Author: Yan Liang, Willamette University
US President Joe Biden wasted no time reversing many of the damaging policies introduced during the Trump presidency, with exception to trade. US Trade Representative Katherine Tai is expected to meet her Chinese counterpart to review the Phase One trade deal, but expectations for the talks are low.
Biden lacks the political will to reverse course on Trump’s trade policies, with bipartisan support for ‘being tough’ on China and using the tariff war as leverage to demand structural change in China. Nonetheless, keeping the Trump tariffs is a mistake.
First, the tariff war is based on a flawed economic rationale. The Trump administration imposed tariffs in response to the bilateral trade imbalance, according to which the United States ran a large and persistent trade deficit. Donald Trump believed that trade deficits are bad for the US economy. But the bilateral trade balance is meaningless when supply chains are globally structured and trade is multilaterally constructed. Consider, for instance, the iPhone X: when imported from China, each unit adds US$409.25 to the balance, even though China accounts for only 10.4 per cent of the value added.
Second, the United States runs a trade deficit with over 100 countries. This is not the product of unfair practices but of the United States’ own internal deficit, with private and public spending outpacing income. It is also caused by the US dollar’s ‘exorbitant privilege’ — trade deficits do not depreciate the US dollar to bring about trade adjustment because insatiable demand for the US dollar boosts its value.
Third, Trump’s tariffs did not achieve their intended goals — the US trade deficit with China continues to widen, while US consumers foot the bill for the tariffs, paying US$1277 more a year on average for consumer goods. Manufacturing jobs were not re-shored, with an estimated loss of 320,000 jobs now predicted by 2025. Continuing the tariff war undermines Biden’s own domestic priority of economic recovery.
The tariff war was a convenient political contrivance for Trump’s populist ‘America first’ agenda that served to amass political support for his presidency. Biden’s unwillingness to depart from Trump’s legacy undermines the prospects of the United States re-joining the multilateral system and resuming global economic leadership. The unilateral imposition of tariffs on China is a clear deviation from a multilateral approach.
Under Trump, trade restrictions were often carried out through executive orders in the name of broadly and vaguely defined national security concerns. But protecting sensitive technologies could follow the approach of ‘small yard, high fence’ through legislation instead of imposing a blanket, punitive tariff scheme. If the United States is to resume global leadership, it needs to resist the temptation of unilateralism and instead rebuild and reinforce a credible multilateral rules-based system.
It is clear that the US tariff war has failed to force China to budge on any structural reforms that are not aligned with its own long-term interests. China sees some of its economic policies — such as supporting state-owned enterprises (SOEs) — as unique to its economic system and critical to its success. From Beijing’s perspective, US demands for changes to SOE policies amounts to interference. The United States needs to understand China’s developmental objectives and approaches and work multilaterally to formulate and update international rules.
While the tariff war is demonstrably counterproductive, phasing out tariffs without any major Chinese concessions is politically challenging. Waging the tariff war may temporarily deflect attention away from structural problems in the US economy. To bypass the partisan stalemate on trade issues, Biden could extend the presidential Trade Promotion Authority.
And China has made efforts to implement the Phase One trade deal. While COVID-19 has dampened Chinese demand and disrupted US supply, post-pandemic demand combined with the continued strengthening of the renminbi will help China fulfil the purchase agreement. China has also made progress in curbing forced technology transfers and easing market restrictions.
To solidify economic recovery and sustain long-term growth, China must continue economic reform and foster positive international relations. It is in China’s long-term interest to ease market access, protect intellectual property rights, reform SOEs and promote tech innovation in a constructive and…