Magazine July 6, 2020, Issue

Trading with the Enemy

(Sutthipong Kongtrakool/Getty Images)
Why tariffs on China aren’t working

Policymakers and commentators, especially on the right, are increasingly hostile to trade with China. The new mood has been a long time coming. China has been growing in wealth and power while its regime remains repressive at home and assertive abroad: a combination that was bound to raise American concerns. Academic and political developments in the U.S. heightened them. An influential paper by a trio of economists including MIT professor David Autor suggested that trade with China had led to the loss of more American jobs than had previously been believed. Chinese imports could thus plausibly be blamed for social devastation: They had pushed American workers out of the labor force and into addiction. The election of an avowed protectionist in Donald Trump, and the strong showing of fellow protectionist Bernie Sanders in the 2016 Democratic primaries, made it look as though restrictions on trade were gaining in popularity.

In truth, they are not growing more popular. Gallup polls show that there is more support than ever for trade, in part because Democratic voters are fleeing from any positions associated with Trump. The Pew Research Center has found a considerable decline over the last eight years in the percentage of Americans who believe that the loss of U.S. jobs to China and our trade deficit with China are “very serious problems.”

Those trends may not matter politically, though, because the public’s view of China overall has simultaneously been turning very negative. In the spring of 2005, Pew found 45 percent of Americans had a favorable view of China and 35 percent an unfavorable one. Now, amid a global pandemic that started in China and was assisted in its spread by the government’s misconduct, 66 percent have an unfavorable view and 26 percent a favorable one. More Americans (33 percent) have a “very unfavorable” view than a favorable one of any intensity.

Politicians are competing with one another to sound tougher about China, and about trade with China. Just a few years ago, the most hawkish end of this debate was advocating tariffs and the threat of tariffs to pressure China to show fairness to American exporters. Now the talk is of “reshoring” American manufacturing, unwinding global supply chains, and “decoupling” the U.S. and Chinese economies altogether.

The emerging consensus holds that opening U.S. markets to China was part of a naïve policy of engagement. Elites in both parties, on this view, held the utopian expectation that liberalized trade with China would enrich us and them while also making them more responsible, peaceful, and democratic. But the Chinese government refused to follow the script. It continued to act as a predatory and mercantilist power, notably by refusing to protect American intellectual property and by practically requiring American firms to transfer their technology to Chinese ones to do business in the country. It acted aggressively in the South China Sea, launched a genocidal campaign against Uighurs, curtailed the liberty of Hong Kong, and threatened Taiwan’s de facto independence. Instead of exporting our values to them, we started importing their values: The National Basketball Association responded to protests in Hong Kong by closing ranks against the protesters.

What we got from trade with China — again, on the view of the regnant school of critics of that trade — was, at best, short-term efficiency gains that came at the expense of our society’s cohesion and resilience. A much-discussed recent essay goes further than that: “For the benefit of a few billionaires, Western societies have immiserated their voter base, dramatically weakened themselves, and helped shorten the lives of hundreds of thousands of their own people.” Learning during the pandemic that we are now dependent on China for everything from medicines to masks has added humiliation to our losses.

It follows that we should be much more willing to use tariffs and government subsidies to bring the manufacture of critical goods home. Beyond that suggestion, though, the new consensus gets fuzzier about what practical steps should be taken. Additional tariffs to “make China pay” for the coronavirus have been mentioned. And President Trump’s preference for bilateral negotiations over global trade deals is seen in some quarters as a template for the future of trade policy. Senator Josh Hawley, a Missouri Republican, has urged a U.S. withdrawal from the World Trade Organization to pursue this new path. Peter Navarro, one of Trump’s advisers on trade, told CNBC viewers in May, “If we don’t learn from this crisis that the only way this great country is going to prosper is by making the stuff we need as much as possible, then we will have learned nothing and we will sink into the abyss.” The president himself has mooted another option: “We could cut off the whole relationship” and thus eliminate our $500 billion trade deficit with China.

Before taking any such action, the new consensus should get more scrutiny than it has so far received. What it gets right is overstated, and what it gets wrong is harmful. China’s rise in power and wealth, occurring as it has been under a brutal dictatorial regime, is indeed a threat to American interests and American values. But the economic policies that the old bipartisan conventional wisdom pursued as a way of responding to that rise were superior to the half-baked policies that are now being implemented and promoted in the name of fighting China.

The old bipartisan view was, for one thing, never quite as utopian as it has recently been portrayed. Take the 2000 decision, much criticized nowadays, to grant normal trade relations on a permanent basis to China and to accept its admission to the World Trade Organization. Newt Gingrich argued that his fellow Republicans should agree to these steps. But he voiced no Panglossian expectations, writing that “we should strengthen our military, our intelligence capabilities and our diplomatic alliances so it will be too expensive for a Chinese government to be adventurous or throw its weight around in the region. It would be naive to assume goodwill and friendship from the dictatorship in Beijing.”

