China’s retaliatory tariffs will provide fodder for those arguing against tariffs. However, China’s automobile industry has proven they can be effective while former President Reagan’s quotas on Japanese vehicles proved quoatas can also work. What is indisputable is that with a more than $375 billion goods trading deficit with China, something needs to be done. The question isn’t whether tariffs, quotas or other measures can work, the question is how best to utilize tariffs and quotas as part of a larger plan to rectify what has obviously been a losing trade policy.
After China joined the World Trade Organization in December of 2001, the U.S. goods deficit with China increased more than four times in just 15 years.
Source: U.S. Census Bureau
For comparison purposes, U.S. GDP increased less than two times over the same period. With facts like these, the question isn’t whether something needs to change in U.S. trade policy with China, the question is what needs to change?
Should tariffs be part of a revised policy or are tariffs the equivalent of economic suicide as some argue? Can tariffs work? China’s 25% tariff on autos, Cadillac’s CT-6, the United States’ 25% tariff on light trucks, and the Toyota Corolla provide answers that discredit the idea that tariffs are always bad.
While some paint all tariffs as always being bad that is not the reality. Like most things in life including economics, the truth is usually found somewhere in the middle, not extreme positions. Tariffs are widely utilized by countries around the globe, because they can work. China places a 25% tariff on imported cars while the U.S. has a 2.5% tariff. How has each country fared? China is the number one producer of cars. China produced more than 24 million cars in 2016, one-third of the world’s production and a 350% increase from its 2008 production levels. The U.S.? Production declined by more than a third from just over six million units in 1996 to just under four million units in 2016. The U.S. now produces one-third less of what it used to produce while China now produces one-third of the world’s cars.
Still think tariffs don’t work? In 1965 the U.S. implemented a 25% tariff on light trucks. What happened? From 1965 to 2015, commercial vehicle production in the U.S. increased more than 450% while passenger car production declined by half during the same period.
Tariffs aren’t the only trade tool that has been proven effective. In 1981 President Reagan instituted quotas on Japanese auto imports. Today, Toyota, Honda and Nissan produce more than three million vehicles in the U.S. including the Toyota Corolla which is made in Mississippi. More than half of the vehicles they sell in the U.S. are produced in the U.S. with Honda producing more than 70% of the vehicles it sells in the U.S. at U.S. production facilities.
Contrast these stats with the American automaker GM. Remember the 25% vehicle tariff imposed by China on car imports? To avoid those tariffs and access China’s market, GM is building its Buick Envision in China while the Cadillac CT-6 is also being produced in China…and exported into the U.S. Tariffs impact production location decisions.
Strategic tariffs and other trade tools, implemented gradually over time to allow manufacturers to reconfigure supply chains can be part of an effective trade policy. The idea that tariffs and other trade tools are always losers is not supported by the facts. Just ask Chinese government officials if they think they are losing or winning in the production of cars.
While there is a common argument that tariffs shouldn’t be used because they are protectionist, this is a damaging argument which contributes to our rising trade deficits, including with China. It is damaging because it is founded on the myth that all countries want free and open trade when the reality is that all countries are protectionist, all countries place gaining a trade advantage above the purity of free trade. Arguing against tariffs based on claims of protectionism is naïve when every other country in the world is protectionist and using tariffs, often higher than U.S. tariffs to gain a trade advantage. It is time we stop using claims of protectionism to disqualify any changes to current trade policy when the reality is that all countries are protectionist. The real question for U.S. trade policy is not whether trade policy needs to be changed, but how best to change it and the role various strategic trade tools including tariffs and quotas can play in improving America’s net exports of goods and services.