Tariffs On China Are Paid For By U.S. Corporations
For those who may have had any doubt, one thing we have learned over the past few months is that trade wars are not easy to win. U.S.-China trade negotiations offer a perfect example -- with the latest round of negotiations, scheduled by the end of this month, postponed.
Those who think trade wars are easy to win have a misconception about why we trade. Unlike the old mercantilist world, we do not engage in trade simply to increase our exports. The principal reason we trade is to increase our imports, or at least our opportunity to import. That is the fundamental misunderstanding at the heart of the current U.S. trade strategy. It is based purely on maximizing exports, at the risk of cutting the economy, producers and consumers off from the benefits of the broader global economy.
The Trump Administration entered negotiations assuming that the large U.S. trade deficit with China gave them a lot of running room: If the U.S. is buying $350 billion worth of goods a year from China and selling less than half that, it was only a matter of time before higher tariffs forced the Chinese to run out of imports to add tariffs to, give in, and simply accept Washington’s terms. What the Trump team forgot is that other countries are not just America’s competitors. They do not simply provide a target market to which to sell. They are also America’s suppliers, providing an economy from which to buy needed goods and inputs that are essential to our living standards and ability to produce.
At a relatively early stage of the trade war last month, U.S. businesses warned the Trump Administration of how badly the U.S. economy would be hurt by tariffs, not simply because they invite retaliation, but even more importantly because they make it more costly to produce in the United States. Last month, dozens of companies voiced concerns to trade officials during hearings about the administration’s planned tariffs on a wide range of Chinese goods. In fact, the length of the hearing had to be doubled to accommodate the leaders of nearly 400 companies testifying against increased tariffs on China.
The companies appearing before the government panel varied widely, by size and industry, but their concerns struck a similar theme: The United States is no longer equipped to produce many materials that they depend on for their products. The rise of global supply chains has shifted the bulk of manufacturing and production outside the United States, leaving companies no choice but to rely on foreign materials, including those from China.
Auto companies have warned that higher import duties on Chinese components are likely to cause negative pressures. Price hikes made to offset the tariffs will likely have some near-term negative impact on volumes in China. Fitbit Inc., which utilizes China-based contract manufacturers, said the latest U.S. tariffs weighed on the company’s material costs. Caterpillar Inc. said U.S. tariffs on Chinese imports are expected to increase its material costs by about $100 million to $200 million in the second half of the year. The heavy machinery maker plans to offset most of the higher costs with mid-year price hikes – leaving upstream producers with little choice but to pass on the costs to consumers. GE estimates that new tariffs on its imports from China could raise its costs by $300 million to $400 million.
Moreover, even if the Trump tactics were to somehow bring China to its knees, all that would do is force U.S. companies to produce more in other countries, such as Vietnam. Honeywell International, for example, has already said it would increase the use of supply chain sources from non-Chinese countries to counter growing costs prompted by the tariff war.
All of these examples demonstrate the cost to America’s ability to compete not because of Chinas's retaliatory tariffs against the United States – but because of U.S. tariffs tariffs against China. In fact, the main advantage of free trade is the opportunity it affords to increase our scope for importing goods and services from other countries.
Because trade allows us to bring a final product to market through extensive supply chains, it further enhances our efficiency. But in order to reap those gains, we have to be able and willing to shift some production offshore – which means recognizing the value of importing.
Because trade allows us to draw on skills, talent and resources from all over the world, it accelerates the division of labor. Quite simply, when we are carrying on trade, we are not restricting ourselves to our own domestic population to produce, but also drawing on the broader global population.
Trade allows us to disseminate knowledge. The lean production methods that have revitalized the auto industry, for example, were transplanted from Japan to the United States. The mini-mills that have made the steel industry much more efficient – and fostered the growth of companies such as Nucor – were adapted to the United States based on the example of foreign producers. This kind of cross-fertilization of ideas and methodologies is possible only because we import. Exporting is a means of spreading your own innovations, but importing is the principal means to draw on others.
It comes down to this: Trade is a good thing because it forces domestic companies to compete. It does that primarily by giving U.S. producers and consumers the opportunity to import. This forces other producers to compete more intensively, lowering prices and raising quality. If U.S. steel companies were not exposed to foreign competition, they would still be the lumbering dinosaurs they once were. If auto companies maintained a virtual monopoly, they would still be focusing on planned obsolescence, rather than continuous product improvement.
Despite what the Trump Administration seems to think, importing is not a necessary cost of trade, something we have to live with in order to export more. Rather, it is a necessary ingredient of economic growth, something that allows us to live better and produce more efficiently.