Biden outdoes Trump with ultra-high China tariffs
Just over six years ago, when Donald Trump first announced tariffs on Chinese goods, it was as if a bomb had gone off. American stocks fell sharply at the prospect of a trade war, businesses warned of blowback and economists lined up to decry the move. Such is the protectionist mood in Washington now that Joe Biden’s announcement of new measures has been met with rather less panic—even though it concerns significantly higher tariffs.
On May 14th, following a policy review, the White House decided to raise tariffs on, among other things, Chinese semiconductors and solar cells from 25% to 50%, syringes and needles from 0% to 50% and lithium-ion batteries from 7.5% to 25%. It hit electric vehicles (EVs) with the biggest increase of all, quadrupling the tariff rate on China-made EVs from 25% to 100%. Lael Brainard of the National Economic Council said the actions would create “a level playing field in industries that are vital to our future”. Yet it is American consumers who will pay the price.
Relative to Mr Trump’s China tariffs, the new levies are both more targeted and more dramatic. Mr Trump’s tariffs in time sprawled to cover over $350bn-worth of imports from China, mostly at a 25% rate. Mr Biden’s tariffs cover about $18bn-worth of imports, though at far more prohibitive rates. The impact is thus not on current trade flows, but on future potential. For example, in Europe, where China-made cars (including Western brands) face a more modest tariff of 10%, they have taken nearly a quarter of the EV market. In America, by contrast, there are few Chinese-made EVs on the road. Owing to the new ultra-high tariffs, it will surely stay that way.
Comparative disadvantage
Within America, the tariffs are aimed at protecting nascent industries rather than large, thriving ones. Under Mr Biden, the American government is spending hundreds of billions of dollars to build up domestic EV manufacturing, semiconductors, batteries and more. This has prompted a boom in factory construction, including in America’s rust belt, but it will be another few years before production lines really kick into gear. The aim is for the new tariffs to buy them time.
Unlike with Mr Trump’s initial salvo of tariffs, criticism from American businesses has been muted. Six years ago many still saw promise in the Chinese market. Such hopes have been beaten down by the growing animosity between the two countries and the rising challenge from Chinese companies. True believers in free trade—especially with China—are now a vanishing breed in Washington, not to mention other global capitals. The European Commission is in the midst of an anti-subsidy investigation that could also lead to higher tariffs on Chinese EVs.
Heftier import taxes on Chinese products will push up prices for American consumers. The immediate effect will be limited, as so much trade in tariff-hit categories has already shifted away from China. But domestic producers may feel less of an incentive to develop cheap goods in the long term, knowing that they are shielded from foreign competition. The tariffs also represent a lost opportunity for the environment. Lower prices for EVs, solar panels and batteries would have boosted their appeal to consumers, as is essential if America is to green its economy.
In addition, Mr Biden’s move arguably displays more disregard for trade rules than Mr Trump’s tariffs. Mr Trump used a “section 301” investigation under American trade law to determine that China had hurt American commerce, notably through theft of intellectual property, and then hit it with tariffs as a remedy. Mr Biden’s tariff rises were grounded in a review of those original 301 levies. But the concern has shifted. Rather than begging, borrowing and stealing to catch up to America, China is now well ahead of it in the EV sector and capable of producing a vast number of cars at a much lower cost.
There is a case to be made that China achieved much of its advantage through its own unfair mix of protectionism and subsidies. Given this background, the traditional way to forestall a flood of Chinese imports would be to apply countervailing duties. “The Europeans are being a little more intellectually honest and doing that,” said Scott Lincicome of the Cato Institute, a libertarian think-tank. He added that Mr Biden’s new tariffs smack of political expediency, coming just months after Mr Trump had pledged to implement tariffs of 60% on all Chinese products.
The levies may also prove to be more harmful than helpful to America’s industrial ambitions. Domestic producers are likely to be more insulated from their fiercest foreign competitors than during past bouts of protectionism. In the 1980s, when it was Japanese cars that provoked angst, Japanese automakers agreed to restrain exports in order to stave off a trade war. That raised costs for American consumers, but Japanese firms ultimately got around the restrictions by investing in America. Because of the current focus on security threats posed by China, its carmakers are not about to follow Japan’s lead. “Without that investment safety valve, how do you ensure that there still is sufficient competition within the American market? That’s the key question,” says Martin Chorzempa of the Peterson Institute for International Economics, a think-tank. Behind a 100% tariff wall, it will be less urgent for American officials to come up with an answer. ■
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