The Art of the New Cold War Newsletter
On Tariffs.
Welcome to The Art of the New Cold War Newsletter.
In this edition, we explore the China tariffs.
As always, for more, check out my book: The Art of The New Cold War
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Topic: To Tariff or Not to Tariff, that is the question:
The Biden Administration is reportedly considering removing the trade tariffs placed on Chinese products in 2018 under the Trump Administration.
Strong pressure for removal of the China tariffs is being applied by multinational corporations and trade industry lobbies with significant business interests and investments in China. As card-carrying members of the China Lobby, the CCP is pushing them, as their American agents, to do everything possible to end the tariffs and other anti-China measures taken by the US government under the Trump administration, and thus far continued by the Biden administration. Chinese Ambassador Qin Gang made this explicit in a recent interview.
Unfortunately, these advocacy efforts, and the campaign contributions that come along with them, are now starting to bear fruit, with many Democrats and Republicans alike signaling support for tariff removal. It is also being advanced under the guise that it will help tame America’s runaway inflation. This argument is especially persuasive with the Biden administration, and Democrats generally, under enormous pressure to do something—anything! —on inflation with midterm elections fast approaching.
As enticing as the prospect may sound to some, however, removal of the China trade tariffs would be a terrible strategic blunder for the US and is a veritable Trojan Horse.
a. China tariff removal will not reduce US inflation.
Let’s first dispense with the fallacy that removal of the China tariffs will reduce inflation in the US in any meaningful sense. This argument relies on two main assumptions: 1. That the China tariffs are a driving cause of inflation in America; and 2. by cutting the China tariffs companies will pass cost savings onto US consumers.
Regarding the 1st assumption, if the China tariffs were a primary driving force of the current US inflation, such that by removing them inflation would significantly decrease, why then did they not generate inflation when Trump first put them into place in 2018 or throughout Trump’s term in office, and only now years later when Biden is in office? On its face, this suggests other main inflationary factors at play, and of course there are. Chief amongst them, massive supply chain disruptions stemming from Covid and the war in Ukraine; enormous stimulus and government spending pumped into economy; and a tight domestic labor market.
Removal of the China tariffs addresses none of these main inflationary drivers.
Indeed, even if all the tariffs were lifted today, China which is currently locking down major cities and ports under their “zero-covid” policy would not be able to deliver supply chain relief. A fact the below graphic from Scott Gottlieb makes abundantly clear.
As to the 2nd assumption, this argument naively assumes that companies and industries benefitting from the removal of the China tariffs will pass along significant cost savings to their customers. But why would they? When the main inflationary drivers previously discussed remain, and there is no shortage of demand for their products at current price levels, which US consumers continue, however painfully, to absorb due to lack of alternatives. It is therefore far more likely that companies merely use any reduction in costs from removal of the tariffs to fatten up their own profit margins and defray effects they are facing from the other inflationary drivers.
Moreover, even if there were some marginal savings passed along, the benefits would be vastly outweighed by the damage removal of the China tariffs would cause to domestic US manufacturers and exporters, and the jobs and wages that come with them.
Indeed, given the current incredible strength of the US dollar relative to the weakness of the Chinese Yuan, which recently hit a 17-month low vs the dollar, a gap poised to further widen with US interest rates rapidly rising, there could hardly be a worse time to cut the China tariffs. For without the tariffs in place to help balance the scales, Chinese exports will possess a massive cost advantage in the US market, while US exports by contrast are far more expensive, and thus at a competitive disadvantage in China. This will further exacerbate the US trade deficit with China. It will also serve to detrimentally effect US long term strategic interests.
b. Removal of the China tariffs harm long term US interests.
Removing the China tariffs will forestall the desperately needed renaissance in US domestic manufacturing and reshoring of critical supply chains. It will perpetuate the same dangerous and idiotic dependencies on China that have destroyed America’s ability to actually make things at home. A fact on stark display during Covid when the US struggled mightily to produce medical equipment, critical supplies, and even the most basic necessities. This has been punctuated even further recently, with the current alarming shortage of baby formula in America, something once thought unthinkable in the richest most powerful nation in the world.
