Removing China Tariffs Won’t Fix Inflation

Removing China Tariffs Won’t Fix Inflation

While the Biden administration is trying to find solutions, the question remains: should the tariffs stay?

The Outlook for the Chinese Regime

A major factor determining the degree of risks above is what China will be. In other words, if China remains a status quo power under the current order, the United States should be less concerned. China has made tremendous economic progress since Deng Xiaoping’s opening policy. Unfortunately, its one-party political system that demands total control of society has not changed, nor will it any time soon. Losing power will be disastrous for the party leaders.

Faced with such persistent political insecurity, the party strangles most of the elements of freedom and democracy, as seen especially in Xi Jinping’s era. It even began to reverse some economic freedoms. The Chinese military is rapidly expanding and has been reported to target the United States as the opposing force. China has no doubt of its determination to unify Taiwan and its inherent support for Russia is noticeable during the invasion.

Scholars have argued that China has a grand strategy: it has revisionist ambitions based on problems with the current liberal order and long plans to displace the America-led order. This is consistent with theories though. The realist theory of international relations, popular in China, asserts that the insecure international system encourages states to strike a balance against perceived threats. It is not uncommon for great powers to become aggressive in pursuit of dominance and power. According to the theory of authoritarianism, autocracies tend to be more aggressive than democracies and seek to eliminate internal and external threats. The liberal international order that emphasizes liberal norms is among the external threats that make the regime nervous.

Core Interests and Grand Strategy

While the administration emphasizes “competitive coexistence” with China, President Joe Biden warned in last year’s Summit for Democracy that “democracy was under threat around the world.” As has been the case in Myanmar, Afghanistan, Russia, Kazakhstan, Belarus, China, Vietnam, and many other developing countries, an authoritarian bloc is on the rise. A primary national interest and goal of the U.S. grand strategy, which pursues its core interests through concerted means, is to defend the postwar liberal international order. In a world where authoritarianism is advancing, we especially need a prosperous, democratic free world to show the world the way. This will also make the United States and its allies safer. After all, the United States has spent trillions in Iraq and Afghanistan, sent billions to defend Ukraine, and spends $800 billion a year on defense, part of the purpose of which is to bolster the order.

Hirschman also points out that trade is a form of influence. The United States is finding it increasingly difficult to persuade others, including many of its allies, as China becomes the largest trade partner with many of them. Chinese trade and investments dwarf the limited U.S. aid to the vast developing world. China is aware of this influence: it is leading the largest regional trade bloc, the Regional Comprehensive Economic Partnership, and wants to be a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an agreement the United States backed out of several years ago. Only selling democracy and security is hard.

What Can Be Done?

There is still leverage for the United States, however. If only half of its $600 billion in Chinese imports were to gradually redirect to India, Southeast Asian nations, Latin American countries, and Ukraine, it will be able to exert huge influence and bolster the economy of democracies. As these countries mostly produce lower value-added goods, the impact of economic efficiency can be minimized. As a result, U.S. firms will regain fair competition, which in turn benefits the domestic socioeconomic shape. Moreover, if more end products such as iPhones are assembled in India and Mexico, suppliers like Japan, Korea, and Taiwan also trade less with China.

Tariffs are an initial and important strategic step in this direction. Later, the United States may consider so-called “good governance” tariffs together with its allies, much like a carbon tariff. If the world enters a struggle between democracy and authoritarianism, deeper dependence on China presents severe security risks and undermines the liberal order. Partial deglobalization may be inevitable as driven by domestic factors and international pressure. Tariffs may not be suboptimal as people think; once removed, they are unlikely to be reinstated politically. The Indo-Pacific Economic Framework or the CPTPP could serve as a useful platform which, however, needs to include a provision on market access. Nevertheless, the United States should continue to cooperate with China on global issues like climate change and public health.

At the moment, inflation hurts. Taking tariffs off the table won’t help much. In some cases, such as for urgent medical equipment or drugs, the president may grant tariff exemptions. In an article, economist Lawrence Summers mentions that 1.3 percent of the consumer price index decrease means an $800 paycheck per household annually. But there is a better way. The $100 billion tax revenue from tariffs is about $800 per household as well if the Department of the Treasury redistributes it to American households. Better yet, it can disproportionally deliver more to low-income homes for pain relief.

George Yean is attending the Department of Government at Harvard University, pursuing a Ph.D. degree. He was trained in economics, political science, and engineering, and spent years working for high-tech companies such as Cisco. He can be reached at [email protected].

Image: Reuters.