There are a lot of folks in the news, and reading it, all breathlessly saying that tariffs are just bad and THE number one thing to do is to eliminate them.
That simply is not true.
A tariff can be a good, or a bad thing. It depends on the context and the outcome desired.
One of the first things to ask about any tariff regime is “Is it symmetrical?” Now no tariff can be perfectly symmetrical since no two economies are identical; but you can have functional parity. So, for example, if you export computers and they export steel, having no tariff on steel but a 50% tariff on computers (by both parties) is not symmetrical in impact. So if they put a 50% tariff on your computers, you put a 50% tariff on their steel. That is functionally symmetrical.
China has a long history of protectionism for their industry. They frequently (may be always, I just don’t have that data) require any ‘foreign’ company coming to their country to hand over 1/2 the business to China. That’s essentially extortion. It is essentially giving your company to China in exchange for a modest term cash flow gain. China also has tariff and other barriers to entry.
In the face of that, to NOT have any barriers to China gaming your markets is just stupid. It is showing up at a gun fight with a cream pie…
China has strong mercantilist policies.
Mercantilism is a national economic policy designed to maximize the trade of a nation and, historically, to maximize the accumulation of gold and silver. Mercantilism was dominant in modernized parts of Europe from the 16th to the 18th centuries before falling into decline, although some commentators argue that it is still practised in the economies of industrializing countries, in the form of neomercantilism.
It promotes governmental regulation of a nation’s economy for the purpose of augmenting state power at the expense of rival national powers. Mercantilism includes a national economic policy aimed at accumulating monetary reserves through a positive balance-of-trade, especially of finished goods. Historically, such policies frequently led to war and also motivated colonial expansion.
Mercantilist theory varies in sophistication from one writer to another and has evolved over time. High tariffs, especially on manufactured goods, were an almost universal feature of mercantilist policy. Even if mercantilism and protectionism are applied through the same economic measures, they have opposite aims. Mercantilism is an offensive policy aimed at accumulating the largest trade surplus. Conversely, protectionism is a defensive policy aimed at reducing the trade deficit and restoring a trade balance in equilibrium to protect the economy.
With the efforts of supranational organizations such as the World Trade Organization to reduce tariffs globally, non-tariff barriers to trade have assumed a greater importance in neomercantilism.
Since China has strong policies to promote their economic growth at the expense of trade partners and to dominate globally key markets; and since their major industries are essentially State Sponsored Entities, it is essential to have a “Protectionist” response to maintain balance. The alternative is called impoverishment and losing.
The neomercantilism wiki is pretty thin:
Neomercantilism is a policy regime that encourages exports, discourages imports, controls capital movement, and centralizes currency decisions in the hands of a central government. The objective of neo-mercantilist policies is to increase the level of foreign reserves held by the government, allowing more effective monetary policy and fiscal policy.
Yup, that’s the whole thing. Monetary emphasis and government controls at the core of it. That’s pretty much China.
So is Trump doing the right thing? Time will tell, but I think so. He, at least, is doing something about our $Billions of imbalanced trade with China. Normally currency exchange rates would adjust to fix trade imbalances, but China has a managed exchange rate to prevent that.
To do nothing when an opponent is busy raping your economy and stealing your wealth is to lose, badly. That has been our policy until now, and it is a policy of extreme stupidity. The only winners are the folks extracting wealth from the USA consumer and the cheap Chinese labor via exploiting both.
Is there a better alternative?
Well, I would require that NO company hand over an ownership stake to the Chinese Government (symmetrical to USA lack of such a requirement). I’d also establish a “loan agency” that would loan money to any US company at the same rate being offered for any China investment; but limited to investments in the USA. Effectively neutralizing any attempt to buy a location build in China via sweetheart loan terms from the Government of China.
You can generalize this broadly. Anything China offers as a requirement or inducement, you either BAN it for US companies to do it, or offer an equal inducement domestically.
Be The Mirror.
There is ONE metric overall. Balance of Trade. As long as that is a net negative for the USA, we need to indulge in “protectionist” measures until such time as China ceases being mercantilist.
It really is that simple. Balance. Symmetry. The Mirror.