There simply cannot be any return to the disastrous policies that have left America so helplessly dependent on a nation in China located thousands of miles away, which hates us and is determined to supplant us. One need only ask the Europeans about that, who have themselves been abruptly awoken due to the war in Ukraine to their own dangerous dependences on Russia for energy; something which in hindsight appears the height of stupidity. America’s dependence on China for its manufacturing is equally insane and dangerous.
The China tariffs also send important signals to the market and investors as they evaluate where and how to deploy funds going forward. If the tariffs are removed, investors will conclude that the risks of investing in China have decreased and will return to pouring money into China as before, instead of investing those funds in America. Companies will also continue to source products and materials from China, and invest in manufacturing there, again instead of America, or other places, because it is easy and profitable for them to do so. They will also learn the lesson that the US government can be bullied into going soft on China.
If, however, the tariffs remain even in the face of a full court press by corporations and their lobbyists, and during a particularly vulnerable time politically with inflation surging and elections looming, it will send an equally strong signal that on China, America is united, and corporations and their lobbyists cannot, and should not even try to influence it. This will portend more and greater trade frictions and economic decoupling from China, making it more difficult and fraught with risk for US companies to do business there. This will serve as a powerful and much needed deterrent. It will also strongly signal America’s long-term determination to combat China and win the New Cold War.
c. Tarriff removal helps the CCP and hurts America win the New Cold War.
The China tariffs must be viewed in the larger adversarial Cold War context, and not simply in economic terms. In that regard, this would be a particularly disadvantageous time to remove the China tariffs.
Firstly, China is clearly complicit in Russia’s war with the Ukraine, having almost assuredly greenlit Putin’s invasion, and subsequently provided Russia with at least financial assistance, if not more, under Xi and Putin’s “no limits partnership.” As such, far from rewarding China with the removal of the tariffs, which they desperately want, if anything, America should be exploring additional sanctions against China for their role in the Ukraine situation, in order to both punish them and to help ensure they cannot profit from the situation, as indeed they already are by, for example, buying up Russian oil and gas on the cheap.
Secondly, the CCP’s stated goal is for China to supplant America as the world’s foremost superpower. China’s growing economy and market are the main sources of its strength and power in the world, from which all others flow. They also underpin the CCP’s political legitimacy in China and the implicit bargain the CCP has made with the Chinese people—absolute political power for the CCP in return for continued economic growth and prosperity.
The tariffs have hurt China’s economy far more even than they have let on. And China’s economy is currently showing severe signs of stress owing in large part to their increasingly disastrous zero Covid policy, which has caused China to lock down entire cities, and may cause China to miss its annual growth targets and fail to create the millions of jobs needed to sustain its massive population. The CCP’s draconian Zero Covid policies also have multinational corporations rethinking investments in China. Additionally, China’s highly indebted real estate sector, which makes up around 30% of their entire economy, has come close to imploding after the collapse of massive Chinese real estate firm Evergrande this year, which exposed huge liabilities in the entire sector. And these are just a few of the major headwinds the Chinese economy is facing at the moment.
These vulnerabilities, along with a general trend towards deglobalization spurred on by Covid and the war in Ukraine, have provided America with a window of opportunity to further accelerate economic decoupling from China and invest in bringing back America’s manufacturing base. Cutting tariffs, however, will only hurt these efforts and help the CCP. Indeed, removing the China tariffs would be akin to a drug addict returning to their dealer for a few more hits, before they swear, they’ll quit. We all know how that ends.
President Ronald Reagan understood that engaging in an arms race with the USSR was in US long term strategic interests. Yes, it was costly to America in terms of greatly increased military spending, but it was far more costly for the USSR, indeed it ultimately exposed their underlying weaknesses and effectively broke them. America must now think similarly regarding economic decoupling with China. Economic decoupling from China, which the tariffs are and should be seen as a necessary and important part of, will undoubtably have some detrimental effects and additional costs to America, at least in the short term. But it will be far more detrimental to China, especially now given their current economic vulnerabilities, and like the arms race was to the Soviet Communist Party, could even prove fatal to the CCP and its ambitions of overtaking America.
Finally, when your enemy wants you to do something, it is generally a bad idea to do it. China is desperate for the tariffs to be removed and for trade to return to what it was before Trump came into office, so that America stays dependent on China, and can continue on its economic growth trajectory. This alone is reason enough not to remove the tariffs. Indeed, if anything they should be doubled.