Trump is Right About Tariffs Against China…But for the Wrong Reasons
Earlier last month, President Trump signed the recently negotiated phase-one trade deal with China. During a ceremony at the White House, Trump called the deal a “momentous step, one that has never been taken before with China, toward a future of fair and reciprocal trade.” This claim, however, is far from the truth. But to understand the truth surrounding the phase-one trade deal, one must first understand the reality of tariffs against China. The bottom line is that tariffs are complex. They can protect a handful of firms while hurting hundreds of others. Many people support Trump’s tariffs against China because they think that they will reduce our trade deficit with China and protect American jobs. However, this overly simplistic story leaves out many economic and political consequences that are at play.
In 2019, the U.S. ran a colossal trade deficit with China that amounted to over $345 billion. Trump takes this deficit as a sign that China is winning, and that America is losing. He claims that “the U.S. has been ripped off by other countries for years on trade,” implying that he believes trade is a zero-sum game in which one party’s gain is always another party’s loss. However, just because the U.S. runs a chronic trade deficit with China doesn’t mean it never gets the carrot on the stick. A few months ago, I purchased a 40-count pack of Pirate’s Booty at Costco for $6.99 (before tax). By doing this, I entered into a trade deficit with Costco. That being said, I didn’t “lose” to Costco. I got a lot of Pirate’s Booty for a great price, and Costco profited from the transaction. It sounds like a win-win situation to me.
Trump has said in the past that “if we didn’t trade, we’d save a hell of a lot of money.” Granted, if America decided to only export and never import, we would run a huge trade surplus. But would we really be better off? Unless we are able to purchase all the goods we consume cheaper domestically, I think the answer to that question is no. Some supporters of Trump’s tariffs claim that China has benefited more from trading with the U.S. than the U.S. has benefited from trading with China. This may be true. But measuring the cents and dollars of who benefited more is a counterproductive way to think about trade. Terminating our trade relations with China because of this reason would be just as ridiculous as ending a working marriage solely because one partner earns a slightly higher income than the other. Would we really save money by not trading with China? Probably not. If the U.S. and China both benefit from trade, then we are both winners.
Another common misunderstanding is that tariffs protect American jobs. It is true that tariffs can protect some jobs domestically. However, due to their complexity, tariffs can save hundreds of jobs while eliminating thousands of others. For example, according to the Aluminum Association, 97 percent of U.S. workers in aluminum are hired from companies that import the metal and shape it into other goods like auto parts. A similar phenomenon exists in the American steel industry. Douglas Irwin, an economist from Dartmouth College, estimates that “140,000 American workers make steel, while 6.5 million workers make products that include steel.” These downstream firms are hurt by tariffs because they now have to pay higher prices for importing raw materials. Alternatively, they can move their operations abroad to avoid paying tariffs. This, however, incentivizes domestic firms to hire more workers overseas, hence cutting jobs domestically.
At the end of the day, tariffs are no simple solution. They can help some parts of the economy while simultaneously hurting others. The key question is whether or not they are worth the tradeoff. In some cases, they aren’t. In 2009, President Obama slapped a 35% tariff on Chinese tires. According to the Peterson Institute of International Economics, Obama’s tire tariffs saved about one thousand jobs but cost Americans over $1 billion due to more expensive tires. That means Americans paid about $1 million per job for jobs that pay an average of about $40,000. More often than not, tariffs are taxes paid by exporters that are subsidized by consumers. Were Obama’s tire tariffs worth it? The answer to that question, of course, depends on who you ask.
There are, however, real reasons why the U.S. may want to impose tariffs against China. Intellectual property theft, currency manipulation designed for cheaper exports, forced technology transfer, and predatory pricing are all examples of bad trade practices exhibited by China that make for an unequal playing field. These malicious practices adversely affect American institutions. While these issues aren’t new, past U.S. presidents have done little to nothing to solve them—or at least haven’t achieved any results. Trump, on the other hand, has proven to be a very decisive president who isn’t afraid of confrontation. To him, tariffs represent a possible solution for America to get the Chinese government to alter its behavior. After all, China’s economy relies on exporting goods to the U.S. much more than the America’s economy relies on exporting goods to China. While there are no simple solutions to complex issues, Trump’s tariffs work as an effective tactic to disincentivize bad behavior from China.
Trump’s signing of the phase-one trade deal, however, tells a different story. A never-ending trade war isn’t attractive to any economy. It makes the global environment less stable and more unpredictable. But the phase-one agreement lacks substance, and the temporary truce between U.S. and China comes at a price. The limited deal promises to end additional tariffs imposed by the U.S. in exchange for increased purchases of U.S. goods and greater access for American companies to China’s financial sectors. You could say that the deal could help prevent worsening trade relations with China. But the reality is that both countries are stuck signing a trade deal that neither of them wants. The U.S. doesn’t get the regulatory reforms in Chinese economic policy that would help American firms, and China still faces levies on over $350 billion of exports. The U.S. also loses significant negotiating power as a result. It sends a message to China that America can be steamrolled when it comes to issues on trade.
So why did Trump sign the deal? My only explanation is political chicanery. With 2020 elections coming up, a more stable economy could win more votes for Trump. While I don’t agree with this sentiment—the idea of choosing presidents based on market trends is strikingly similar to China’s ancient doctrine of the Mandate of Heaven—an uninformed public may think that the economy will continue to boom under Trump’s leadership. However, sacrificing America’s bargaining chips for a temporary truce with China is like setting your furniture on fire to stay warm during the winter. America’s markets may temporarily warm up to the phase-one deal. But by the time the fire finishes burning, there will be no furniture left to negotiate with.