Martin Feldstein explains the implications of the US imposing tariffs on Chinese imports.
The most frequent questions that I get when I speak to non-economists concern the tariffs that the United States is levying on imports from China.
Why is President Donald Trump’s administration doing this? Aren’t the tariffs a tax on the goods purchased by American consumers? Why does Trump think the US can “win” a trade war with China? How do the Chinese respond to the current tariffs and threats of more? And so on.
I usually start my answer by stressing that, like almost all economists, I oppose tariffs in general. I, too, prefer an environment in which governments do not interfere with imports and exports, and in which US firms can operate freely in foreign countries.
I acknowledge that we have an enormous trade deficit with the rest of the world (about $800 billion this year, or 4% of US GDP) and that our trade deficit with China is about half of that total (about $400 billion). But I always emphasize that our overall trade deficit reflects the fact that the US spends more than it produces, requiring us to obtain the difference through net imports.
It’s hard to know why the US is imposing tariffs, because the administration has not said clearly what it is trying to achieve in doing so. One reason for the ambiguity is that several senior officials are vying to influence America’s China trade policy: Treasury Secretary Steven Mnuchin, US Trade Representative Robert Lighthizer, White House Director of Trade and Manufacturing Policy Peter Navarro, and Commerce Secretary Wilbur Ross.
The US did file a complaint with the World Trade Organization earlier this year after an extensive investigation confirmed that the Chinese violate their WTO obligations by requiring foreign firms that do business in China to have a domestic partner and to transfer technology to that firm. But the US did not wait for a WTO ruling to confirm its claim and to authorize the imposition of tariffs as a penalty for China’s rules violation. Nor has the US said that it would end the tariffs if the Chinese rescinded their illegal technology-transfer requirement.
Chinese officials say their policy is clear: American firms can have access to the Chinese market only if they contribute their technology in return. But this policy is explicitly prohibited by the WTO and is not a policy that other countries pursue. And President Xi Jinping recently confirmed China’s approach by announcing that foreign companies could enter the automobile industry without such technology sharing.
When Mnuchin went to Beijing a few months ago to negotiate with the Chinese, he brought a long list of changes in Chinese economic policy that the US would like to see, including an end not only to the technology-transfer requirement, but also to Chinese government subsidies to various industries. The Chinese negotiators rejected Mnuchin’s list, arguing that it was too long and sought to change the nature of China’s economic policy.
Technology and imposing China Tariffs
I think policymakers should make it clear to the Chinese that the US would end its tariffs if the Chinese stopped stealing American firms’ technology. This would include the Chinese policy of requiring US firms to transfer technology to Chinese partners as a condition of doing business in China, as well as the Chinese practice of taking technology directly from US firms through cyber espionage and other illegal methods.
The Chinese government agreed to end government cyber theft of industrial technology when then-President Barack Obama met Chinese President Xi Jinping in 2013 and showed the evidence of such activity by the People’s Liberation Army. But that agreement didn’t cover theft by state-owned enterprises and private firms. Negotiations should cover all forms of technology theft.
Trump and other US officials think a tariff war with China can be won because China exports about four times more to the US than the US exports to China. The US can therefore impose a much larger burden on Chinese exporters than the Chinese can impose on US exporters. The Chinese economy is also much more dependent on exports than the US economy is.
The tariffs are indeed a tax on American consumers and firms that use Chinese products in their production processes. But the increase in prices that Americans pay for Chinese imports and the resulting loss of real income are very small. Annual imports from China total about $500 billion. If the US imposes a 25% across-the-board tariff, the rise in the cost to American buyers – assuming no change in the prices charged by Chinese exporters – would be $125 billion. With US national income exceeding $20 trillion, the increased cost would be a little more than 0.5% of total US spending. And, because Chinese exporters would probably reduce the prices of some of their products, the increased cost to American buyers would be less than $125 billion. Moreover, American buyers would shift some of their purchases to products produced by US firms or to imports from other countries, further lowering the net cost.
In short, the cost of the imposed tariffs is not large relative to the gain that would be achieved if the US succeeds in persuading China to stop illegally taking US firms’ technology. The White House should make it clear that this is the goal of US policy, and that the tariffs will be removed if and when the Chinese comply with their WTO obligations.