J oe Biden promised supporters he would “make America respected around the world again.” The most recent refutation of that promise comes...
Joe Biden promised supporters he would “make America respected around the world again.” The most recent refutation of that promise comes in the area of trade. In a recent statement, Hans Dahlgren, Sweden’s minister for EU affairs, warned that “the new president [Joe Biden] is more favorable to cooperation with Europe. . . . But we must not fool ourselves; [Biden] is representing the interests of the United States, and when he defends America first, he sounds very similar to the trade policy of [Donald] Trump.”
Now, the U.S. doesn’t have a duty to follow the advice of European bureaucrats. But wisdom comes from strange places these days. The trade policies of Trump were damaging, as U.S. trade representative Katherine Tai said in a recent speech. But the policies she lays out do not show a significant break from Trump’s. Tariffs remain a “very important tool” in the administration’s policies, according to her speech.
In fact, we just learned that, in the month of August, the federal government collected $7.6 billion in tariffs — a higher monthly total than any month of the Trump administration. If Trump’s policies were damaging, this administration is on the right track to solidify and extend that legacy.
We shouldn’t be surprised. Trade wars create a deadly cycle of market distortion. Tariffs are followed by retaliatory tariffs, followed by subsidies to help domestic industry harmed by the tariffs. Further, tariffs persist long after they are implemented despite efforts to remove them. Tariff policies under Trump and Biden provide a case study against their widespread use.
Tariffs are sticky, meaning they are much harder to eliminate than to implement. This is because they can be imposed unilaterally, but can only be removed through laborious bilateral negotiations. This is a form of the prisoner’s dilemma. Both sides could cooperate by refusing to impose tariffs, thus giving neither side an edge in trade. Once either side attempts to gain an edge, however, the other will inevitably retaliate. If this occurs, it leaves both countries worse off economically and with no trading advantage — the worst of all outcomes. Of course, the way around a prisoner’s dilemma is cooperation, but the process is complicated and time-consuming.
The dynamic of sticky tariffs is evident in U.S. trade relations with China. Beginning in 2018, Trump imposed tariffs on $50 billion in Chinese goods. Afterward, China retaliated with tariffs in an equal amount. The two sides further escalated with tariffs on $200 billion in Chinese exports and $60 billion in U.S. exports. Although a trade deal was negotiated in January 2020, it only suspended further escalation, leaving past tariffs in place. When China implemented tariffs on farm products such as soybeans, the U.S. subsidized farming. One market distortion often leads to a domino effect where the government attempts to solve a series of cascading problems initially caused by its own actions.
Dahlgren’s prediction proved prescient. Last Monday, the Biden administration announced it will leave Trump-era tariffs in place and even consider imposing more while it continues to negotiate with China. The Biden administration claims this is due to China’s violating the terms of the Trump administration’s trade deal, in which China committed to closing the trade deficit by buying an additional $200 billion of U.S. exports. This is despite the fact that trade deficits are a mulligan. A trade deficit is the difference between the value of U.S. imports and exports. The U.S. currently imports more goods from China than China exports to the U.S. Contrary to the misleading term “deficit,” the U.S. does not owe anything to China based on this difference. It simply means Chinese individuals hold U.S. dollars while U.S. consumers hold more goods. There are far more important issues in the trade debate than trade deficits. Even if you do care about the trade deficit, Biden–Trump trade policies don’t seem to be having much of an effect on it: In August, the trade deficit reached an all-time monthly high of $73.3 billion. Unfortunately, Trump’s trade policies are here to stay, at least for a while longer.
The economic damage from these policies will stretch far into the future. Trade restrictions are a loss for American consumers, producers, and workers. Consumers see higher prices as the costs of tariffs are passed on to them. They regularly pay multiples of hundreds of thousands of dollars per domestic job saved by tariffs. Tariffs disrupt the market process and cause unintended consequences for American producers. For instance, because of retaliatory tariffs from the European Union, Harley Davidson announced it would move some production outside of the United States. Lowered productivity also harms U.S. workers on net, since their wages are largely determined by growth in productivity.
Rejecting tariffs as an ineffective tool does not exclude a realistic policy for managing the threat from China and other aggressors. The U.S. should focus on strengthening industries in which we have a comparative advantage. U.S. trade policy should involve more-targeted methods, such as sanctions against particular bad actors, instead of tariffs. Using tariffs in response to Chinese fraud and manipulation is like wielding a sledgehammer on a finish nail. As of now, none of the problems tariffs were supposed to target, such as Chinese intellectual-property theft and domestic subsidies for industry, have been solved.
Free trade has become a politically homeless idea, supported by neither party with any great eagerness. Trump opposed the idea of free trade and now Biden shows signs of following in his footsteps. But Biden–Trump protectionism is a dead end. The U.S. should recommit to the idea of global free trade within fortified rules of the game. Focusing on our strengths will increase prosperity and U.S. competitiveness abroad. Tariffs and other trade restrictions are much easier to impose than to eliminate, and they eventually must be eliminated if the American economy is to flourish. Any attempts to loosen trade restrictions are admirable, but the difficulty of those attempts should caution against implementing them in the first place.
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