Never let a good set of talking points go to waste! Earlier this morning, one of the broadcast networks asked if I was available for a segment on the latest Trump administration tariff announcements, and wanted to get an idea of where I came down. Even as I was typing up the following, though, I was told that the plan had changed, and that the program in question had decided to go with a Member of Congress instead.
Yet since they’re still relevant to this latest phase of U.S. trade policy, I thought you might find them useful in this slightly edited form.
1. If the Europeans and other major economies retaliate vs the new U.S. steel and aluminum tariffs, they’ll make clear their indifference to the government-subsidized Chinese output has flooded global markets with both these metals, and seriously distorted trade flows. In recent years, these foreign governments have paid lip service to the need to curb Chinese overcapacity, but many have enabled it by transshipping Chinese metals (mainly steel) to the US market or stepping up their own exports to the US to relieve the pressure China has put on their own producers.
2. As a result, (as I’ve previously documented) during the current global economic recovery, the US is the only major steel producing country that has seen its share of world output fall significantly.
3. Moreover, (as I’ve also shown), the higher input costs resulting from the new metals and other tariffs pale beside the benefits recently received by U.S.-based businesses (including metals users) due to tax reform and regulatory relief.
4. Re both the steel and China tariffs, I wish that Trump had backed a superior alternative: the Border Adjustment Tax contained in the original version of the House GOP tax bill.
The BAT would have functioned like a value-added tax (a levy imposed by virtually every other country) — imposing a tax on imports heading for the U.S. market, and providing a subsidy for U.S. exports. Since the BAT would have been across-the-board, no U.S. industry (e.g., metals-using manufacturers) could have argued that it was going to be disadvantaged because its products would have received the same benefits.
Moreover, the BAT was backed not only by House GOP leaders with staunch pro-free trade records. It was also supported by many major multinational manufacturers. In addition, it would have been perfectly legal under the WTO, since it so closely resembles the value-added taxes so many other countries have had in place for decades. But President Trump – for reasons that remain unclear – never came on board.
5. In the absence of the BAT, though, the metals tariffs are essential for correcting major distortions in global trade flows caused by Chinese overcapacity, and the China-specific tariffs are essential for offsetting the impact of Chinese trade predation (including rampant intellectual property theft and extortion) on high tech industries, exemplified by the “Made in China 2025” program.
6. Nonetheless, re China specifically, I have criticized some of the Trump response as being internally inconsistent. If for example the United States convinces the Chinese to treat U.S. companies operating in China more equitably, U.S. corporate investment in the PRC could well increase, and the trade deficit that Mr. Trump wants to shrink is likely to grow, as much US investment in China creates products exported to the US.
7. More generally, I’m deeply skeptical that any Chinese promises to halt or reduce these forms of protectionism can be verified — because the Chinese bureaucracy operates so secretively, the Chinese national manufacturing complex is so vast, and because the United States will never be able to send over to China enough officials to monitor compliance effectively.
8. As a result, rather than seeking to improve Chinese behavior, I believe U.S. policy toward the PRC should aim first and foremost to reduce the extensive linkages between the two economies. In this vein, ever more sweeping U.S. moves and proposals to curb Chinese direct investment in key industries in America is a good first step.