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An ill-advised decision on Chinese tariffs

An ill-advised decision on Chinese tariffs

 


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Six months before the presidential election, Joe Biden showed this week that he was ready to put the long-time champion of American free trade back into play in order to prevent Donald Trump from returning to the White House. On Tuesday, his administration launched a series of protectionist measures, designed to woo blue-collar workers and support America's industrial base. This included a quadrupling of the tariff rate on Chinese electric vehicle imports, a doubling of the tax on solar cells and a tripling of fees on Chinese lithium-ion batteries for electric vehicles. At this point, no political gain is clear. But for America and the world, it will likely do more harm than good.

The $18 billion in additional tariffs imposed by Biden on Chinese goods comes on top of the $300 billion imposed under Trump. The new 100 percent levy on electric vehicles is more abominable than biting, since the United States only imports 2 percent of them from China. But the tariffs will increase costs for battery makers, who are already struggling with expenses. Other manufacturers will be penalized by higher production costs. In the long term, rising tariffs insulate U.S. industry from competition, hampering innovation and increasing costs for consumers. This is before considering retaliation from China, which dominates supply chains essential to the American economy.

Bar chart of US import share by value and source for the first quarter of 2024, showing that Biden's Section 301 tariffs will hit batteries hardest.

The administration reportedly argues that heavily subsidized Chinese exports pose a threat to its efforts to expand U.S.-made green and strategic technologies under its Inflation Reduction Act and Chip Act. . There is some logic to this, but flat rates are not the answer.

First, investments under the IRA and the Bidens Chip Act, which aim to boost US semiconductor production, are also limited by skills shortages, lengthy permitting procedures and political uncertainty . Second, global supply chains are notoriously agile. After earlier U.S. efforts to block cheap solar panels, some Chinese companies began rerouting signs through Southeast Asia. This raises the question of how well America enforces the rules for transshipped and lightly processed Chinese products from third countries.

Unfortunately, political logic can also push Washington to impose even more tariffs: Trump has already said that he would put a 200 percent levy on Chinese automobiles produced in Mexico. Biden's move puts pressure on Europe to also follow suit, lest it face a flood of redirected Chinese products. This threatens to spread the evils of tariffs more and more widely.

These measures deal a major blow to the green transition at home and potentially abroad. With households already facing the high cost of living, the falling prices of electric vehicles and solar panels now appear to be a missed opportunity.

As for concerns about unfair trade and national security risks, Biden could have put conditions on his actions. Beijing has implemented a series of protectionist measures to tilt trade in its favor. But it appears nothing has been asked of China to comply that would result in lower tariffs. Biden's catch-all approach risks turning a pragmatic policy of risk reduction into a dangerous policy of decoupling.

But it's mostly about optics. Biden's approval ratings, particularly confidence in his handling of the economy, are falling. The tariffs are aimed at appeasing voters in industrial heartlands, including Pennsylvania and Michigan, two swing states. These measures risk transforming the electoral campaign into a war of one-upmanship against Chinese warmongering, which Trump has adopted. Biden's wave of support for manufacturing, however, could rally support from uncertain voters and help him preempt a second Trump presidency that some say could be more capricious than the first. However, it is regrettable that global growth and progress on climate change are being held hostage in this process.

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