for illusory geopolitical alliances from which American workers never benefited. In 1974, the Senate Finance Committee prophetically reported that
U.S. trade policy has been the orphan of U.S. foreign policy. Too often the Executive has granted trade concessions to accomplish political objectives. Rather than conducting U.S. international economic relations on sound economic and commercial principles, the Executive has set trade and monetary policy in a foreign aid context. An example has been the Executive’s unwillingness to enforce U.S. trade statutes in response to foreign unfair trade practices. . . . The result of this misguided policy has been to permit and even to encourage discriminatory trading arrangements among nations.
Instead of duplicating the mistakes of the ’70s, we should learn from them. In an era of bottlenecks, price surges, and fragile supply chains, the most dependable way to combat inflation is to increase domestic productivity. That requires investment in the domestic economy’s ability to innovate and build, which cannot happen if our producers’ supply chains are yoked to a perennial cheater. Cutting tariffs on that cheater in the name of lowering inflation would be more than ineffectual — it would hinder our capacity to build a resilient economy for the dangerous world to come.