Tariffs Are A Bad Negotiation Tool
Is he, or isn’t he? That’s the big question when it comes to the $100 billion in tariffs that President Trump has threatened to impose on China.
Many supporters of these threatened tariffs would claim that the answer is: he isn’t; or more accurately, he won’t need to. In this view, the tariff threat is simply a negotiation tactic. And, according to these supporters, the tactic is already working as evidenced by President Xi Jinping’s recent offer to reduce the tariffs that China levies on foreign automobiles.
If only it were so.
As described in Politico, the Chinese offer barely changes the trading landscape, and the proposed reforms were already under consideration long before the tariff threats were announced. In short, the Chinese offer gives the appearance of liberalizing trade, but in the end, changes very little.
Perhaps more importantly, it is highly unlikely that the Chinese response to the threat of tariffs will be to implement the necessary changes to China’s discriminatory business environment, including the elimination of China’s rampant theft of U.S. intellectual property.
If this assertion is correct, and China will not kowtow to the U.S. demands, then using the threat of tariffs puts the U.S. in a difficult position. Either the U.S. can levy the tariffs, or it can back down.
Let’s imagine the U.S. levies the tariffs in the hopes that China will feel economic pain and ultimately reform its policies. In such a scenario, U.S. consumers and businesses will bear large economic costs as the higher tariffs will increase the costs of goods across the economy.
As people in the U.S. must spend more money to buy automobiles and washing machines, we are all made worse off. Then, as China retaliates with tariffs of their own (harming Chinese citizens in the process), more people in the U.S. will be harmed – such as soybean farmers in Nebraska or commercial jet makers in Seattle.
The rising economic costs created by these policies make the ultimate objective of reducing overall global trade barriers harder and harder to achieve. Thus, once the tariffs go into effect, the likely end-result will be higher trade barriers long-term. This will enshrine the economic pain from these tariffs for years to come.
Considering these economic realities, perhaps the U.S. would ultimately blink and not impose the threatened tariffs. From an economic perspective, this is the right outcome. But, from a geo-political perspective the U.S. will lose credibility on the world stage. The damage from such a high-profile reversal will be high.
These scenarios highlight the problems of using tariffs as a threat to try to change China’s clearly inappropriate behavior. Ever since Adam Smith wrote the Wealth of Nations in 1776 economists have recognized the economic harm created by tariffs. Claiming that tariffs are a negotiation tool does not change this reality.
Wayne Winegarden is senior fellow in Business and Economics at the Pacific Research Institute.