U.S. tariffs on Chinese imports are poorly considered

By Sara Hsu

President Trump announced the placement of $50 billion in tariffs on Chinese imports to the U.S. in response to what the U.S. has determined is intellectual property theft by Chinese firms from American businesses operating in China. The tariffs also appear to be Trump's way of reducing the American trade deficit with China. Both reasons for the tariffs are poorly considered, as trade restrictions cannot benefit the US.

Steel workers pack up galvanized plates at a branch of Ma'anshan Iron and Steel Company (Magang Group) in Ma'anshan City, east China's Anhui Province, Sept. 22, 2014.[Photo: Xinhua]

Protectionist policy

The US set a target of 15 days from the first announcement to declare the list of goods that will incur tariffs. Tariffs may target sectors that are key components of China’s Made in China 2025 program, which seeks to bolster industries like robotics and advanced microchips. The U.S. has complained that these sectors are subsidized by the Chinese government and unfairly compete with American businesses. China is not willing to negotiate this point, as government support is a critical part of building up China’s high-tech industries. The planned duties of up to 25% violate World Trade Organization rules, which permit tariffs only in the case where goods are considered to be traded unfairly, not for blanket retribution against another country.

U.S. Treasury Secretary Steven Mnuchin and U.S. trade representative Robert Lighthizer sent a letter to Vice Premier Liu He requesting a reduction of Chinese tariffs on imports of American automobiles, increased Chinese purchases of American semiconductors, and better access by American firms to China’s financial sector. China had already pledged to lower tariffs on automobile imports.

Overall, China was not amused. China responded by announcing plans to implement tariffs of up to $3 billion on imports of American goods, including fruit, wine, and ethanol. China has also indicated that it is willing to go further if a trade war is carried out. The commerce ministry stated, “China doesn’t hope to be in a trade war, but is not afraid of engaging in one. China hopes the United States will pull back from the brink, make prudent decisions, and avoid dragging bilateral trade relations to a dangerous place.”

Tariffs are not the answer

Unfortunately, there is a real problem in U.S.-China economic relations, and tariffs don’t address them properly. The issue is that American businesses operating in China have been required to set up joint ventures with Chinese firms and to hand over intellectual property in order to enter the market. American businesses have pushed back on this for some time, asserting that this is a violation of global trade roles. The forced technology transfer presents a huge barrier to entry for American firms wanting to do business in China.

However, tariffs are not the answer to this. Tariffs are a blunt weapon that strongly and negatively impact consumers and producers. Protectionist policies have been shown to damage the economy. Both broad and targeted tariffs implemented in the U.S. have been proven to be at best ineffective, if not destructive, as experienced under widespread tariffs imposed during the Great Depression. 

The Trump administration has stated that the U.S. will attempt to target items that businesses purchase, including information technology products and industrial machinery, in order to shield consumers from the worst effects of the tariffs. However, it is probable that businesses will pass on increased costs to consumers. In addition, a greater burden on businesses may also affect employment, causing firms that are less able to bear the costs of the new duties to lay off workers in order to purchase the same amount of high tech products. Capital-intensive businesses that use high-tech products, including small businesses, are likely to suffer greatly.

The tariffs will also fail to reduce the U.S. trade deficit with China. The trade deficit is determined by market forces, and is not a zero-sum game. In fact, trade can be fashioned to yield a net positive outcome for both parties. This is because trade generally makes goods less expensive for consumers in both trading nations. President Trump has failed to grasp this basic fact; he views the deficit as a “loss” to America. Yet, in reality, the deficit means that the U.S. demands more goods from China than China does from the U.S., and to balance this, China holds more dollar reserves than the U.S. holds RMB reserves.

What may be more beneficial is dialogue between the U.S. and China. This is something that the U.S. abandoned last year and had only tentatively committed to this year; it can be said that the Trump administration has vastly underused diplomacy as a mechanism to resolve differences. Because Trump remains wary of China’s promises, it seems unlikely for him and his cabinet to use negotiation as a tactic. Still, the fact is that negotiation and cooperation are probably the only means to resolve these issues.

(Sara Hsu, associate professor, the State University of New York at New Paltz)