Trump's China Tariffs Will Succeed

For the last four decades, the United States has often engaged in trading away its future by running up debt and selling assets instead of products. This brought about the stagnant living standards and incomes experienced by the U.S. middle class during the presidencies preceding Trump.

The countries with which the U.S. had the largest trade deficits (goods and services) in 2018 were:

  1. China - $379 billion
  2. Mexico - $78 billion
  3. Germany - $67 billion
  4. Japan - $58 billion.

These countries accounted for 93% of the total, with China, by itself, accounting for 61% of the U.S. trade deficit. Donald Trump was elected by the people who have borne the brunt of this policy failure, with a mandate to fix it

On Friday, President Donald Trump took a huge step toward doing just that. He raised the U.S. tariff rate from 10% to 25% on $200 billion per year worth of Chinese goods that were being imported into the United States. Back in July, when Trump had initially imposed the 10% tariffs on Chinese imports, China responded by imposing tariffs on $110 billion of U.S. exports to China.

Trump also threatened to place tariffs on the other Chinese goods being imported each year into the United States. This gives the U.S. leverage that China can’t match. As a result of its mercantilist strategy, China exported $540 billion worth of goods to the U.S. but only let $121 billion worth of U.S. goods into China in 2018. (Mercantilism is the “beggar-thy-neighbor” economic strategy of maximizing exports and minimizing imports in order to grow at one’s trading partners’ expense.)

China has been engaged in economic warfare against the U.S. for decades. China leverages all available means to achieve its mercantilist ends -- from manipulation of its currency, to tariffs, to non-tariff barriers, to forced technology transfer, to outright stealing of technology.

The negative consequences of China’s trade policies have hit many parts of the United States and many regions of the U.S. economy. Innovation, marriage, health, and welfare suffered as a result of what economists term the China shock.

The massive trade surpluses accumulated by China have reflected and catalyzed the massive transfer of technological and manufacturing capacity from the free world to China's censored, repressed, firewalled, and very much unfree world. By 2013 many millions more workers were employed in manufacturing in China than across the entire Western world

There are still many who would have us continue the Biden-Bush-Clinton-Obama approach -- accept fig-leaf promises of change from China while allowing China to continue its depredations. Far too many who pretend allegiance to the banner of "free trade" would have Trump do just that. But unilateral free trade has brought us to the current fix.

Free trade with China is like "free trade" with the thief who stole your car. Keep buying it back from him whilst doing nothing to punish the theft and you will keep getting poorer while confirming the thief in the view that you are an easy mark.

As negotiations with China enter a difficult and vital phase, America is very lucky to have a president with the gumption and determination to chart a different path. The trade war with China is one that the U.S. must, can, and will win. And when it comes to the tariffs proposed so far, the U.S. has not yet begun to fight.

If the current negotiations lead to a trade agreement, many sectors of the U.S. economy -- including agriculture -- will benefit immensely. China already keeps out almost all U.S. meat on one pretext or another. When the completed negotiations require more balanced trade, China will suddenly find that it can accept many more U.S. agricultural products, cars, motorcycles, and other goods.

Trump’s first successful trade agreement was completed with South Korea in 2018. The South Korean government agreed to let in more American agricultural products. In 2018, U.S. agricultural exports to South Korea surged 21%, while U.S. trade with South Korea became much more balanced.

If China prefers to remain mercantilist, Trump should continue to ratchet up his unilateral actions. He should expand his 25% tariff to all Chinese goods exported to the United States, just as he has threatened. Then if China responds with even greater restrictions on U.S. imports, Trump could set our tariff rate to be proportional to our bilateral trade deficit.

In other words, Trump’s future step could be the scaled tariff we first proposed nearly a decade ago in which the rate is scaled so as to take in half of our bilateral trade deficit as tariff revenue. The more that China reduces its imports from the U.S., the higher our tariff rate on Chinese goods would climb. In contrast, if China were to import more from the U.S., our tariff rate on Chinese goods would go down. (We recommend that our Scaled Tariff be included in any long-term trade agreement that Trump negotiates with China.)

Trump’s tariffs would work even if they don’t lead to a trade agreement. U.S. importers would find new sources for the goods that we now buy from China. Trade with those countries would work the way it is designed to work -- they would buy more from us when we buy more from them. Meanwhile, China’s mercantilism would fail, resulting in isolation, disinvestment, and containment. If Trump hangs tough, China's mercantilism will be Trumped. 

The Richmans coauthored the 2014 book Balanced Trade published by Lexington Books, and the 2008 book Trading Away Our Future published by Ideal Taxes Association.