January 16, 2021

The imbroglio of tariffs to China

The imbroglio of tariffs to China


Martin Feldstein (Professor of Economics, Harvard University)

Updated:

The most frequently asked questions that I get when I talk to people who are not economists have to do with the tariffs that the United States is applying to China's imports. Why is the administration of President Donald Trump doing this? Are tariffs not a tax on goods bought by American consumers? Why does Trump think the United States can "win" a trade war with China? How do the Chinese respond to current tariffs and threats of more in the future? And so on.

I usually start my answer by emphasizing that, like all economists, I am generally opposed to tariffs. I also prefer an environment in which governments do not interfere with imports and exports, and in which American companies can operate freely in foreign countries.

I recognize that we have a huge trade deficit with the rest of the world (some 800,000 million dollars this year, or 4% of the US GDP) and that our trade deficit with China is about half of that total (some 400,000 million). But I always emphasize that our overall trade deficit reflects the fact that the United States spends more than it produces, which requires us to obtain the difference through net imports.

It is difficult to know why the United States is imposing tariffs because the administration has not clearly stated what it is trying to achieve with this measure. One reason for the ambiguity is that several high-ranking officials compete to influence US trade policy for China: the Treasury secretary, Steven Mnuchin, the representative of the United States Trade, Robert Lighthizer, the director of Commercial and Industrial Policy of the White House, Peter Navarro, and the Secretary of Commerce, Wilbur Ross.

It is difficult to know why the United States is imposing tariffs because the administration has not clearly stated what it is trying to achieve with this measure

USA filed a claim with the World Trade Organization (WTO) earlier this year after extensive research confirmed that the Chinese violate their WTO obligations by requiring that foreign companies doing business in China have a domestic partner and transfer technology to that company. But the United States did not wait for a WTO ruling to confirm its request and authorize the imposition of tariffs as a penalty for the violation of the rules by China. The United States has also not said it would end tariffs if the Chinese rescinded their illegal requirement of technology transfer.

The Chinese authorities say that their policy is clear: American companies can only access the Chinese market if they contribute their technology in return. But this policy is explicitly prohibited by the WTO and is not a policy applied by other countries. And the president Xi Jinping It recently confirmed China's strategy by announcing that foreign companies could enter the auto industry without having to share technology.

When Mnuchin went to Beijing a few months ago to negotiate with the Chinese he carried a long list of changes in Chinese economic policy that the United States would like to see implemented, including the end not only of the technology transfer requirement but also of the Chinese government subsidies. to various industries. Chinese negotiators rejected Mnuchin's list, arguing that it was too long and intended to change the nature of China's economic policy.

I think that policy makers should make it clear to the Chinese that the United States would end its tariffs if the Chinese stopped stealing technology from American companies. This would include the Chinese policy of requiring American companies to transfer technology to their Chinese partners as a condition of doing business in China, as well as the Chinese practice of taking technology directly from US companies through the cybernetic espionage and other illegal methods.

The cost of tariffs is not great in relation to the benefit that would be obtained if the United States managed to convince China to stop illegally taking technology from North American companies

The Chinese government agreed to end the cyber-theft by the government of industrial technology when then-President Barack Obama met with Chinese President Xi Jinping in 2013 and presented evidence of that activity by the People's Liberation Army. But that agreement did not cover theft by state companies and private firms. Negotiations should cover all forms of technology theft.

Trump and other US officials think that a tariff war with China can be won because China exports about four times more to the United States than they export to China. The United States can then impose a much greater burden on Chinese exporters than the Chinese can impose on US exporters. The Chinese economy is also much more dependent on exports than the US economy.

Tariffs are, in effect, a tax on consumers and US companies that use Chinese products in their production processes. But the rise in prices that Americans pay for Chinese imports and the resulting loss of real income is very small. China's annual imports total about 500,000 million dollars. If the United States imposes a general tariff of 25%, the increase in the cost for US buyers-assuming there is no change in the prices charged by Chinese exporters-would be 125,000 million dollars. The national income of the United States exceeds 20,000 million dollars, so that the highest cost would be slightly more than 0.5% of the total US expenditure. And, since Chinese exporters would likely reduce the prices of some of their products, the higher cost to US buyers would be less than 125,000 million dollars. Moreover, US buyers would transfer part of their purchases to products produced by US companies or imports from other countries, further reducing the net cost.

In short, the cost of tariffs is not great in relation to the benefit that would be obtained if the United States managed to convince China to stop illegally taking technology from North American companies. The White House It should make clear that this is the goal of US policy, and that tariffs will be eliminated from the moment that the Chinese fulfill their obligations to the WTO.

Martin Feldstein (Professor of Economics, Harvard University)Martin Feldstein (Professor of Economics, Harvard University)

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