During this U.S. presidential election year, you are likely to hear and read a lot about tariffs. The Economist notes, “Although it is unfashionable to say so these days, one of the great accomplishments of the past half-century was the remarkable decrease in global tariffs. This reduction, from average levies on imports of more than 10% in the 1970s to 3% today, helped fuel a boom in international commerce and a near-tripling in global GDP per person. The more that countries opened up, the more they flourished.”[1] Unfortunately, times are changing. The magazine laments the fact that both leading American presidential candidates have appealed to voters by trying to look tough on China by levying tariffs. The magazine admits, “China is not playing fair.” Nevertheless, it notes, “Because trade benefits consumers broadly, but harms specific workers and companies that are able to organize resistance, it has always carried political costs. Today those costs loom large in politicians’ minds. The consensus required to underpin an open trading system is disintegrating. … Politicians in America from both parties argue that they need to increase tariffs on a wide range of goods.” Companies, and the workers they employ, that don’t fare well when global trade is relatively free will continue to welcome tariffs. Consumers, however, will pay the price for those tariffs. The Economist explains, “As David Ricardo laid out more than two centuries ago and experience has since shown, it makes sense for governments to open their borders to imports even when others throw up barriers. Residents in the liberalizing country enjoy lower prices and greater variety, while companies focus on what they are best at producing. By contrast, tariffs coddle inefficient firms and harm consumers.”
In world desperately looking for leadership, The Economist asserts American leadership is headed in the wrong direction. They explain, “America’s blatant disdain for the need to make a rigorous case [for tariffs] has dangerous consequences. At home it invites more firms to seek protection. Republicans and Democrats are already vying to offer the steepest barriers. … Abroad, protectionists will follow suit as China exports its surplus around the world, dealing another blow to the trading system that America once championed. … America is still leading global trade policy — but in the wrong direction.” No one is arguing that Chinese trade tactics shouldn’t be challenged or countered. What is being argued is that there are saner ways to do it than levying blanket tariffs.
Tariffs and Politics
The Economist is not alone in its concerns. According to economist Steven Rattner, “The tide of globalization is receding, at least from American shores. Two successive presidents have come down firmly on the side of tariffs rather than trade agreements as the preferred mechanism for managing international commerce. History shows that we should proceed with caution. While there are political and security reasons for tariffs, America’s new protectionist stance will raise prices, limit consumer choices, and risk our growth.”[2] He also sees politics as the cause for this shift in trade policy. “While the U.S. economy continues to grow (albeit a bit slowly) and create jobs (at a fast pace),” he writes, “Americans are dissatisfied; polls show that a majority of voters surveyed said the state of the economy is poor.” Journalist Andrew Duehren adds, “The topic [of tariffs], usually consigned to the academy, is spilling onto the presidential campaign trail, as President Biden and rival Donald Trump jockey over trade policy. With trade barriers likely headed higher under either man, it also has consequences for economic performance and inflation in the U.S. … The economic evidence largely concludes that the tariffs Trump imposed — and Biden has maintained — on imports from China were largely passed on to American buyers, rather than forcing Chinese sellers to charge less.”[3] The simple truth is that tariffs raise the cost of doing business. Katheryn Russ, an economics professor at the University of California, Davis, told Duehren, “It’s a tax. Somebody has to pay it. It’s a question of who. It’s been really hard for economists to say definitively how much of the cost of the tariffs is going to translate into higher end-retail prices.” Nevertheless, neither candidate believes they can back off without looking weak.
Conservative journalist Ramesh Ponnuru finds the current situation both frustrating and confusing. He explains, “A new report from the U.S. trade representative’s office finds that President Donald Trump’s tariffs on Chinese products reduced Americans’ real incomes and depressed investment but didn’t increase manufacturing employment. Though China made some changes to its abusive trade practices in response to the tariffs, it ‘largely took superficial measures aimed at addressing negative perceptions.’ Having reached these dismal conclusions, the report recommended not just keeping the tariffs but also adding new ones, which is what the Biden administration has done. That’s the way it goes in the strange world of trade, where policies can succeed politically not only in spite of, but even because of, their economic failures.”[4] He goes on to note that previous administrations also used tariffs as blunt, if ineffective, weapons against unfair trade practices. So why are tariffs such a popular political tool? Ponnuru explains, “A recent academic study of the Trump tariffs confirmed that they worked better electorally than economically: Voters were more likely to move toward him in areas with more jobs protected from foreign competition, even though the intended beneficiaries did not see economic gains. The authors speculated that these voters might have appreciated the gesture of solidarity.” With the presidential election being fought primarily in swing states, tariffs can play an outsized role in election outcomes by appearing to help workers in those states.
