President Trump has announced tariffs on $60 billion worth of Chinese imports, the latest action in a series of policy measures aimed at changing Chinese economic practices that the administration believes are harming American businesses. Based on their reactions, few American businesses welcome the move. Chamber of Commerce president Tom Donohue, recently warned that “tariffs could lead to a destructive trade war with serious consequences for U.S. economic growth and job creation.”
The problem with tariffs is that they aren’t paid by Chinese businesses or the Chinese government. Instead, American consumers and businesses foot the bill. The administration’s hope is that the higher prices paid by Americans will reduce their demand for Chinese goods and thus hurt the Chinese manufacturers. That’s a little like cutting off your foot in order to hurt the shoemaker.
Moreover, that’s only the damage we are doing to ourselves. The Chinese have already signaled that retaliation is sure to follow, most likely aimed squarely at American farmers and ranchers. Welcome to Donohue’s “destructive trade war.” The business community’s negative reaction to the proposed tariffs and other restrictions is significant. It tells us that a great many American producers find that our current trade and investment relationship with China actually works well for them.
No one would doubt that China is trying to look out for its own interests in trading with the United States. China does have not a market economy. The country operates with restrictions and controls. But those artificial restraints on trade hold back economic progress and reduce the gains from trade for both the Chinese and their partners. That said, American businesses are neither dupes nor victims in the process. They enter into trading and investment relationships with Chinese commercial entities when it is profitable to do so. When there is no gain, there is no trade.
President Trump has railed against the U.S. trade deficit with China, arguing that Beijing is taking advantage of us. But in any voluntary economic trade, and all of our trade with China is voluntary on our part, we are taking advantage of them as well. That is the nature of free trade: Both parties to the transaction benefit. Both sides have an advantage. The administration seems focused on those businesses facing competition from Chinese products, and they are certainly deserving of consideration.
But many other Americans are benefitting significantly from their economic relationships with the Chinese. Our exporters benefit from access to the Chinese market. Our manufacturers benefit from the imported Chinese goods they use in their manufacturing processes. American workers benefit from jobs created because of Chinese investment. American consumers benefit from lower cost Chinese products. All of these Americans are equally deserving of consideration.
It is the nature of the our capitalist economy to let the market determine prices and production levels. When the government interferes with that process, through tariffs or other trade restrictions, it tilts the playing field in favor of some Americans and against others. Such favoritism is deeply offensive to the American sense of fairness and justice.
According to the Index of Economic Freedom, America remains one of the freest economies in the world, while China is far down the list, with weak rule of law and little financial or investment freedom. In countering practices we find troubling, such as the Chinese emphasis on gaining access to intellectual property when engaging with American firms, we need to make sure that our actions are designed to make the Chinese act more like us. We must avoid the trap of restricting our own economy, and thus becoming more like them.
The United States benefits from more trade rather than less. It always has and always will. There is no doubt that China can be a tough adversary for American dealmakers. But Americans are tough negotiators as well. The administration would do well to remember that fact as it inserts itself and its own judgments into economic relationships that American businesses and consumers have already decided are in their own best interests.
This piece originally appeared in The Hill on 03/22/18