Trump's critics warn that tariffs will harm workers and the U.S. economy. But China's economic history suggests otherwise.
President Trump‘s fresh tariffs on $34 billion in Chinese goods set the stage for price increases hitting American companies and consumers. So how does it affect the everyday American? We explain.
As President Donald Trump imposes tariffs on Chinese goods, opponents warn that trade sanctions will boomerang back and hurt the U.S. economy. But these same critics overlook several key lessons from recent global trade history. And what they ignore is that China’s own meteoric rise was driven by a staunchly nationalist trade strategy.
Some brief history. For the past 25 years, China has implemented every pillar of a protectionist trade agenda. Starting in 1994, Beijing deliberately undervalued its currency against the dollar to make Chinese exports cheaper in the US market. It raised tariffs on a wide range of U.S. goods, including everything from consumer products to automobiles. It levied a value-added tax that encouraged its manufacturers to target export markets. It funneled hundreds of billions of dollars in subsidies to key industrial sectors. And it mandated the transfer of proprietary technologies to “partner” companies before allowing US companies access to its consumer market.
Internally, the real-world effect of such a strategy was to tax China’s population, and to raise the cost of goods and services. And devaluing its currency added further to consumer woes, since it made imports more costly.
China's history proves tariffs work
Why did Beijing subject its citizenry to such austerity? Because it worked. Economic growth in China averaged 10 percent a year from 2000 to 2007, and has recently run in the 6 to 7 percent range, while so-called advanced nations struggle to reach 3 percent.
China’s long-term growth has been stunning. In 1993, yearly exports to the US totaled $32 billion. By 2000, they had reached $100 billion. Last year, they hit $505 billion. Once a net importer of steel, China is now the world’s largest steel exporter. According to the Petersen Institute for International Economics, urban manufacturing employment in China rose from 32.4 million workers in 2000 to 52.4 million in 2014. In 2005, the U.S. Bureau of Labor Statistics (BLS) was already estimating that total manufacturing employment in China might run as high as 109 million workers. BLS noted that China’s manufacturing sector had already achieved the remarkable feat of “shed[ding] surplus workers from inefficient state-owned factories, while increasing employment in the private sector.”
At the same time, a completely inverse landscape was emerging in the United States. In 1998, America’s manufacturing employment topped out at 17.6 million workers. Today that number has dwindled to roughly 12.6 million. Over that time, Washington reduced tariffs on Chinese goods and welcomed a flood of subsidized imports. Some dismissed China’s manufacturing rise as simply providing cheap t-shirts and toys for U.S. households. But the truth is that America gradually ceded key industrial sectors. Where the US ran a $5 billion trade surplus in advanced technology products in 2000, for example, that balance had shifted to a $110 billion deficit by 2017.
China has been eating America’s lunch for a quarter-century. And they’ve done it by following exactly the strategy that pundits and free traders now suggest will be destructive to the US economy.
Why did China’s economic nationalism work so well? Because the tariffs imposed only a negligible burden on China’s citizenry. But a far larger, corresponding increase in production proved an absolute boon to employment, incomes and industrial capacity.
Beijing has been very, very smart. China’s ruling elite recognize that manufacturing provides tremendous value-added for their overall economy. It has a multiplier effect over time. It generates wealth. It supports skilled employment for a wide swath of their population. And it incentivizes the research and development of next-generation technologies that will provide even greater market opportunities in the coming years.
Tariffs give a boost to manufacturing workers
Now, the United States is in a large hole, with millions of formerly prosperous citizens tumbling down the wage scale to hourly work in the retail sector. The president’s critics caution that tariffs will harm these folks — under the assumption that, thanks to their current minimum wage employment, they can somehow still purchase a wide array of goods.
The truth is, much of America lives far downstream from the effects of tariffs on China’s high-tech goods. But they are undoubtedly ready to resume good-paying manufacturing jobs, once domestic producers find breathing room from China’s heavily subsidized competition.
The normally pro-free-market International Monetary Fund (IMF) recently praised China’s economic record, commenting that “over 800 million people have been lifted out of poverty and the country has achieved upper middle-income status.” In addition, the IMF noted that persistent trade imbalances are “putting the global economy at risk.”
While the president’s course may be stern, it is the only realistic path forward to address the carnage that China has wrought through its self-serving rise. The greater question is, if Beijing has been allowed to generate unilateral prosperity for its citizenry, why can’t the United States do the same? Unless Washington stands up to China now, the trajectory of the past 25 years points to a troubling, continued decline for America’s working families. And so, for those who suggest that tariffs are a mistake, they need merely look at China’s rise for an instructive rethink.
Jeff Ferry is research director at the Coalition for a Prosperous America (CPA).