Bill Clinton also repeatedly sounded cautionary notes. “I do not believe increased commercial dealings alone will inevitably lead to greater openness and freedom,” he said in 1998. He spoke positively in 1999 about Chinese lawyers and judges who came to study in the U.S., but added, “We don’t assume for a moment that this kind of engagement alone can give rise to political reform in China.” The claim that we opened trade to China to make them junior Americans is much like the claim that we invaded Iraq for a similar purpose. These were hopes and arguments that influenced many, but decisive considerations for few.

A more prosaic reason Congress overwhelmingly voted for normal trade relations with China is that we already had them. Our trade barriers had already been low, and trade between our countries had been increasing, for two decades. Every year Congress voted by large margins to continue those low barriers. In 2000, Congress extended them permanently in exchange for reforms from China, including a reduction in its tariffs on American exports. Nearly every other developed nation had by that time already agreed to low tariffs and Chinese membership in the WTO. The question before Congress, as Clinton argued, was “whether the United States will share in the economic benefits of China joining the WTO.”

 China’s full participation in the global trading system was not so much an elite policy error as the acceptance of a geopolitical and economic reality that had been several decades in the works. And given that reality, it was the best choice available in 2000.

Nor were the results as dire as the revisionists make them out to be. Trade with China brought great benefits to the United States in the form of lower prices. Xavier Jaravel, an economist at the London School of Economics, and Federal Reserve economist Erick Sager calculate that for each displaced job because of trade with China from 2000 to 2007, the total purchasing power of U.S. consumers increased by over $400,000. Other work indicates that these lower prices disproportionately benefited low-income consumers.

There were costs to this trade, as well, for some Americans. But these costs are not well understood. The research of Autor, David Dorn, and Gordon Hanson (ADH) does not claim that trade with China was bad for the nation as a whole, or even for workers in general. Economic theory provides reasons for thinking that the overall effect of increased trade on employment levels should have been roughly a wash — and other research provides empirical backing for that hypothesis. ADH is silent on the question of trade’s overall economic effects.

In a 2017 paper, economist Robert Feenstra and his co-authors find that the U.S. lost about 3.5 million manufacturing jobs due to Chinese imports from 1991 to 2007. Export-driven job gains over this period totaled about 3.3 million. The net effect is about 200,000 fewer jobs over this period. Looking over the full two decades, these economists find even more balance. In another paper, Feenstra and economist Akira Sasahara study how both imports and exports have affected U.S. employment from 1995 to 2011. They find that the growth in U.S. exports led to increased demand for 6.6 million jobs, including 2 million in manufacturing and 4.1 million in services. At the same time, import growth reduced that demand. The net effect was positive, with increases in services outweighing declines in manufacturing.

And the job losses should be considered in the context of the staggering amount of churn in the U.S. labor market. In a typical month — not year, and not decade — between 4 and 5 million workers separate from their employer, including a couple million workers who voluntarily quit their jobs. At the same time, millions of workers get new jobs each month.

Autor himself has cautioned against reading his research as an argument for the U.S. to impose tariffs. Partly that’s because he thinks the main lesson of the research is that labor markets have been too slow to adjust to change — including both increased trade and increased automation. (As Scott Lincicome wrote in these pages, a vast range of American policies, from housing restrictions to occupational licensure, impede worker mobility.) Partly it’s because the “China shock” ADH analyzed has already ended and cannot be undone. It’s also worth pausing over the mechanisms that caused the shock.

To the extent ADH has seeped into the popular press and political speeches, it has left the impression that we reduced our barriers against Chinese imports, allowing a destructive surge in them. But our trade barriers were, again, already low. The closest ADH comes to the popular narrative is when it suggests that committing to keep barriers low encouraged Chinese firms to concentrate on exporting. It goes on, though, to suggest that WTO entry also aided Chinese exporters by forcing the Chinese government to close or privatize state-owned industries and to reduce its own tariffs. Lower tariffs meant lower input costs for Chinese exporters. That’s hardly an argument for higher U.S. tariffs now.

There is also the track record of past tariffs on Chinese products to consider. While the old bipartisan consensus is sometimes caricatured as a kind of free-trade fundamentalism, it accommodated discrete forays into protectionism — forays that were limited, in part, because of their disappointing results. A review of U.S. government actions to stop Chinese producers from “dumping” exports below cost between 1998 and 2006 found that they helped American companies only in the short run while yielding increases in imports from other countries. In 2009, the Obama administration levied 35 percent tariffs on Chinese tires (something allowed, incidentally, by the WTO). A study found that these tariffs saved at most 1,200 jobs at an annual cost of at least $900,000 per job.

What has worked better, though far from perfectly, is bringing complaints against harmful Chinese practices before the WTO. In a paper for the Peterson Institute, Jeffrey Schott and Euijin Jung report that the 23 cases the U.S. brought against China from 2002 to 2018 resulted in nine settlements, eleven rulings for the U.S., and no rulings for China. (Three cases were left pending.) China has usually responded to losing cases by opening access to its markets.

