The Return of Tariff Man—But Not the One You Were Expecting

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The news last week was that Tariff Man is back, but not Donald Trump. Instead, we have Tariff Man #2, Joe Biden, who announced, after a mere two-plus years of study, his decision on what to do with Trump’s Section 301 tariffs on China. His action was to impose significantly higher tariffs on selected sectors—electric vehicles (EVs), batteries, critical minerals, solar cells, “legacy” semiconductors, needles and syringes, and ship-to-shore cranes. There were no tariffs removed, although he did apparently promise U.S. solar companies to remove them on certain manufacturing equipment they rely on.

The tariffs are largely prophylactic. They are designed to prevent the United States from being swamped with imports that are the product of Chinese overcapacity. The administration is acting preemptively because it has seen this movie before—Chinese government-led overinvestment in selected industries leading to overcapacity, overproduction, and a tsunami of products being dumped into other countries. China in recent history has dealt with its economic problems by attempting to export its way out of them rather than make needed internal reforms, and it appears that is happening again. Responding early is the best way to keep the United States’ companies healthy.

Unilateral action, however, is squeezing the balloon. Tariffs may keep the excess production out of the United States, but it will surely pop up somewhere else. The U.S. tariffs will put pressure—perhaps unwelcome—on others, primarily the European Union, to adopt similar tactics, which will be helpful in pushing the surplus production back to China. Ideally, the administration should have coordinated its action with the European Union beforehand, but that would have been difficult. While Europe is moving in the U.S. direction in its assessment of the economic challenges China presents and is currently considering similar measures on EVs, they are not there yet. The U.S. action was probably intended to push them along.

Because some of the tariffs affect products that are not currently being imported in large quantities, and because they are phased in over two years, the immediate inflationary effect is likely to be small. The administration calculated the impact at only $18 billion.

There are three more complicated questions. The first is whether the tariffs will force U.S. companies to adjust their supply chains. That appears to be one of the administration’s objectives, but the Covid era has demonstrated that supply chain adjustments are costly and can take a long time. The administration will need to be prepared to deal with the inevitable disruptions that result as the economy transitions to a new equilibrium at higher price levels.

The second is that the real loser in this decision is climate. The administration has been pursuing two contradictory policies—accelerating the transition to green, non-fossil fuel technologies and revitalizing onshore manufacturing. The main purpose of the tariffs appears to be to enhance or maintain U.S. manufacturing and to prevent it from being buried under a wave of Chinese imports. However, since we rely on China for key elements of the green transition, notably solar cells, batteries, and the critical minerals that go into them, the effect of the tariffs will be to make those products more expensive and to slow down the transition that will help the United States meet its climate obligations. Clearly, we cannot have our cake and eat it too, but the administration is coming to that realization only reluctantly. 

The third question is the Mexico problem—the growing likelihood that China will seek to access the U.S. market by manufacturing in Mexico. In the case of autos, while it is unlikely that Chinese cars manufactured in Mexico could comply with United States-Mexico-Canada Agreement rules of origin or qualify for IRA tax credits, they could likely enter the United States with only the normal 2.5 percent tariff, which would make them exceptionally competitive. U.S. trade representative Katherine Tai indicated last week that the administration would deal with that separately, so stay tuned for further action.

Unknown, as always, is the nature and extent of China’s retaliation. The Chinese government almost always acts, and it is in a position to cause more serious supply chain disruptions in the United States than it has thus far. The administration also needs to be prepared for that inevitability.

Finally, I would be remiss if I failed to mention the obvious—the politics behind the decision. I have argued, most recently last week, that the administration’s trade policy is based on politics, and this decision is no exception. It is designed to get out in front of Trump on tariffs and inoculate Biden against the inevitable accusation that he is soft on China. Trump will no doubt say he would have gone further (and will, if he is elected), but Biden’s action will help neutralize that. In effect, he is saying, “I can be a Tariff Man too.” That may help him win the election, and it may be a win for the U.S. economy, but it is not a win for the trading system.

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