China becomes richer and more technologically advanced every day. America's strategy to slow that momentum? Massive and onerous tariffs.
This is pure folly.
At best, this course of action means near-term pain for U.S. businesses and consumers. But the bigger risk is that a distracted America, beset by populist politics, will neglect the deep strengths that have made it the world's leading economic power.
Questions about how President Trump's trade war will end seem increasingly irrelevant. At least as long as global markets are placid and American voters confident, the conflict will continue. And the stakes have risen. What started as a vanity policy project by a president with idiosyncratic trade views is turning into a long struggle to change China's entire economic model.
Does anyone really think that if the tariffs are punishing enough and long-lasting enough, Beijing will abandon its industrial policy of attempting to dominate advanced tech sectors — including AI, robotics, aerospace, and electric vehicles — through billions in subsidies, investment, and other government support? Gee, maybe they'll stop stealing our tech and intellectual property, too. All that through the Trump tariffs.
And ... the very same import taxes that are supposed to drive Beijing to its knees will also supposedly have little effect on the American economy, the Trump administration assures us. This is the ludicrous win-win scenario they're selling. As Commerce Secretary Wilbur Ross told CNBC on Tuesday, "Nobody is going to actually notice [prices hikes] at the end of the day" because they will be "spread across thousands and thousands of products."
Perhaps, but that doesn't mean a higher cost of living won't hurt workers. And businesses will certainly notice. They already do, in fact. One recent business survey found nearly half of respondents in the retail, food, and manufacturing sectors report their production costs have climbed. And that's before an additional $200 billion in tariffs on China kick in, likely to be followed by another $267 billion if Beijing retaliates. Those will raise the severity of what Goldman Sachs calls "secondary" tariff effects including "greater business uncertainty, potentially tighter financial conditions, a hit to supply chains, and non-tariff retaliation."
Meanwhile, China will continue to spend and steal. Maybe high tariffs for a decade will change that behavior to some extent. (Targeting Chinese companies might be the more effective approach.) But it's hard to believe an authoritarian state, especially one culturally rooted in the Confucian idea of harmony, will tolerate the massive disruption needed for long-term innovation in a market economy like America's. Indeed, Beijing is going in the opposite direction, subjecting state-owned industries to greater protection rather than competition. Even their tech giants seem like arms of the state, at least to competitors in the United States and Europe.
As my AEI colleague Derek Scissors has written, "A highly indebted country with a shrinking labor force and depleted natural resources must foster an extremely competitive environment to encourage the needed innovation. China is manifestly failing to do so." Moreover, even some trade hawks will concede that the main reason to crack down on Chinese tech theft is to maintain public support for trade rather than to keep China from obtaining some decisive technological edge.
But American policymakers shouldn't assume Chinese stagnation. Nor even hope for it, given it's a nation of 1.4 billion with a per capita income of just a quarter of rich economies like America's. At the same time, keeping our technological edge is important for both economic and military reasons. And that means not squandering one of our greatest strengths: being the premier global destination for people who want to do something great with their lives, whether in Silicon Valley or the shop around the corner.
Protectionism isn't what made America wealthy. It was always pretty rich, thanks in large part to active overseas trade, as economist Douglas Irwin writes in Clashing over Commerce: A History of U.S. Trade Policy. But when the U.S. clearly became the world's leading economy in the late 1800s, the high tariffs that were in place weren't the reason. Immigration was a key catalyst for growth, whether it was the striving unskilled who worked in factories or the ambitious skilled who brought technological know-how with them from abroad.
America's nationalist populists want to raise the drawbridge to imports and immigrants. It's a toxic combination for an economy built on openness.