Netizen: 18: Tariff

Sunday, January 18, 2026

18: Tariff

China’s Trade Surplus, Part III How should policy respond? ........ China’s immense trade surplus. In a saner world — a world in which the United States weren’t ruled by a madman — this surplus and its disruptive effects would be the biggest issue confronting the global economy. ........... China has an enormous economy and is relying on its export prowess to make up for its domestic failures. And the political economy that has set China on this path isn’t likely to change any time soon. ........... there is a theoretical case for simply buying the cheap stuff China supplies. But in practice China’s massive surplus creates serious problems for the rest of the world, and therefore requires a serious policy response. ............... “The rest of the world” for this discussion mostly means the United States and Europe, who are the key global economic players outside China. While other nations also have choices to make, only the US and the EU are big enough to influence China’s behavior. ........... I realize that offering serious policy advice to the current U.S. government is like preaching to baboons: You won’t get heard over the hooting, and even if they did hear, they wouldn’t understand. .............. how big that surplus is relative to the world economy. .......... China’s trade surplus in manufactured goods — exports of manufactures minus imports — is a larger share of world GDP than any country has ever captured in the past: ........... I don’t want to engage in crude mercantilism and portray China’s trade surplus as an unmitigated bad for the rest of the world. China isn’t “stealing” from other countries by selling more than it buys. If anything, China is subsidizing the rest of us by selling us goods cheaply. Also, because the balance of payments always balances, the counterpart of China selling more goods than it buys is China purchasing more overseas assets than it sells. In practice China buys an enormous quantity of U.S. Treasury bills and other safe assets that pay low interest rates — and helps keep those rates low. ..............

China is like a store that offers merchandise at highly discounted prices and also offers buy-now-pay-later plans with low financing charges. In effect, China is subsidizing the rest of us.

.................. China’s surging exports are economically and socially disruptive. The “China shock” caused by the rapid growth of Chinese exports between the late 1990s and around 2010 eliminated well over a million jobs in the United States, with job losses concentrated in a relatively limited number of communities. ................ In terms of overall US employment, these job losses were offset by job gains in industries not in the path of the Chinese export surge, such as in healthcare. But most of the workers and communities displaced by the China Shock were not able to take advantage of these new opportunities. So while overall U.S. employment and economic growth do not appear to have suffered from Chinese competition, significant numbers of workers and their communities did. .................. The second reason that China’s enormous trade surplus is harmful to its trading partners rests on an old argument against completely free trade — the importance of retaining domestic capacity in industries crucial to national security. This concern has much more force now than it did, say, 30 years ago. As Abraham Newman and Henry Farrell have argued, we are living in an age of “weaponized interdependence,” in which governments that have control over economic “chokepoints” — crucial nodes in the world production system — can and do use that control to throttle, or threaten to throttle, geopolitical rivals. .................... After winning the Cold War, the United States controlled most of these chokepoints. And until Trump II, the U.S. exercised restraint, mostly respecting international agreements and the rule of law. As a result, the targets of weaponized interdependence tended to be rogue states like Iran. ............. Today, under Trump II, America is looking more and more like a rogue state itself. .............. massive Chinese trade surpluses threaten to give the Chinese government control of multiple chokepoints. And China is an authoritarian state that can’t be expected to refrain from weaponizing the rest of the world’s dependence on its exports. .................. China recently used its dominance of rare earth production and especially rare earth processing to put the screws on the United States, Japan and the EU amid trade disputes. In a recent dispute between the Dutch government and China over unauthorized technology transfer, China threatened to disrupt the entire EU automotive industry by withholding critical supplies of semiconductor chips. So it’s entirely reasonable to harbor concerns over allowing China to acquire leverage over chokepoints in the global economy. ...................... there is the risk that China will lock in a long-term advantage in the industries of the future. ............... U.S. leadership over Europe in information technology. ........... that dominance overwhelmingly arises from high-tech clusters in the Bay Area and Seattle, where an early lead has created a self-reinforcing “ecology” of skilled workers and specialized suppliers that makes it very hard for Europe to break in. ............... China already appears headed for a similar lock on a number of industries, such as solar panels and electric cars, and other industries will follow if massive trade surpluses continue. .............. For example, can we be sure that China won’t embed monitoring capabilities in its information technology – a risk that has been associated with Huawei? ................
There’s a widespread perception that economists have nothing to say about globalization other than “Yay free trade!” In reality, while economists do often act as cheerleaders for free trade, they have also devoted considerable attention to the conditions under which policy should deviate from pure free trade. Equally important, when those conditions are met, economics has a lot to say about how policy should deviate from free trade.
......................... The case for free trade is the same as the general case for letting markets work. If importing a good is cheaper than producing it domestically, then limiting imports and/or subsidizing domestic production is usually a misallocation of resources. That is, those resources could have been used more productively making goods for the domestic market or for export, instead of competing with lower-priced imports. Consequently, government policy shouldn’t try to overrule the market by supporting domestic production against imports unless an industry satisfies a key condition: that maintaining domestic production generates sufficient benefits that aren’t taken into account by markets. If that condition is met, the government should engage in an industrial policy to support that industry. ....................... the European digital industry was never able to successfully compete with Silicon Valley because it started too late and the EU never engaged in policies to shelter it from American competition. ................. The bottom line is that free trade isn’t an inviolable principle. There are good reasons to intervene to in order to protect some industries from the effects of foreign, and especially Chinese, competition. ............ If the goal is to aid an industry, tariffs are almost always the wrong policy tool. Subsidies are almost always a better choice. ............. subsidies — possibly targeted subsidies that, say, promote employment — are almost always a better policy than tariffs. For while tariff protection may help a domestic industry facing import competition, it also raises prices for consumers. Furthermore, if the targeted imports are “intermediate goods” — inputs into the production process, like steel – tariffs will raise the cost of production for the final good. Hence Trump’s tariffs on steel imports have raised the cost of domestic production of autos. .............. Approximately half of U.S. imports are intermediate goods, some of which — like steel and many products made from copper — now face high tariffs. The way these tariffs have raised production costs is one of the reasons manufacturing employment, which Trump’s tariffs were supposed to boost, has steadily declined since last spring. ............. Subsidies, which don’t raise prices, avoid this kind of collateral damage. If you say that subsidies to preserve an industry would cost too much, you’re really saying that the industry isn’t worth saving. Why? Because a tariff actually costs morethan a subsidy that achieves the same results, once you take the adverse effects on consumers and downstream industries into account. ................. A necessary condition for supporting an industry is that it be an example of at least one of the three basic reasons I gave that China’s burgeoning surplus is a problem. That is, it must be an industry in which a rapid decline would be strongly disruptive to workers; or an industry where retaining a strong domestic presence is crucial for national security; or an industry that may be key to the economic future.