Not surprisingly, importers, and the trade groups representing them, are unhappy about the current situation. Blake Harden, Vice President of International Trade at the Retail Industry Leaders Association, asserts, “Broad-based tariffs are not strategic and will impede U.S. economic growth. [The levies will end up] hamstringing American businesses trying to compete globally and negatively impacting the paycheck of American workers.”[5] A similar sentiment was expressed by David French, Executive Vice President of Government Relations at the National Retail Federation. He insists, “As consumers continue to battle inflation, the last thing the administration should be doing is placing additional taxes on imported products that will be paid by U.S. importers and eventually U.S. consumers.”[6] On the other hand, industries being protected by tariffs support the levies. For example, the electric vehicle and battery manufacturers argue, “These measures reflect a more assertive US trade policy towards China. By taking a firm stance against what it considers unfair trade practices, the administration aims to protect American economic interests and uphold fair trade principles. While these actions may strain US-China relations, they reflect a strategic imperative to safeguard critical industries. Other nations may view the US approach as a precedent for addressing similar concerns with China, potentially leading to a more concerted international effort to enforce fair trade practices.”[7]
Concluding Thoughts
Ponnuru notes, “The big change in U.S. trade policy under Trump and Biden is that there’s no longer any big-picture effort to move toward freer trade.” The problem is that the “big picture” is very different depending on where you sit and what you believe about China’s trade practices. The Washington Post’s editorial board notes, “The White House is right about Beijing’s predatory trade tactics, to be sure. … China’s broader macroeconomic policies tend to suppress domestic demand, leaving exports as the only outlet for excess production. This is why Europe, too, is considering protectionist measures. … Cheap Chinese imports in the first decade of the 21st century greatly harmed some communities that depended for employment on a certain set of industries exposed to import competition.”[8]
The board goes on to note, however, “The main factor driving the long decline in manufacturing’s share of employment has been not trade but automation. There is little government can do about that, which is partly why — despite all the federal dollars the Biden administration has spent on industrial policy so far — manufacturing has added only 139,000 jobs over the past five years.” The editorial board agrees that politics, not economics, is the reason tariffs have become popular. They write, “No doubt, Mr. Biden’s tariffs are good politics. They amount to his imitation of the China-focused protectionism that his predecessor and 2024 opponent, former president Donald Trump, has mainstreamed. … Politically, Mr. Biden’s new tariff war with China might be a winner. But forcing consumers, via tariffs, to subsidize domestic clean energy companies that are far from the cutting edge of technology is an economic and environmental loser.” It appears that politics will top economics for the foreseeable future. Let’s hope, however, that The Economist is wrong when it predicts the global trade system is disintegrating.
Footnotes
[1] Staff, “America’s 100% tariffs on Chinese EVs: bad policy, worse leadership,” The Economist, 15 May 2024.
[2] Steven Rattner, “Biden’s Get-Tough-on-China Tariffs May Backfire,” The New York Times, 21 May 2024.
[3] Andrew Duehren, “Tariffs Push Up Costs. But Not Always Inflation,” The Wall Street Journal, 19 May 2024.
[4] Ramesh Ponnuru, “How Trump taught Biden to love tariffs,” The Washington Post,” 21 May 2024.
[5] Paul Page, “Import Groups Decry Higher U.S. Tariffs on China-Made Goods,” The Wall Street Journal, 14 May 2024.
[6] Ibid.
[7] Michael C. Anderson, “New US Tariffs Designed to Protect EV/Battery Industries from China Trade Practices,” Battery Technology, 14 May 2024.
[8] Editorial Board, “Tariffs against China hamstring the transition to a clean energy future,” The Washington Post, 16 May 2024.
