There isn’t one.
Contrary to the prevailing narrative, the pain didn’t start when the United States imposed tariffs on our trading partners. The pain started much earlier. When, exactly, doesn’t necessarily matter, though we can focus on China’s accession to the World Trade Organization (WTO), its subsequent skirting of the rules, the WTO’s insistence on hamstringing the U.S. response, and our allies’ insouciance as long as the U.S. acted as the market of last resort. These actions led to unnatural offshoring of manufacturing in the Midwest, which delivered the 2016 election to Donald Trump.
Many critics glibly remark that we know tariffs don’t work because Smoot-Hawley and Ricardo and other stuff from freshman economics. We’ve already thanked Doug Irwin for debunking the argument that Smoot-Hawley caused the beggar-thy-neighbor policies that aggravated the Great Depression: that was – as with other memorable global crises – due to a banking failure, not a U.S. tariff bill. A propos of that: it turns out that even after the financial crisis banks remain as terrible at self-regulation as they were before it. But carry on unwinding Dodd-Frank.
- All markets are perfectly competitive.
- Good are homogeneous.
- There are no transportation costs.
- Labor is mobile within countries but not across them.
- There is full employment.
- Labor is the only factor of production.
Does this sound like the world you live in? Me either. Especially the last one, since, as the Economist has pointed out, globalization favors capital over labor. (As do massive corporate tax cuts that aren’t tied to investment or workers.) These arguments must seem out-of-touch, elitist even, to those who’ve lost their jobs, or had friends and relatives lose their jobs, because of import penetration – import penetration that economists underestimated.
So let’s move past the obsession with the argument that tariffs are always bad because that’s what a completely unrealistic economic model tells us.
That doesn’t mean tariffs are good. But we need to talk about the purpose of the tariffs currently in play, not just the tariffs themselves.
The goal of the tariffs isn’t premised on the nostalgic idea that we can rebuild the Midwest Rust Belt to look just as it did in the 50s. That’s a fundamental misunderstanding of the exercise.
The stated goal of the tariffs is to make sure the Chinese don’t siphon off the rest of our modern manufacturing. Aeronautics. Robotics. Advanced automotive manufacturing. Pharmaceuticals. Information technology. Because that’s what Made in China 2025 seeks to do. What jobs carcass will be left for us to pick over if China succeeds?
It’s not clear how the Administration plans to get there. The dueling talking points this spring by Secretary Mnuchin, who came back from China thinking there was a deal, and Ambassador Lighthizer, who didn’t, don’t inspire confidence that the Administration has a concrete vision of what kind of results it wants to see.
But the fact that the Administration doesn’t convey a unified message doesn’t mean they haven’t correctly diagnosed the problem. Make no mistake: removing the tariffs won’t end the pain.
Indeed, China’s industrial policy isn’t the only thing we should be worrying about. Signs abound that China is sitting on a big bubble. What happens first: Does China’s bubble burst, which is terrible for the American economy, or does China execute Made in China 2025, which is terrible for the American economy? There’s a reason national security types are concluding our supply chains are too dependent on the Chinese.
In that context, the fixation with tariffs on Chinese goods is the equivalent of fixating on deck chairs as the Titanic hurtles toward the iceberg. Let’s quit talking about the deck chairs to the exclusion of focusing on the iceberg. Even if tariffs turn out not to be the answer, it doesn’t follow that there wasn’t a serious problem to begin with.
The most concerning thing that’s happened on the trade front in the last six months isn’t the tariffs. It’s the President’s reversal of the sanctions on ZTE, and Congressional Republicans’ recent capitulation. The Chinese know we’re divided. It exposes our weakness. They’ll bank that we won’t be able to stay the course. And if so, the pain – past and present – will have been for naught. With more pain in the offing as our manufacturing capabilities continue to be drained offshore, following the well-worn path of steel and aluminum smelters, to name just two examples.
The Chinese are focused on 2025, and we’re focused on the next quarterly earnings call.