China Tariffs: Digging Out of the Hole

The question of what to do about the China tariffs has been creeping up the policy agenda in Washington, demonstrating again that Trump’s legacy lives on in numerous ways despite the Biden administration’s efforts to move on. The tariffs, imposed in several tranches beginning in 2018, have been controversial from the beginning, with the business community strongly opposed because of the costs of both the tariffs and the subsequent Chinese retaliation.

It now appears, in the wake of public comments by several administration officials, that removing or revising them is once again under consideration or, more accurately, continues to be under consideration. The administration seems to have been thinking about this, without making a decision, for at least eight months.

Fortunately, at just the right time, Ed Gresser of the Progressive Policy Institute, who was formerly at the Office of the U.S. Trade Representative, has come up with some actual data that helps us think about what to do. First, the tariffs clearly brought more money into the government. The total tariff revenue in 2017, the last full year before the Trump tariffs, was $32.9 billion. In 2021, that number was $85 billion, more than twice the pre-tariff figure. Tariffs specifically on Chinese imports increased from $13.5 billion in 2017 to $56.6 billion in 2021 on essentially the same amount of trade. Gresser does not address the question of who is paying all that money, but others have suggested that most of it was paid by importers and U.S. consumers rather than by the Chinese.

Second, the tariff’s impact on trade has been modest. China’s share of total U.S. imports has declined, but their value has stayed pretty much the same. In 2017, imports of Chinese-made and assembled goods were $506 billion, or 21.6 percent of the U.S. total. There was a dip in 2018 and early 2019 because of the tariffs and another one in 2020 due to Covid-19, but in 2021, the value of Chinese imports was $505 billion—almost exactly what it was before all this started, although their share of the total was smaller, as the United States took in more imports from other sources as well. (U.S. exports to China experienced the same change—a dip after 2017 and then a return to higher levels in 2021.)

Third, the tariffs were clearly inflationary, although there are differing measures of the actual effect. Gresser notes that estimates for last year range from 0.3 to 0.5 percent from higher import prices to 1.3 percent if you also take into account price increases in comparable domestic products. The latter is not unusual. The point of tariffs is to provide protection for domestic competitors, and it is normal for the domestic manufacturers to take advantage of that by raising their prices. Last year’s inflation spiked to 7 percent, so the tariff effect is a relatively small part of that—but it is not insignificant.

So, where does that leave us? While the tariffs brought additional money into the U.S. Treasury, they did not change the longer-term trend in U.S.-China trade, and, more importantly, it does not appear that they changed Chinese behavior on the issues identified in the Section 301 report used to justify the tariffs—subsidies, forced technology transfer, intellectual property theft, etc. At the same time that they were not achieving their goals, they were also causing significant collateral damage in terms of inflation and higher costs that made U.S. manufacturers less competitive.

It has seemed to me from the beginning of the Biden administration that its preference would be to find a way to get rid of at least most of the tariffs. That it has not done so is due more to politics than to economics. Like all negotiators, the USTR is reluctant to unilaterally give up leverage. Their colleagues in the White House also understand that concessions to China without obtaining anything in return would subject them to withering criticism from Congress. Their dilemma is that they are unlikely to get anything from China aside from dropping its retaliatory tariffs, which will not be enough to offset the continuing attacks from Republicans that the administration is “soft” on China.

That reality holds back negotiations—any result will be deemed inadequate by the president’s opposition—and creates uncertainty about what to do next. The short-term plan, pressing China to meet its phase one obligations, always had a limited shelf life and is now past its expiration date. The preferred solution would be to maintain or even increase tariffs on imports that benefit from Chinese unfair practices (although that might prove hard to define) or that have security implications for us (also hard to define) and remove the others. Like all compromises, this will be attacked by both sides—business, which wants all the tariffs to go away, and the China hawks, who want to keep them—and six months before an election may not be the smartest time to roll that out.

That leads to the other alternative being discussed: initiating another Section 301 investigation. That would allow the administration to punt the issue into next year while providing time both to answer the definitional questions posed above and to construct the narrative of continued Chinese unfair practices that it needs to justify whatever action it will ultimately take. Since the first two tranches of the tariffs expire this summer, it would also enable the administration to finesse an immediate decision. That is not exactly biting the bullet and making the hard choices people expect from their president, but it may be the best way out of the hole dug by the previous administration.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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