Well before the Trump and Sanders campaigns got underway, policymakers in both parties had devised a strategy to counter Chinese mercantilism that learned from this history. Its major component was strengthening an economic alliance built on principles more favorable to the American model of political economy. Multilateral negotiations for the Trans-Pacific Partnership had proceeded quite far before President Trump, suspicious of trade agreements finalized before him, hostile to international institutions and multilateral engagement, and eager to embark on a more tariff-centered trade policy, pulled out of it. Other participants then went ahead, although, naturally, they modified the agreement to discard elements that the U.S. had sought.

The TPP strategy was incomplete. It should have been complemented by reforms to enhance our own economy’s productivity, including a modernized immigration system, and it should have included a ramped-up effort to work with other countries harmed by Chinese economic abuses to bring cases before the WTO. But, limited as it was, the TPP still looks superior to the policy that has succeeded it and the ones now being discussed.

President Trump’s trade policy has raised costs to both consumers and producers and reduced the variety of products available for purchase. The uncertainty its erratic execution has engendered slowed business investment to a crawl, counteracting the effects of the corporate tax cuts he signed into law. 

The tariffs have also drawn retaliatory tariffs from China, which was predictable even if Navarro said in public that it would not happen. In part, this is why the president’s trade war has hurt, not helped, manufacturing employment. Aaron Flaaen and Justin Pierce, economists at the Federal Reserve Board, found that protection from import competition did support employment in affected industries. But that effect was swamped by the increased production costs caused by the tariffs and the reduced international competitiveness for U.S. firms from retaliation. Overall, manufacturing employment dropped by over 1 percent owing to the trade war. Beyond employment, the manufacturing sector was harmed. Producer prices increased because of the president’s tariffs, but manufacturing output did not. 

So far, all that Trump’s tariffs and threats of tariffs against China have achieved is a “phase one” deal that supposedly commits China to treating American companies better and increasing its purchases of American products. But China is not even halfway to being on track to meet its targeted level of purchases, and many of the tariffs on both sides remain in place, doing harm. 

The case for the superiority of the TPP strategy remains so compelling that the Trump administration itself cannot help backing into it. In April 2018, Trump reportedly instructed top aides to take a fresh look at rejoining it, and some of those aides spoke favorably about the basic idea. In May 2019, he suggested on Twitter that companies should transfer their production from China to Vietnam — the kind of move that the TPP would facilitate. In April 2020, Secretary of State Mike Pompeo said the administration was working with several countries on the other side of the Pacific Ocean to “move the global economy forward”; other officials said the idea was to adopt common economic standards.

The administration’s record during the coronavirus pandemic has also evinced a grudging understanding of trade-offs that protectionist rhetoric typically obscures. The crisis has been accompanied by many exaggerated claims about our dependence on other countries: It is not true that 80 percent of the active ingredients in American medicine come from China, and no country has made good on threats to withhold medicine from us. There is nonetheless a kernel of truth in the alarm: We have a national interest in secure supplies that markets can’t be guaranteed to achieve, and so government intervention may sometimes be justified.

Very rarely, however, will the justified intervention take the form of tariffs or subsidies designed to bring manufacturing home. Often a small government investment in stockpiling will be enough to meet the need. At other times we need only ensure that we have a diverse range of overseas or domestic suppliers. Tariffs will tend to work against another national interest of ours, which is that critical supplies be affordable. The Trump administration recognized the point in mid March by providing relief from its tariffs on many Chinese medical products. Even so, the Wall Street Journal reported in April that remaining tariffs were causing shortages of disinfectants.

Specific proposals to limit imports or promote domestic production have to be considered on their own merits. Their usefulness and cost-effectiveness cannot be ruled out in principle. But we have ample reason to be skeptical of such proposals, and to think that a political system that reduces its skepticism will be opening the door to many more destructive than constructive policies. There is no rational theory of America’s economic interests that would counsel aiding the steel and aluminum industries at the expense of the much larger industries that use steel and aluminum. But tariffs on steel and aluminum imports from nearly all our most important trading partners were among this administration’s first moves on trade policy. The president’s fondness for protectionism dovetailed with a powerful lobby’s desires. The result wasn’t even competent mercantilism.

Even if it were desirable to impoverish China, we do not have the power to do it at an acceptable cost to ourselves. We can and should act in concert with other nations to limit the damage that the Chinese regime can do and to encourage better behavior from it across a range of concerns. But this type of multinational engagement and cooperation has been actively spurned by the Trump administration. Trade restrictions should continue to be far down our list of preferred options to achieve these ends — and even farther down our list of methods for strengthening the U.S. economy.

⁠— Mr. Ponnuru is a senior editor of NR. Mr. Strain is the director of economic-policy studies at the American Enterprise Institute.

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