Former President Donald Trump was lambasted for the tariffs imposed when he was in office and for proposing more of the same. But then President Joe Biden slapped new tariffs on steel from China routed through Mexico, an act met mostly with silence. Are both men wrong?
Are tariffs sound policy or a terrible idea? It is an age-old question of economic policy. The simple answer: yes. But it is an age-old question with an answer that changes over time due to changing circumstances, which is why this lifelong free trader now insists on an exception.
In theory, tariffs are a terrible idea, but this conclusion rests on three propositions. First, nations must abstain from giving domestic producers artificial advantages. Tariff-free trade requires governments to let the chips fall where they may, with the most competitive firms winning out. Such an environment provides the greatest advances in prosperity to the most people. Welcome to the conservative economist’s heaven.
But we know nations cheat — sometimes inadvertently, sometimes intentionally. The second founding proposition requires some mechanism to identify cheating and resolve trade disputes swiftly and fairly. Two common phrases apply here. The first is heard in every schoolyard: Cheaters never prosper. Those who break the rules must be made to stop. Thus, the now largely defunct World Trade Organization (WTO) was created.
But then the second phrase applies: Justice delayed is justice denied. Even when the WTO functioned, the process took years — years in which those injured by the cheaters were counselled patience in their suffering.
Finally, tariff-free trade is sustainable only when those found guilty pay a compensatory penalty. Under existing rules, the penalty imposed is to sin no more. That is like getting busted for speeding repeatedly and having the judge rule that your penalty is to drive safely. What? No fines? Not under the trading system.
For all of its weaknesses, the current trading system works pretty well for the United States most of the time. Sure, the WTO is too slow. True, the lack of real penalties is a flaw. But between the United States, the European Union, Japan and a few others the system suffices.
But when a nation repeatedly and massively breaks the rules, a different regime applies. Yes, we are talking about China. It is foolish to follow the trade equivalent of the Marquess of Queensbury rules when the other guy in the ring brought a knife to the fight. Even Chuck Norris would skip that one.
Against China, tariffs are entirely appropriate. China subsidizes anything and everything it cares about. It is unfortunate, but a fact. It is foolish to ask American companies and workers to compete against the Chinese as though China were playing by the old rules.
Determining the tariffs is the next issue. A trade policy answer would be to impose tariffs approximately equal to China’s subsidies. Level the playing field. But China subsidizes some things a lot, some a little, and some not at all — and sometimes even substantial subsidies are impossible to quantify. Exactitude is not possible. Close enough would have to do.
On the other hand, even Europe is coming to accept the extent to which China aggressively threatens western democracies. Following its recent meeting, NATO called China out as a “decisive enabler” of Russia’s war against Ukraine. It is not that President Xi Jinping loves President Vladimir Putin in a bromance of dictatorships. Xi loves anything that weakens the West.
NATO reacted decisively — albeit inadequately — to Russia’s war with economic sanctions. That is economic warfare to punish the aggressor. China has declared economic war on the United States. This is not a matter of enforcing proper trade etiquette. America’s tariff policy toward China needs to reflect the greater threat.
