Sunday, May 19, 2024

Can Biden Out-Tariff Trump?

When all else fails you can always try to out-tariff him. President Biden is losing in the polls. His campaign team is beginning to panic. The solution, out Trump Trump-- and that means imposing more tariffs on Chinese goods.

Tariffs are a complicated and difficult topic. Fortunately for those of us who have not studied advanced economics, today we have two useful and cogent articles about tariffs, one from the New York Times and one from the Financial Times. The latter is an editorial. The former is news analysis.

Writing in the New York Times, Jim Tankersley explains the perils of free trade. You know that free trade, as opposed to mercantilism, is a cornerstone of the free enterprise system. So said Adam Smith.

Free trade has succeeded in flooding the American market with cheap goods, especially cheap goods made in China. But then, this has meant fewer jobs and less manufacturing at home. It is a trade-off. You want cheap goods. You must do business with foreign countries. You want cheap goods. You will be manufacturing less at home.

Those imports drove some American factories out of business, and they cost more than a million workers their jobs. Discount stores and online retailers, like Walmart and Amazon, flourished selling low-cost goods made overseas. But voters rebelled. Stung by shuttered factories, cratered industries and prolonged wage stagnation, Americans in 2016 elected a president who vowed to hit back at China on trade. Four years later, they elected another one.

The issue does not divide the country on partisan lines. The last two presidents have equally chosen to punish China with tariffs.

In separate but overlapping efforts, former President Donald J. Trump and President Biden have sought to revive and protect American factories by making it more expensive to buy Chinese goods. They have taxed imports in legacy industries that were hollowed out over the last quarter-century, like clothes and appliances, and newer ones that are struggling to grow amid global competition with China, like solar panels.

In the past both Democrats and Republicans favored free trade. It meant more cheaper products in Walmart and on Amazon. Thus, it enhanced quality of life. Politicians believed that American manufacturers would follow the dictates of the theory and shift their focus to different products. That is the basis of free trade policy. Foreign countries could produce the cheap junk; we would produce the advanced high tech products. Innovation would win out.

Tankersley wrote:

Democrats and Republicans once joined forces to engage economically with Beijing, driven by a theory that America would benefit from outsourcing production to countries that could manufacture certain goods more cheaply, in part by paying their workers low wages. Economists knew some American workers would lose their jobs, but they said the economy would gain overall by offering consumers low-cost goods and freeing up companies to invest in higher-value industries where the United States had an innovation advantage.

President Trump initiated something like a trade war with China. One remarks that important conservative voices, like the editorial page of the Wall Street Journal, opposed his trade polities.

Now that Biden has slapped tariffs on certain Chinese goods, Tankersley reports that Trump is trying to out-tariff Biden:

Mr. Trump wants to tear down the bridges of commerce between the world’s two largest economies and dramatically restrict trade overall. He has pledged to raise tariffs on all Chinese imports, by revoking the “most favored nation” trade status that Congress voted to bestow on China at the end of the Clinton administration, and ban some Chinese goods entirely. He would impose new taxes on all imports from around the world.

In principle, that means higher prices, and thus, inflation:

Mr. Trump bluntly asserts China will pay the cost of those tariffs, not consumers, though detailed economic studies contradict him. But Robert Lighthizer, his former trade representative who remains an influential voice in Mr. Trump’s trade discussions, told New York Times reporters late last year that it was worth trading higher consumer prices for increased manufacturing employment.

“There’s a group of people who think that consumption is the end,” Mr. Lighthizer said. “And my view is production is the end, and safe and happy communities are the end. You should be willing to pay a price for that.”

Biden’s tariffs are more focused:

Mr. Biden rejects Mr. Trump’s proposals as too broad and costly. He wants to build a protective fortress around strategic industries like clean energy and semiconductors, using tariffs and other regulations. Mr. Biden is also showering companies in those sectors with billions in government subsidies, including for green-energy technologies through the Inflation Reduction Act.

By most accounts, the European efforts to limit carbon emissions through government policy have failed. Naturally, the Biden administration has not registered this.

As for innovation, we are not doing all that well. Worse yet, spending more for domestically produced goods means spending less on innovation.

Many economists who continue to favor less restricted trade with China have criticized both candidates’ plans, and not simply because they risk raising prices for American shoppers. They say Mr. Trump’s and Mr. Biden’s policies could slow economic growth. Cutting off Chinese competition, they say, could force companies and consumers to spend money on artificially expensive domestic goods, instead of on new and innovative products that would create new industries and new jobs.

In an editorial published yesterday the Financial Times examines the downside of trade wars.

In the long-run, the tar­iff ratchet insu­lates Amer­ican industry from com­pet­i­tion, sty­my­ing innov­a­tion and rais­ing costs for con­sumers. That is before con­sid­er­ing any retali­ation from China, which dom­in­ates sup­ply chains essen­tial to Amer­ica’s eco­nomy.

It is worth making the point. China controls markets in pharmaceuticals and rare earth metals. That it might retaliate seems not to have crossed anyone’s minds. And let us not forget the fentanyl crisis. Most of the raw materials that go into the production of this poison come from China. Making China an enemy might have unwanted side-effects.

As for the chance that America is going to overcome the loss of cheap goods by innovating, the truth is we are suffering from a significant “skills shortage.” We do not have the people who can do the jobs in advanced innovative technology. Recall that in Silicon Valley, the majority of the tech jobs are held by people who were educated in China.

Also, the FT remarks that China has skirted tariffs by shifting production to other countries, in Southeast Asia and in Mexico.

And the American government requirements for diversity, for green policies and for labor union participation tend to slow down innovation, not to mention production.

First, invest­ments under the IRA and Biden’s Chip Act, which seek to boost Amer­ican semi­con­ductor pro­duc­tion, are also throttled by skills short­ages, lengthy per­mit­ting pro­cesses and polit­ical uncer­tainty. Second, global sup­ply chains are notori­ously nimble. After earlier US efforts to block cheap solar pan­els, some Chinese firms began rerout­ing pan­els via south-east Asia. This raises the ques­tion of how well Amer­ica enforces rules for trans­shipped and lightly pro­cessed Chinese goods from third coun­tries.

The moral of the story is quite simple. Just because it feels good to impose tariffs, the consequences might not always be what you wish.

Macho posturing is surely going to be less effective than ramping up domestic manufacturing.

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1 comment:

David Foster said...

The US had a high and rising standard of living long before China became a significant economic factor, and for most of that time, the US had pretty high tariffs.