How Tariffs Could Boost the US Economy and Fix the Trade Imbalance With China
Udumbara
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The common understanding of tariffs is that they are bad for trade. That can be true, but not always. They certainly helped China develop in a number of ways.
Yes, Tariffs Can Raise Prices
In simple terms, tariffs are a tax foreign companies must pay to sell their goods in a target market, such as China or the United States. The typical result is that foreign goods become more expensive because they raise the price of the goods they’re selling via the “market access tax” that tariffs truly are.Not Always Intended to Protect Domestic Producers
Tariffs are often meant to protect domestic producers from foreign producers with lower labor costs, government subsidies, economies of scale, and other advantages. Domestic producers often raise their prices as well to capture more profit because their foreign competitors have raised theirs. For most goods, higher prices typically mean lower overall consumption.In the case of China in the late 1980s and throughout the ‘90s, there were few domestic producers of anything the developed world wanted. China didn’t make cars, furniture, computers, appliances, etc., so there was no need to protect non-existent domestic producers. At the same time, labor costs in developed economies were high by global standards. China had abundant, cheap labor, offering huge profit opportunities for foreign producers.
And yet China still imposed tariffs. There were several good reasons for that.
China as a Business Opportunity
Essentially, foreign companies paid in advance for the opportunity to help China develop, expecting to produce goods much cheaper than at home and sell to China’s large market, once its income level rose enough to do so. In the meantime, tariffs on capital goods and products brought into the country provided China with immediate money, lots of it, without having even to lift a finger.China Disrupted the Global Economy
Thus, China’s transition from global isolationism to the world’s manufacturing center of gravity fundamentally disrupted the global economy.For several decades, massive amounts of foreign capital have flowed into China in the form of tariffs and direct investment, fueling China’s growth as it hollowed out the economies of the West. Those factors raised income levels for hundreds of millions of people and gave China the industrial, scientific, and supply base it has today. All the while, tariffs remained in place.
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But Beijing also imposed unconventional tariffs in the form of trade policies that required foreign companies to share their intellectual property (IP), designs, and even ownership with Chinese companies, many of which were state-owned enterprises (SOEs), and many more that would later become SOEs.
The Chinese regime’s IP theft, forced technology transfers, and other crippling adversarial practices against their trading partners amounted to the most egregious tariffs the world has ever seen, driving companies out of China and out of business after taking them for all they had in terms of technology, design, processes, IP, and capital.
In other words, communist China treated the rest of the world the way it treats its own people, but with a much grander payoff.
Did China’s partners make money? They certainly did for years. But China’s trading partners, especially the United States and Europe, lost much of their manufacturing bases, jobs, and domestic supply chains as they moved operations to China to take advantage of its cheap labor.
US Tariffs
Today, the United States is disrupting global trade with its own high tariffs on trading partners, including China, Europe, and many other nations. But it’s not doing so in a vacuum. Looking at just a few key factors tells a very different story about tariffs than the traditional negative image that some economists typically portray.For example, the world’s companies are fleeing China for all the reasons mentioned above, plus the fact that there are now cheaper labor costs available in India, Thailand, Mexico, and other places.
US Trading Partners Have Choices
The Trump administration is giving countries and companies a clear choice. They can either pay high tariffs to sell their goods to U.S. consumers or build factories and invest directly in the United States to avoid paying tariffs. With $7 trillion to $21 trillion in new trade and investment deals from Europe, Japan, the Middle East, and other partners, the tariff strategy seems to be working.
It is becoming increasingly apparent that tariffs are the stick to hit U.S. trading partners, while trade deals and direct investment in the United States are the carrots that benefit both the U.S. economy and its trading partners. In short, the Trump administration’s tariff strategy is designed to leverage the U.S. position as the world’s largest economy and best market to steer trade and investment back into the United States, thereby creating more jobs, more demand for U.S. labor, and more wealth and innovation.
That’s more of a win-win for trading partners than the lopsided trading relationships they’ve endured with China over the past several decades.
