Three times tariffs or other trade strategies worked
By Chris Macke
President Donald Trump’s plan to impose stiff tariffs on Chinese imports has drawn cheers in some circles and jeers in others.
But are tariffs the grand solution to our trade deficit with China, as the president insists, or are they a looming debacle that will lead to a trade war, as critics predict?
Sometimes answers aren’t found at the extremes. People say that tariffs are really good or they say that they are really bad. Actually, they are a mix of good and bad. But ultimately, tariffs are widely used by countries around the globe because they work.
It’s understandable that Trump might try them considering that the U.S. trade policy has experienced more than four decades on the negative side of net exports of goods and services. In 2017, the country’s net exports totaled a negative $571 billion.
The question isn’t whether something needs to change but what needs to change and how.
All countries are protectionist. All of them try to gain a trading advantage, and we are naïve if we think their goal is free trade. They want trade agreements that benefit them. If every country could, they would have the most unfair trade agreement that benefits them.
Here are just three examples of how tariffs or other efforts to gain a trading advantage have played out.
China’s own tariffs
China places a 25 percent tariff on imported cars while the U.S. has a 2.5 percent tariff. How has that worked out for each country? China is the world’s No. 1 producer of cars, producing more than 24 million in 2016, which is one-third the world’s production. In the U.S., we have gone in the opposite direction. Production declined by more than a third from just over six million units in 1996 to under four million units in 2016.
One lesson from history
In 1965, the U.S. implemented a 25 percent tariff on light trucks. What happened as a result of that? From 1965 to 2015, commercial vehicle production in the U.S. increased more than 450 percent while passenger car production declined by half during the same period.
Another approach
Tariffs aren’t the only trade tool that has proved effective. In 1981, President Ronald Reagan placed a quota on Japanese auto imports. As a result, those foreign automobiles became more homegrown. Today, Japanese manufacturers Toyota, Honda, and Nissan produce more than three million vehicles at plants they operate in the U.S. More than half of the vehicles they sell in the U.S. are produced right here.
Strategic tariffs and other trade tools, implemented gradually over time to allow manufacturers to reconfigure supply chains, can be part of an effective trade policy. When implemented too suddenly and aggressively, they’re more problematic.
The idea that tariffs and other trade tools are always losers is not supported by the facts. Just ask Chinese government officials if they think they are losing or winning in the production of cars.
Chris Macke is the founder of Solutionomics, a nonpartisan platform dedicated to developing and disseminating solutions for creating a more dynamic American economy. He has 25 years of experience in the financial services industry, including advising the U.S. Federal Reserve by providing market updates and counsel around the potential impact of monetary policies. Macke earned a bachelor’s degree in political science from the University of Southern California and an MBA from the Kelley School of Business at Indiana University.
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