Free Markets

China Is a Problem, But Higher Tariffs Are Not the Solution

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There's a human instinct to want to punish people for a perceived wrong. If someone does something bad to us, we not only want that person to stop, we want there to be some kind of consequence, in the hopes the bad behavior is curbed later. It's not enough that the bully in the schoolyard is caught stealing our lunch money. He needs to sit through a load of detentions, too.

That same instinct is in play with figuring out the China puzzle right now, and it was one of the few truly contentious issues among the Republican candidates at the FOX Business Network debate last night. Donald Trump, the frontrunner -- and, indisputably, the candidate in the race with the most experience dealing with China on business issues -- continued to promote the idea of slapping high tariffs on Chinese exports to the U.S.

"I'm totally open to a tariff," he said (though he disputed a New York Times report that he was looking for a tariff as high as 45 percent). "If they don't treat us fairly...Hey, their whole trade thing is tariff. You can't deal with China without tariffs. They do it to us. We don't do it. It's not fair trade."

Trump is right. It isn't fair trade. China is the schoolyard bully of the economic world, with tariffs, currency manipulation, economic cyber warfare, and a spotty track record of acting with integrity. But Trump is wrong on his remedy. Just because China deserves to be punished doesn't mean it should be. Tariffs aren't the answer, since they will hurt the U.S. economy more than China.

Tariffs are the third Martini of economics. They make us feel good, even though we know deep down we probably shouldn't have them and we're certain we'll feel some nasty effects in the morning. They really never help an economy, which is why very few economists actually push for them. It's politicians who love them, since they create a wonderful "us vs. them" narrative. If you slap tariffs on, say, shoes from another country, you can crow about how you're protecting American workers by ensuring American factories are operating at a level playing field with so-called "cheap" foreign goods. In turn, those American workers can reward you with their vote, which overseas laborers cannot.

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Lost, though, is how tariffs affect costs. In the case of the American shoes, the reason that industry needed protection in the first place is that the consumer price of those shoes made in the U.S. was higher than those imported from abroad. Well, the overseas factory isn't just going to eat the whole cost of the tariff. Rather, they are going to pass on most of that cost to the end buyer -- the American consumer -- but, if they're smart (and they are) they will still maintain a slight price edge. That means the overseas producer won't feel a pinch from tariffs. The American buyers -- workers and politicians alike -- will. It's like spitting in the wind.

China has the added problem of being a schoolyard bully. They won't just take a tariff and pass it along. They will almost certainly raise their own tariffs on products coming into their country from the U.S. That makes it more expensive for American manufacturers to sell their goods there, and much harder to compete on areas like price. Companies that rely on exports to China, like the farm industry, could get crushed.

Truth is, for decades, there has been an almost Cold War on trade with China, with alternating flare-ups and detente, but both economies have grown nonetheless. Many entrepreneurs, while saying they want to manufacture domestically, still end up choosing an Asian option because the cost is better and, in truth, quality control has improved. China is a great manufacturing partner for American entrepreneurs. Look at Apple. It brags how its products are engineered in the United States, but they are made in China.

What's more, China has shown an interest in investing capital in  American companies, and the country is a major buyer of our national debt. In short, China has been a driver of our own growth, seeing that as a way to fuel its own. 

How have we maintained this symbiosis with a giant nation that acts like a thoughtless bully? Well, we've been the jock in the schoolyard, protecting the little guy and flexing our muscles on the world stage in a way that makes the bully worried about trying to pick on us. We have matched strength with strength, and that's worked in the favor of both our economies.

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However, there's been an indisputable erosion of our standing on the world stage in recent years and China in particular has smelled blood. At the heart of the tariff debate isn't so much real economics but wounded national pride. In discussing tariffs during the debate, Trump prefaced his plan on the idea that China "can't believe how stupid the American leadership is." Trump's electoral appeal is predicated on the fear that America, once captain of the football team, is getting pushed around by a thug. As always in politics, a punitive tariff is a convenient and popular cudgel.

Interestingly, the other GOP candidates agree with premise of America's economic weakness, even though many economic indicators -- including the unemployment rate -- have improved, all the while ignoring the effect China's own economic slowdown is having on our financial markets. That's good politics, but, usually, good politics begets bad policy. So it was heartening to see the entire Republican field (and the FOX Business moderators, for that matter) turn against Trump so vigorously on the issue. Almost to a person, the other candidates proposed a smarter, less dangerous approach: improve the American economy through a combination of tax cuts, regulatory relief and elimination of red tape and a stronger U.S. will regain the leverage on the world stage it once had with China. Focus on the domestic priorities and the international situation will improve.

Whether that message plays with the electorate is an open question. "Punish China" is a simpler phrase to understand than almost anything that comes out of John Kasich's mouth, even if Kasich has a more thought-out solution and government experience dealing with an issue like this. Also, it has broader appeal, since protectionism plays well across party lines.

But that would be the wrong approach. Tariffs don't work, and as nefarious as China is, it can actually be even worse when prodded. Tariffs are the wrong approach, and a sign of weakness, rather than strength.

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