Trade War: What Is It Good For?

“We have all the cards, but we don’t know how to use them,” Donald Trump declared in 2015 as he announced his candidacy for president, moments after he descended the golden escalator in Trump Tower.

He was talking about his favorite adversary, China, and how he would hire people to transform the U.S. approach toward fighting its unfair trade practices. “We could turn off that spigot by charging them tax until they behave properly,” he boasted.

Nearly a decade later, I’m not sure the U.S. has gotten better at countering Beijing on the global economic stage. But one thing is clear: We’re all now playing from Trump’s deck of cards.

President Joe Biden this week announced new tariffs on a suite of Chinese goods, the result of a yearslong investigation into what, if any, changes should be made to his predecessor’s punitive tariffs on China. Essentially, the finding left all of Trump’s tariffs in place and then added to them.

But what’s the endgame here?

The obvious answer is: fighting back against China. With Washington coalescing around the idea of Cold War-esque competition with Beijing, issuing tough trade penalties feels good.

But we should judge this acute shift in trade policy by the actual goals we’re trying to achieve, and that means defining the problem in more specific terms.

Is it that the U.S. needs more manufacturing jobs?

Is it that the U.S. should make things in certain strategic sectors?

Is it that China needs to change its behavior?

Is it that we don’t want to rely on China specifically for certain goods?

These are not mutually exclusive, but they are distinct issues, some of which tariffs are better suited to addressing than others. The Biden administration’s announcement this week seems particularly focused on boosting American manufacturing in specific sectors, especially when coupled with green energy subsidies in the large investment package passed by Democrats in 2022.

This seems reasonably likely to succeed, as this is how industrial policy has historically been used around the world.

But Biden is also selling this policy as an effort to promote jobs. It may boost employment in those sectors, but it’s not at all guaranteed that it would increase manufacturing employment overall – people could simply shift from one set of manufacturing jobs in one sector to another favored by Biden, like making electric vehicles.

Even after Trump’s broad-based tariffs on Chinese goods, jobs in the manufacturing sector stayed basically steady.

And manufacturing output also isn’t the same as manufacturing jobs. The sector as a share of the U.S. economy hasn’t really declined much in the past 70 years, once you’ve factored in inflation. Fewer people work in those jobs because a lot of it is now automated.

What about China itself? Here Biden and Trump seem to have qualitatively different goals.

Top Biden administration officials have emphasized the need to strategically reduce our reliance on China in American supply chains, an approach that has been dubbed “de-risking.”

It’s an attempt to be more targeted than Trump’s proposal for putting 60 percent tariffs on all Chinese goods.

Trump’s former top trade negotiator, Robert Lighthizer (who presumably would also be in line for a top job if the Republican candidate wins a second term), has advocated for a more extensive break from Beijing to eliminate our persistent bilateral trade deficit. He calls it “strategic decoupling.”

But unraveling China’s presence in American supply chains would take much more extreme action than just tariffs and would be extremely disruptive to an economy that has already gone through the process of globalization.

Companies are already moving parts of their production out of China, in response to both actual policy and political tea leaves, but recent research suggests that U.S. exposure to China is not particularly decreasing, it’s just less direct.

Tim Fiore, who oversees manufacturing surveys at the Institute for Supply Management that are considered benchmark indicators of the state of the economy, told me recently that’s because it would lead to a large hike in costs for businesses to stop sourcing from China, at a time when people are already unhappy with high prices.

“If industry hadn’t made these big moves 25 to 30 years ago, you wouldn’t have the quality of life you have in the United States today,” he said, estimating that many product inputs might cost as much as 30 percent to 40 percent more. That would have made everyday goods much more expensive for Americans to buy.

Indeed, there’s some irony that tariffs are more popular at a time when inflation is a leading economic concern and when unemployment has been below 4 percent for more than two years. Tariffs might not raise overall inflation, but they by definition increase costs for the products they’re applied to, and that feeds through to the prices consumers pay.

Retaliatory tariffs can also be quite damaging for the affected industries, a price borne most acutely by the agricultural industry following the Trump tariffs.

It’s a tricky trade-off, and it’s not the only one.

Biden, notably, through his announcement this week is basically preventing consumers from having access to $10,000 Chinese-made electric vehicles.

In effect, Biden is choosing to make the green transition more expensive for consumers in order to put a check on China.

But an official at the Office of the U.S. Trade Representative argued to me that that’s short-term thinking, and that the U.S. cares about making sure we have a stable supply.

There’s also clearly a desire within the administration to avoid a second China shock in what Biden would call “the industries of the future.” In fact, even some old-school industries are still warning about the dire threat from Beijing.

The National Council of Textile Organizations, whose members make stuff like yarn and fabric, warned this week that three domestic textile manufacturers had announced closures in just the last few days, citing Chinese products flooding global markets.

It’s true that tariffs shield domestic industry.

But they also come at a cost, and we should make sure the cost is worth what we’re getting. Michael Froman, Barack Obama’s former top trade negotiator, says that’s something policymakers will have to develop a framework for.

“The whole field of economics and certainly the whole approach to free trade has been based on the notion of efficiency,” Froman told me. “We now have come to the conclusion, I think properly, that it’s not the only value. That the cheapest supply chain, wherever it is, is not the only criteria. We want resilience. We want redundancy. We want security.”

“But I don’t think we have an economic theory that says, ‘OK, that's the efficiency paradigm. Here’s the alternative paradigm. Here’s how you optimize for inclusive growth, diversification, national security, in a world where we’re not trying to seek just efficiency.’”

This entire conversation is frustrating, of course, to free-trade economists who think everyone has forgotten the extensive benefits of having fewer barriers to trade: higher-quality products that come from more competition, more wealth and less extreme poverty, to name a few.

It seems pretty clear, though, that that’s not the conversation we’re having anymore. As Lighthizer wrote in his book: “The process of strategic decoupling has already begun.”