Trading War or Trading Threats?

| Stephen Steiner | May 1st, 2018 |

Last month, the Trump administration announced steel and aluminum tariffs in an effort to protect the domestic steel and aluminum industries from falling steel prices across the globe. While the tariffs have been levied on imports from the majority of countries, the target is largely China. They have recently ramped up their steel production capacity, but they did so to an extent that they have effectively flooded the market and lowered the price precipitously. While this certainly makes for interesting politics at both the national and international levels, it would be useful to quickly recap the dangers of protectionism and talk about those hurt by tariffs.

Tariffs, by definition, raise the price of foreign goods. This makes goods produced domestically more enticing than they would be without the tariffs and creates a larger demand, which is the desired effect. However, domestic firms have an incentive to raise the price of their goods to the same level or just below the level of the taxed foreign goods because consumers can no longer purchase the foreign good at a discount. Therefore, while domestic industries are protected, domestic consumers are hurt.

Historically, trade policy has been enacted to nurse American industries back to health; take the Obama administration’s tariff on Chinese tires. The administration boasted that the tariffs saved 1,200 jobs in the tire industry, but Gary Clyde Hufbauer and Sean Lowry of the Peterson Institute estimate that consumers paid $1.1 billion more for tires than they would have without the tariff. That means that each job saved in the tire industry cost consumers roughly $900,000. This has been a recurring theme in domestic trade policy and likely will continue with the Trump administration’s steel and aluminum tariffs. The Economist recently wrote:

“Americans employed in steel-consuming sectors far outnumber those employed directly in steel and aluminium industries[…] Higher prices of inputs for products such as cars, air-conditioning units, refrigerators and beer cans will be passed on to consumers. If they respond by buying less, jobs will be lost. Studies have found that George W. Bush’s tariffs on steel in 2002 destroyed more American jobs than they saved.”

Therefore, while often great political talking points, tariffs are quite honestly one of the worst ways to correct trade imbalances. The Trump administration and many administrations before President Trump took office have frequently cited the trade deficit with China as a worrisome trend and an attack on American industry. By offering tariffs as a response, though, they are hurting American consumers.

That is not to say that President Trump is wrong to attack unfair Chinese trade practices, quite the contrary. According to CNN, China has “require[d] companies that want to enter the country to pair up with domestic firms in joint ventures. Such partnerships can give Chinese companies access to information that foreign companies would otherwise keep private.” China is trying to strong-arm American companies into strengthening their domestic businesses. In this way, the Chinese are showing blatant disregard for rights to intellectual property and are preventing tech companies around the world from enjoying the benefits of innovation. In a 2017 report authored by the Commission on the Theft of American Intellectual Property, the Commission “estimate[s] that the annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software, and theft of trade secrets and could be as high as $600 billion. It is important to note that both the low- and high-end figures do not incorporate the full cost of patent infringement”.

The Chinese, in this way, have compromised the integrity of international trade in technology and have threatened the integrity of the system at large. Admittedly, the Trump administration is looking at a means of punishing China for their bad trade behavior. They have suggested placing tariffs on $50 billion worth of tech products like advanced information technology, robots, and more, and recently they have said that they would use the International Emergency Economic Powers Act of 1977, giving the administration the legal authority to address China’s trade practices. It is encouraging to see that the current administration is employing new tactics in addition to the ones that have become old hat, but it’s also frustrating to see that President Trump is being characteristically cavalier with his demands. His administration recently asked China to cut the trade deficit by $100 billion. I wish I could underline, capitalize, and bold this to emphasize the ridiculousness of such a demand; they’re requesting a reduction in the trade deficit without offering any incentives in return. This seems like nothing more than an attempt by Trump to appeal to his base with tough China talk.

So, while Chinese trade abuses are egregious and have little place in a world of supposedly free markets, the Trump strategy thus far is a mixed bag of sensible and crazy. Their penalties against China regarding Chinese tech policy offer promise in that they combat an issue that is specifically Chinese. To my knowledge, no other country requires forfeiture of tech secrets or requires partnerships with domestic industry. Many other countries across the globe have been alarmed at this development and the Trump administration likely could have found allies easily and taken the issue to the World Trade Organization (WTO). Instead, Trump alienated the US by enforcing steel and aluminum tariffs on all countries rather than just China. And while they the Trump administration will still likely take Chinese tech policy to the WTO, their case could very well fall on deaf ears because of the fallout from their steel and aluminum tariffs. Trump is trying to apply an outdated, unilateral solution to a multilateral situation; China has not been especially compliant with WTO policy in the past, but they have also never been met with a direct complaint to the WTO. It’s time that we update our policy and work within our means of the 21st century to come to a solution that is inherently global.