OPINION:
If reelected, former President Donald Trump promises more radical measures than during his first term, including a 60% tariff on Chinese imports.
Those wouldn’t eradicate trade with China or appreciably boost American jobs. They wouldn’t profoundly change the size of the trade deficit. But they would accelerate changes in the composition of U.S. trade.
The U.S. dollar should remain the international reserve currency for the next few decades. The size and relative stability of the American economy make U.S. Treasury securities the best asset for foreign central banks to hold to back up their currencies, and those conditions make Treasuries the safest and most stable choice for international fixed income investors.
The yuan is not comparably attractive because, as Federal Reserve Gov. Christopher Waller aptly points out, “it is not freely exchangeable, the Chinese capital account is not open, and investor confidence in Chinese institutions is relatively low.”
China’s municipal government debt — which bankrolled many of the infrastructure projects the national government encouraged to juice growth in recent decades — is over 75% of gross domestic product, compared with less than 10% for U.S. local governments, and is a considerable threat to Chinese stability.
Each year, the demand for dollar-denominated securities increases to facilitate a growing economy and store wealth, and this creates a surplus in the U.S. capital account. That must be matched by a deficit on the U.S. current account — the balance on trade in goods and services, interest payments and transfer payments (for example, foreign aid and remissions abroad of individuals).
The mechanism that equates the two accounts is the exchange rate for the dollar against other major currencies — the yuan, yen, euro, pound, Swiss franc, etc.
A strong dollar and unimpeded access to credit and equity financing for households and businesses encourages Americans to consume more than they produce through the trade deficit.
Those requirements for a U.S. trade deficit are as certain as the number of commandments on Moses’ stone tablets.
Slapping a 60% tariff on Chinese imports would shift U.S. trade to other sources and result in some reshoring, but it would hardly eliminate the trade deficit. China is too important a source for solar panels, wind turbines, batteries, lithium and rare earth minerals. Allianz estimates China is a critical source of supply for 276 types of goods.
To avoid U.S. tariffs imposed by Mr. Trump, businesses are importing more from Mexico and Vietnam, which in turn are sourcing more components from China.
After accounting for all the exclusions and exceptions, Mr. Trump raised the trade-weighted average tariff on U.S. imports from China to about 12% and increased prices on all final goods and services by about 1.3%.
We could expect the inflationary impact of a 60% tariff to be several times as large. Many U.S. manufacturers that source materials from China would be at a decided disadvantage against producers in Southeast Asia, India, South Korea, Mexico and the European Union. An initial 5% increase in prices would lower living standards and set off a wage-price spiral as workers sought to make up real income losses in salary negotiations.
This is not the smartest way to go about decoupling from China.
Since peaking at 22% in 2017, the Chinese share of U.S. imports has declined to 14% and will likely continue falling because China’s unstable economy and arbitrary government policies make it a less reliable partner for business supply chains.
The real battleground will be for rapidly growing markets in East and Southeast Asia and India.
The United States could increase its exports and develop new cost-competitive alternatives to Chinese suppliers by aggressively cultivating these markets. For example, we should join the Trans-Pacific Partnership free trade arrangement.
Cooperating with Europe and Japan to develop new sources of critical materials, as the Biden administration is pursuing, is critical, too. Instead, Mr. Trump’s trade advisers are exploring new protectionist measures against EU trade, raising considerable alarm among our allies. Equally harmful to cooperation on strategic materials are his threats to abandon NATO allies.
Regarding China, higher tariffs would be useful, but it is a matter of degree.
U.S. imports of goods and services from China exceed exports by a 2.4-to-1 ratio. We could require licenses to import from China, limit those to two times the value of U.S. exports, award those by competitive bidding and gradually reduce the ratio each quarter until we reach one after four years.
That would prioritize those importers that most value Chinese imports, only gradually raising the cost of those purchases and providing time for alternative sources to supply and develop.
The inflationary impact would be mitigated as competitive sources of supply developed here and in Asia, Mexico and Europe.
Overall, that strategy would be less disruptive to the U.S. economy and ordinary consumers.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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