OPINION:
President Biden is correct to focus the nation’s economic and strategic resources on China as the pacing challenge to our security and prosperity.
That’s quite a tangle of domestic and foreign policies, with each affecting others’ objectives.
Tariffs are a good example.
The automobile industry is central to the prosperity of America’s industrial heartland and vulnerable.
For now, Americans are pushing back on electric vehicles.
We have long distances to traverse, and Mr. Biden has not delivered his promised network of 500,000 EV chargers. Detroit is shy to put forward enough affordable EVs.
Emerging battery technology is getting close to eliminating the cost advantage of internal combustion-engine vehicles. At that point, the private sector will have an incentive to succeed with private chargers where the bumbling state capitalism of the Biden administration has failed.
The Obama and Biden administrations have provided incentives to purchase EVs and taken other steps to promote the industry’s development, but nothing as effective as China’s $231 billion in subsidies and protection, which have spawned 127 surviving brands of EVs.
Mr. Biden’s tariffs are essential to leveling the playing field, but they force the hand of our European security partners. Already absorbing half of China’s EV exports, they become an even bigger target and have been forced to respond with their own tariffs.
The same thing happened with the steel tariffs under former President Donald Trump. And that joins the issue of the role of trade policy and protectionism in broader strategic competition with China.
Two schools of thought have emerged among policy wonks in Washington. There are those calling for victory over China through the kind of pressures that brought down the Soviet Union, and those that embrace the Biden policy of managed competition and seek to prevent unnecessary escalation that could spin out of control and precipitate war.
The former is based on a false premise. China is more ethnically unified and economically stronger than the old Soviet Union and therefore less inclined to buckle under the kinds of economic pressures created by Ronald Reagan’s military buildup.
The latter targets selected industries such as semiconductors but is too limiting.
China has prioritized a broad range of manufacturing and exports. Even with a property sector meltdown, it’s growing about 5% a year.
Resulting tax revenue helps finance a military buildup in the Pacific that the United States is challenged to match qw Russia and Iran’s allies create mischief elsewhere.
Beijing’s paranoia is driving down foreign investment and the yuan.
According to the World Bank’s estimates, the exchange rate that would equate costs for producing goods in the United States and China is about 3.81 yuan per dollar, not the current 7.13.
In that light, Mr. Trump’s 60% tariff is hardly radical but could harm many other priorities.
Europeans are more cautious about losing access to Chinese markets to retaliation by Beijing.
A 60% U.S. tariff would divert Chinese exports to their markets. The European Union could either follow with its own tariffs or try to cut a deal with China. The latter would isolate the United States and undermine broader U.S. economic and security interests.
Whatever we do, we need to bring our allies along.
A 60% tariff could raise overall U.S. prices by 1.2%, tax the prosperity of ordinary citizens and severely disadvantage U.S. businesses that rely on Chinese components in domestic and world markets.
Solid empirical research indicates that when our allies follow suit — for example, the Trump steel tariffs — Chinese producers, lacking other markets to dump excess capacity, reduce prices. They absorb part of the tax and ease the burden on U.S. customers.
When our allies don’t follow suit, U.S. consumers bear the full burden of the tax.
If U.S. policy is structured to encourage our allies to participate, as they are doing on steel, EVs and semiconductors, and the full amount of the tariff is returned to households through a tax cut favoring lower- and middle-income Americans, then they would come out ahead.
Domestic manufacturers would not be disadvantaged in the U.S. and other Western markets by higher-priced Chinese components, because everyone would be paying closer to what they should.
By neutralizing Chinese mercantilism, trade would be based more on comparative advantage. That would encourage stronger growth.
To encourage this outcome, tariffs on imported Chinese components should be rebated on U.S. exports and applied to the Chinese content in U.S. imports from third countries, but only for trade with nations that don’t impose comparable tariffs on Chinese products.
If other nations did, then Chinese mercantilism would take a mighty blow. Its excess capacity would be turned inward, and Beijing would face the kind of economic pressure Reagan put on the Soviet Union.
It would not bring down the regime, but a tariff would surely make the autocrats in Beijing less capable of financing strategic mischief.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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