To Challenge China, The Next US President Should Fix Trade

In May 2024, the Biden administration
announced
additional tariffs on $18 billion of Chinese goods, resulting in a tax increase of $3.6 billion.

President Biden's trade policy differs from the former president's in that he seeks to increase production and jobs in a select group of emerging high-tech industries. Additionally, he has tightened trade restrictions with China under the“Small Yard, High Fence” approach, limiting the sale of American technology to Beijing while directing federal subsidies to US manufacturers competing with Chinese manufacturers. Another key difference in President Biden's trade policy is that his strategy relies on bringing international allies together to counter China through a mix of domestic incentives and potentially coordinated tariffs on Chinese goods.

Among the reasons countries impose tariffs are:

• to protect domestic industries vital to national security,
• to incentivize foreign countries to change their practices, and
• to raise revenue.

The Trump and Biden administrations both stated they imposed tariffs for the first two reasons.

The Trump administration
argued
that tariffs were“imposed to encourage China to change its unfair practices” as they“threaten United States companies, workers, and farmers.”

Similarly, after the Biden administration announced tariff hikes on May 14, the White House announced tariff increases were designed“to protect American workers and American companies from China's unfair trade practices,” including forced technology transfers and theft of intellectual property. The administration also pointed out China's“growing overcapacity and export surges that threaten to significantly harm American workers, businesses, and communities.”

The biggest problem with the latest round of tariffs imposed in May is that it cannot resolve the problems the Biden administration sought to tackle. Rather than focusing on changing China's forced technology transfers and protecting intellectual property rights, the tariff increases were more about boosting US industries.

Furthermore, doubts persist about whether tariffs truly benefit the US economy. By raising the cost of parts and materials, tariffs increase consumer prices, and reduce private sector output. This will eventually reduce the return to labor and capital, incentivizing Americans to work less and invest less.

There are numerous studies claiming the negative economic consequences of tariff policy. In August 2019, the Congressional Budget Office (CBO)
estimated
that the negative GDP effects of recent tariff increases had outweighed the positive ones and were decreasing real output by 0.3%. Meanwhile, the Tax Foundation
estimated
in July 2023 that the long-run effects would bring GDP down by 0.2% and total employment down by 142,000 jobs.

Another issue with the extended tariff policy is that China has evaded its impact. The US-China trade war and rising risks of investing in China prompted global companies to adopt a“China Plus One” strategy, diversifying production into ASEAN countries. These nations became attractive alternatives to replace China for their relatively young populations, free trade agreements with key players, and prime geographical locations.

However, it wasn't just American firms relocating to Southeast Asia. Chinese manufacturers also shifted operations there. Currently, Chinese firms attempt to bypass tariffs by selling components to manufacturers in ASEAN, where the final goods will not be regulated by the US. In the electric vehicle industry, Chinese companies are rapidly expanding into Southeast Asia, making it difficult to regulate them under current trade policies.

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Harming allies

Successive administrations have pursued protectionism, from Trump's steel and aluminum tariffs to Biden's Inflation Reduction Act subsidies. Unfortunately, these protectionist policies are also hurting friendly countries. The steel and aluminum tariffs also affect the European Union and Japan, while the subsidies from the Inflation Reduction Act
have
created challenges for US allies trying to conduct business in the US.

In response, countries like Japan, the EU, Canada, Australia, and others have adopted their own domestic subsidies.

Getting trade policy right

If the new administration aims to achieve the stated goal of changing China's unfair trading practices, the new president should consider reviewing its trade-distorting policies and reigniting a policy of market-driven economic integration with its allies.

To regulate China's non-market, export-driven model of growth, the administration should work through international organizations and institutions, just as it did during the recent G7 meeting in Italy. Through channels such as the G7, the WTO and the OECD, the US could build an international coalition demanding that Beijing change direction. If those efforts should prove ineffective, the administration could authorize collective action to rein in China's exports while simultaneously revitalizing the market economy.

Su Hyun Lee
(... )
is a researcher focusing on US-China relations and economic security at the Korea National Diplomatic Academy. Previously, she was a 2021-22 resident Korea Foundation fellow at the Pacific Forum.

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