The “China tariffs” are under review. The U.S. trade representative (USTR) is looking into whether President Trump’s Section 301 tariffs, which remain in place under President Biden, are “effective” or not. No need to wait for the study. The answer has long been clear: No.
By every measure, the tariffs have done serious harm to the U.S. economy. The full price of the tariffs has been paid by American wholesalers, retailers and consumers. Trump touted the idea that the tariffs would have a “zero pass-through:” U.S. prices would rise, Chinese prices would fall, but neither by the full amount of the tariffs. This didn’t happen. Why?
The evidence suggests that China diverted its exports to third markets, and thus didn’t have to change its prices. In fact, China’s exports to the world did not decline, and commanded the same price after the tariffs as they did before.
U.S. retail prices on affected goods didn’t change either. American wholesalers and retailers ate the full cost of the tariffs. U.S. export competitiveness also took a beating, given the higher costs of imported inputs.
The biggest canard is that the tariffs boosted U.S. manufacturing employment. They didn’t. The evidence shows that in industries most exposed to the tariffs and Chinese retaliation, American manufacturing jobs declined by over 2 percent.
Finally, there’s the myth that the revenue generated from the tariffs outweighed their costs. Nonsense. By themselves, the 2018 tariffs came at the expense of roughly 0.05 percent of gross domestic product (GDP). Throw in the 2019 tariffs, and the economic damage soars to around 0.2 percent of GDP.
Confronted with all this evidence, proponents of the China tariffs like to play one last card: namely, that Section 301 brought Beijing to the bargaining table. This, too, is absurd. The purchase agreements built into Phase 1 of Trump’s US-China deal were embarrassing, and didn’t come close to making US agricultural exporters “whole” after Trump pulled out of the Trans-Pacific Partnership (TPP). There was no Phase 2, and even aspirations for it paled in comparison to what the TPP promised.
Adding insult to injury, the U.S. was forced to defend the tariffs at the World Trade Organization (WTO). This was a no-win situation. The U.S. trade representative ended up arguing an implausible (albeit creative) affirmative defense about “public morals.” The argument was that Chinese intransigence was seen by Americans as morally repugnant, hence the morals argument. It didn’t work.
The China tariffs have failed economically, politically and legally. The evidence is clear. The mystery is how anyone expected otherwise. We get that “leverage” is in the eye of the beholder, but there was no way the China tariffs were going to overturn economic theory.
We’ll redouble our efforts in the classroom. Congress should claw back its tariff authority to rein in Section 301.
Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University. Daniel Trefler is the Douglas and Ruth Grant Canada Research Chair in Competitiveness and Prosperity at the Rotman School of Management, University of Toronto.