Op-Ed: The Trouble with Tariffs

 
 
The world's economies are interconnected by globalization, which makes threats of tariff wars doubly dangerous, says Willy Shih.
 
 
by Willy C. Shih
Stacks of shipping containers waiting to be filled with export goods. ralfgosch

In March, when the Trump administration released its proposed tariffs list against China, I was eager to get a look. After all, these are the products from China that we see as unfairly threatening our domestic producers, and thus worthy of slapping with 25 percent or higher penalties as they come in the country.

The first three pages were chemicals and medical products, and as a one-time chemist I was surprised to see what the US was aiming to protect: obscure chemicals used as ingredients in products like paint, active ingredients for anti-nausea drugs, even the drug inside an EpiPen. There were also more mundane items like milking machine parts and telescopic gunsights for rifles. The careful selection avoided high-profile items like smartphones or shoes, which would have hit consumers directly in their pocketbooks.

Since then, as the stock market roller coaster has shown, the rhetoric has only ratcheted upwards. On April 5, the president threatened tariffs on an additional $100 billion in Chinese goods. China returned fire proposing new tariffs on $50 billion on American imports.

"The real issue here is industrial policy (on the Chinese side) competing with a lack of an industrial policy (on the US side)"

This equally calibrated response from China suggests we are witnessing preparation for a “big negotiation” to avoid a real trade war. For example, even though China targeted Boeing aircraft with a 25 percent duty, the applicable weight range of 15-45,000 kg meant that only 24 older-generation Boeing 787-800s would be impacted, not any of its newest 737 Max aircraft or any widebodies, where Boeing would be really hurt.

The real issue here is industrial policy (on the Chinese side) competing with a lack of an industrial policy (on the US side). Going all the way back to the mid-1980s, the Chinese government has been mapping a pathway for the country to become a modern economy possessing core technological capabilities in key fields. Most people would agree that this strategy has been very successful, and its positive balance of trade with the United States reflects the progress it has made.

But balance of trade is a lagging indicator of success. With looming technological leadership to be decided in areas like telecommunications, this challenge from China will likely get more serious. Huawei, the Chinese telecommunications equipment maker that has effectively been barred from selling into US markets, is now a leading innovator, and through sheer scale and scope of its engineering, is making heavy contributions to the global 5G telecommunications standard. It’s already the leading network infrastructure supplier globally, ahead of Cisco, Nokia, and Ericsson. It is a leader in optical network equipment, and has passed Apple in smartphone sales (outside the US, of course).

In the US, it is anathema to discuss industrial policy. That’s because generally we don’t believe government is good at, nor should engage in picking winners and losers. I don’t disagree with that, but perhaps it would be constructive for us to have a national conversation about what has made us so successful in the past—investments in the sciences and basic research—and what it will take for us to maintain leadership in the future.

What the USTR list did highlight for me is the extent to which supply chains have globalized and intertwined across almost every industrial sector. That means that economic sanctions between one country and another can quickly slop over and effect companies and economies the world over.

To look at one example, the Chinese are threatening in their President Trump response to increase tariffs on American-made cars. We’ve already seen that German car maker BMW, which exports its X-series from South Carolina, would get hit pretty hard. That might force them to move production destined for China to somewhere else. Such unintended consequences make businesses uneasy. Firms conduct business under a set of accepted rules, just like athletes want to compete on a level playing field. Those rules include regulations, but also the conditions of trade—taxes, tariffs, comparative costs, workforce capabilities—all of which go into their location choices and supply chain designs.

When governments change the rules, as the US and China are threatening, we’re likely to get a lot of unexpected consequences as firms re-adjust to the new conditions. That’s not helpful to companies, consumers, or economies.

Related Reading:

Trump’s Tariffs Could Harm Allies as Much as Opponents
Is China About to Overtake the US for World Trade Leadership?
The ‘Mother of Fair Trade’ was an Unabashed Price Protectionist

What do you think?

What's your view on the current trade threats being waged between the United States and China? If imposed, how will tariffs affect your industry?

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