The United States will inaugurate its 45th president, Donald Trump, this week. Economists and policymakers continue to debate Trump’s public statements about U.S. trade policy, which entails placing a 45 percent tariff on imports from China. The question on the mind of business owners is how they will be affected. This piece evaluates how business owners can develop an effective business strategy, should these statements actually become practice. The piece goes further to offer policy recommendations that will reduce the chance of a trade war, while increasing the benefits of international trade for businesses, the economy, workers and consumers.
What is the current trade balance between China and the United States?
The U.S. trade deficit in goods and services with China has increased 44 percent from 2009 to 2014. U.S. exports to China jumped 90% during the same period, and U.S. imports from China grew by 57%. Although exports showed a greater increase than imports, the value of U.S. imports still surpass that of U.S. exports to China.
What Does History Reveal About Trump’s Current Proposal?
President-elect Trump has argued for placing tariffs as high as 45 percent on goods coming from China in an effort to restore U.S. manufacturing jobs. A number of articles illustrate how such a practice would result in increased costs for U.S. consumers.
History has shown that enacting a protectionist policy does not work. In 1930, President Herbert Hoover signed the Smoot-Hawley tariff bill, which started out with high tariffs on agricultural imports and later included manufactured goods. The Smoot-Hawley tariff bill is considered one of the largest tariff increases in U.S. history. The effects of the bill were detrimental to the U.S. economy, which many economists predicted. In a letter to President Hoover, economists and other leaders wrote:
We do not believe that American manufacturers, in general, need higher tariffs. The report of the President’s Committee on Recent Economic Changes has shown that industrial efficiency has increased, that costs have fallen, that profits have grown with amazing rapidity since the end of the World War. Already our factories supply our people with over 96 percent of the manufactured goods which they consume, and our producers look to foreign markets to absorb the increasing output of their machines.
As a result of the bill, trade contracted dramatically from a year earlier, and a number of countries began to implement their own protectionist policies to reduce dependence on U.S. goods.
What Can Business Owners Do Should There Be a Trade War with China?
Last year, during a training session for business owners in California, a gentleman explained to me that he was affected by U.S. tariffs against Chinese tires. Unlike Trump’s proposals for tariffs against all Chinese goods, these tariffs on specific product are allowed by the World Trade Organization (see the next section about the WTO dispute settlement process). In the case referenced here, the business owner explained that his costs of production increased and wanted to know what he could do in the meantime.
My best response was to consider diversifying his import market. In other words, identify those markets that manufacture the same item at a lower cost. The next step would be to look at those markets that have signed a trade agreement with the United States or that are a part of preferential access programs, such as the Generalized System of Preferences. These free trade agreements and other trade programs allow businesses to import goods into the United States without having to pay tariffs, or taxes, on imports from member countries.
What Direction Should U.S. Policy Take?
Embracing a protectionist policy against such an important trading partner is not the answer. As pointed out in an earlier piece, protectionism is a quick, reactive response that ignores deeper issues such as education and modern technology. (See how the trucking industry will be affected by self-driving trucks, which, of course, will affect employment in logistics and other related industries.) This approach does not guarantee a dramatic increase in jobs. Furthermore, unilateral high tariffs do not limit competition from other lower cost producers.
Rather, U.S. policy should continue to use the institutions that are already put in place to address unfair trade practices on the part of WTO members. For instance, the United States filed a complaint at the WTO-level about Chinese truck and bus tires that were subsidized and sold in the United States below market value. The WTO ruled in favor of the United States and allowed the United States to impose tariffs of around 20% on tire imports from China. The United States has brought similar cases against other countries that it has found to engage in trade practices that violate WTO rules (See my piece on Obama’s legacy, which includes a discussion about U.S. dispute cases before the WTO.)
Otherwise, implementing tariffs across the board on Chinese goods could place the United States in violation of WTO rules. In turn, China can also file complaints against the United States and receive permission to raise tariffs on numerous U.S. goods.
My only hope is that U.S. trade policy will be built on sound research rather than quick emotion and rhetoric under the next administration. Trade policies have provided U.S. businesses with an opportunity to compete in the international market. Even with the next administration’s focus on China, there are still opportunities for U.S. importers and exporters to compete in the global economy.
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