Trump tariffs on Chinese goods could cost Americans, but Biden still needs to do more

By Peter Morici

A 60% tariff on Chinese imports could end up hurting the U.S. more than China

President Joe Biden has been correct to focus on China as the main challenge to U.S. national security and prosperity.

Trade is a key issue, and trade tariffs in particular will be a focus of the next U.S. president, whoever wins November's election. But how big of a tariff will be enough to matter to China?

Two main schools of thought about how the U.S. should manage its China relations currently prevail among Washington policy wonks. Some advocate complete victory over China through the kind of pressures that brought down the former Soviet Union. Others embrace the Biden policy of managed competition, seeking to prevent unnecessary escalation that could spin out of control and precipitate war.

The victory over China goal is based on a false premise. China is more ethnically unified and economically stronger than the Soviet Union was, and so less likely to buckle under the kinds of economic pressures created by the Reagan administration's U.S. military buildup in the 1980s.

China's economy is expected to grow at just under 5% this year, while Western economies will struggle to accomplish half that pace. China's growth helps it finance a military buildup in the Pacific, which the U.S. is hard-pressed to match.

The Biden approach targets selected Chinese industries such as EVs and semiconductors. Yet it is too limited. China has prioritized a broad range of manufacturing and exports to resurrect an economy beset by a property crisis. That broadly frustrates trade based on comparative advantage.

Meanwhile, the 60% tariff on Chinese goods that former U.S. President Donald Trump has proposed could raise overall U.S. prices by 1.2%, tax the prosperity of ordinary Americans, and disadvantage U.S. businesses that rely on Chinese components in both domestic and world markets.

Biden's tariffs are vital to leveling the playing field, but this forces the hand of our European security partners. Already absorbing half of China's EV exports, for example, they become an even bigger target.

Moreover, Europeans are cautious about losing access to Chinese markets. A 60% U.S. tariff would divert Chinese exports to European markets. The EU could then either impose its own large tariffs, or try to cut a managed trade deal with Beijing. Such a deal would isolate the U.S. and undermine broader U.S. security interests.

Whatever we do, the U.S. needs to bring its allies along. Solid empirical research indicates when our allies follow suit - for example, Trump's steel tariffs - Chinese producers, lacking other markets to dump excess capacity, cut prices. This absorbs part of the tax and eases the burden on U.S. customers.

If U.S. policy encourages our allies to participate, as they are doing on steel, EVs and semiconductors, and the full amount of the tariff is returned to households through a tax cut favoring lower- and middle-income Americans, then those groups would on average come out ahead.

U.S. manufacturers would not be disadvantaged in domestic and Western markets by higher-priced Chinese components, because everyone would be paying about the same.

By neutralizing Chinese mercantilism, trade would be based more on comparative advantage - enabling a more efficient allocation of global resources and stronger Western growth.

To encourage this outcome, tariffs on imported Chinese components should be rebated on U.S. exports and applied to the Chinese content in U.S. imports from third countries - but only from jurisdictions that don't impose comparable tariffs on Chinese products.

If other nations participate, then Chinese mercantilism would take a mighty blow. China's excess capacity would be turned inward, and Beijing would bear the kind of economic pressure that Reagan put on the Soviet Union. It would not bring down the regime, but the tariffs would surely make the autocrats in Beijing less capable of financing geopolitical mischief.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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-Peter Morici

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09-24-24 1409ET

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