Many people generally believe that tariffs are detrimental to trade, and in some cases, this is indeed true, but it is not an absolute truth.
Before delving into a detailed discussion, it is necessary to briefly review the historical background of tariffs.
Simply put, tariffs are taxes imposed on foreign businesses when selling goods to target markets (such as China or the United States). The usual result is that foreign goods become more expensive because tariffs directly increase the prices of goods through “market access taxes”.
The impact of tariffs on prices will have a chain reaction throughout the economy. When the prices of goods rise, the prices of other goods and services will also increase, as the costs of tariffs are shifted from manufacturers to importers, distributors, wholesalers, retailers, and resellers, ultimately passed on to consumers.
Tariffs are usually aimed at protecting domestic producers from the impact of foreign competitors with lower labor costs, government subsidies, economies of scale, among other advantages. With foreign competitors raising prices, domestic producers often raise their prices to gain more profit. For most goods, price increases usually lead to a decrease in overall consumption.
In the late 1980s and throughout the 1990s, China did not have producers of goods needed by developed countries. China did not produce cars, furniture, computers, electronics, etc., so there was no need to protect non-existent domestic producers. At the same time, labor costs in developed countries were generally higher by global standards, and China had a large pool of cheap labor, providing foreign enterprises with tremendous profit margins.
Even so, China still imposed tariffs for several valid reasons.
Due to extreme poverty brought about by a planned economy, China opened its vast labor market to developed countries in exchange for technology, expertise, and direct investment. Before cheap labor and manufacturing industries had fully played their roles, China levied tariffs in advance to quickly gain profits, accumulating the foreign exchange it urgently needed.
Essentially, foreign enterprises paid a fee in advance to participate in the development of China, anticipating the future production of goods in China at costs much lower than in their home countries, and selling products to the vast Chinese market after an increase in the income levels of the Chinese. At the same time, tariffs on capital goods and products entering China allowed the Communist Party to immediately gain significant revenue with minimal effort.
The logic behind this is similar to the Marshall Plan for the reconstruction of Europe after World War II. American manufacturers were unable to sell goods to war-torn Europe, and Europe needed to rebuild to re-engage in the global economy. Foreign enterprises saw China as a business opportunity not to be missed.
As a result, China’s transformation from isolation to becoming the center of world manufacturing has fundamentally altered the global economic landscape.
For decades, a large influx of foreign capital into China in the form of tariffs and direct investments has driven China’s economic development, while also draining the economies of Western countries. These factors have raised the income levels of hundreds of millions of people, laying the foundation for China’s industrial, technological, and supply chain infrastructure today. Throughout this period, tariffs in China have remained in place.
The Communist Party also imposes tariffs through non-traditional trade policies, requiring foreign enterprises to share intellectual property, design plans, and even equity with Chinese companies (many of which were state-owned and later became state-owned).
The Communist Party’s theft of intellectual property, forced technology transfer, and other destructive hostile actions are arguably the worst tariff means in history, squeezing foreign enterprises of their technology, design, craftsmanship, intellectual property, and capital, often forcing these companies to withdraw from the Chinese market or even shut down.
In other words, the way the Communist Party treats the rest of the world is no different from how it treats its own people, only with even more lucrative returns.
Have China’s trade partners made money? Over the years, they certainly have. However, these trade partners, especially the United States and Europe, have lost a large manufacturing base, jobs, and domestic supply chains in the process of shifting their businesses to China to leverage cheap labor.
On the other hand, it is only through cooperation with the world’s wealthiest and most innovative enterprises and countries and by stealing their wealth, talent, knowledge, and technology at any possible time and place that has created the China we see today.
Now, the United States is imposing high tariffs on its trade partners (including China, Europe, and many other countries), disrupting the global trade landscape. However, this action is not isolated. Just from a few key factors, it is clear that tariff policies are fundamentally different from the traditional negative image often portrayed by some economists.
For example, due to the aforementioned reasons, coupled with lower labor costs in countries like India, Thailand, and Mexico, global companies are withdrawing from China en masse.
In addition, although high tariffs may seem clumsy, they have successfully shattered the existing perceptions of the US trade policy in the global economic sphere. The viewpoint that tariffs will inevitably harm free trade completely overlooks the differences in economies, subsidy levels, trade tactics of counterparts, and other unequal factors.
The Trump administration is providing clear choices for countries and companies. Either they pay high tariffs to export products to the US market or they build factories and invest in the US to avoid tariff payments. With new trade and investment agreements worth $70 billion to $210 billion signed between the US and Europe, Japan, the Middle East, and other trade partners, the tariff strategy appears to be working.
Several factors support this strategy: with the US accounting for over 30% of global demand, having the most active financial markets, the most transparent and efficient legal system, and the most business-friendly regulatory environment among developed countries.
Increasingly, tariffs are seen as a means for the US to exert pressure on its trade partners, while trade agreements and direct investments are incentives that benefit both the US economy and trade partners. In short, the tariff strategy of the Trump administration aims to leverage the US as the world’s largest economy and the best market, redirecting trade and investment back to the US, creating more job opportunities, increasing demand for US labor, and ultimately bringing more wealth and innovation.
This approach is more mutually beneficial for trade partners than the imbalanced trade relationships with China in the past few decades.
The author, James R. Gorrie, is the author of “The China Crisis” (2013) and discusses current affairs and China issues on his YouTube podcast TheBananaRepublican.com.
(source: Epoch Times)