Trade Policy Reconsidered

3/20/21

With China evolving as a growing economic powerhouse and at the same time serving as one of our top three trading partners, we’re faced with having to both compete and cooperate. Navigating those seemingly contrary paths would be difficult under almost any circumstances, but that difficulty is magnified by the widely held perception in the US that China has been violating some critically important norms, both politically and economically.

In the political sphere, many are troubled by allegations of long-standing human rights abuses directed at several ethnic or cultural minorities. More recently, China’s reputation has been further sullied by their heavy-handed imposition of national security laws in Hong Kong that have significantly compromised basic rights of the city’s residents. On the economic front, critics claim that China has engaged in unfair trade practices at our expense for years. Those transgressions include limiting the access of their domestic markets to US companies, imposing coercive arrangements on US companies that compromise their proprietary intellectual property, outright theft of copyrighted or patented materials, and using governmental subsidies to protect Chinese industries from international competition.

While I don’t claim any particular standing as a China expert or the capacity to evaluate the legitimacy of the critics’ charges, I nonetheless have strong feelings as to the manner in which we conduct the trade-aspects of our relationship. In particular, I’m committed to a foundational economic principle of free trade. Free trade is aspirational because it bestows benefits on both parties of a trading relationship, but it’s critical to appreciate that advocating for free trade doesn’t confer a laissez-faire, anything goes framework. One can favor free trade but still realize the need to engage with our trading partners in the hopes of mitigating virtually all of the concerns that we currently have with China. In fact, this orientation largely guides our trading approach, not just to China, but with virtually all of our trading partners.

That said, we do employ one trade policy that is wrongheaded, and that is our reliance on tariffs. Tariffs are about as antithetical to the notion of free trade as you can get. When we impose tariffs on the goods from other countries, those costs are borne by us and not them.

As a punitive tactic, tariffs on imports end up hitting the wrong target. Besides imposing additional costs on US consumers and businesses, tariffs also interrupt supply chains of US companies, with the potential of causing untold and far-reaching delays of production by US producers. And, finally, as the recent experience with China so aptly demonstrates, tariffs invite retaliatory tariffs. Following Trump’s imposition of tariffs on roughly $300 billion of Chinese goods, primarily steel and aluminum, China followed up with tariffs of their own on approximately $75 billion of US goods, largely directed at the US auto industry.

Among the biggest champions of tariffs are those who see them as a way of protecting American jobs, but this “me first” attitude is shortsighted. Although it may play well to an American audience, it serves to derail our efforts to regain or reassert US leadership in the arena of international trade. Achieving that goal requires taking a more even-handed and neutral posture. Our objective in any trade deal should be to encourage an expansion of trade, which creates greater opportunities for all — not just for US workers. It should be obvious that we wouldn’t be comfortable with protectionist attitudes being expressed by our trade counterparties. Why should our trading partners be comfortable accommodating to this posture imposed by us?

I don’t want to minimize the pain for those who do lose their jobs because of foreign competition. That pain is real and severe, but we need to address it with a greater focus on the individuals specifically affected, as opposed to employing protectionist policies that have more pervasive deleterious effects on efficiency over broad ranges of economic activity.

With the new administration, I had hoped we might see some re-thinking of our use of tariffs as a policy lever; but thus far, I’ve been disappointed. I’ve gleaned my most recent indications from the hearing last week for Katherine Tai, who was just approved to head the Office of the US Trade Representative. At that hearing, I wasn’t surprised to hear Ms. Tai commit to maintaining tariffs as one of the tools in her arsenal; but I would have liked for her to state unequivocally that she recognizes the destructive nature of tariffs and that she would relegate them to the category of a “last resort” option. In fact, she should have gone further. I would have liked for Ms. Tai to commit to initiating a comprehensive review of existing tariffs currently in place across the board and pledging to eliminate as many of them as humanly possible. There might be no better use of her talents and that office.