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It’s Time to End the Trump-Biden Trade War with China
There’s a better path for U.S.-China trade.
LATE LAST MONTH, Commerce Secretary Gina Raimondo flew to Beijing in an attempt to thaw chilly relations between the world’s two largest economies. She arrived at a time of growing uncertainty about the future of China’s economy and by extension the global economy. The visit was a reminder of just how off-track U.S. economic policy toward China has been since the end of the Obama administration—and provides an opportunity for a reset.
Five years ago this summer, the Trump administration first imposed tariffs on Chinese goods. This act officially began a United States-China conflict that was subsequently embraced by President Biden. The clash has dramatically expanded in both scope and magnitude, and shows signs of growing worse in the months ahead.
Contrary to President Trump’s famous March 2018 Twitter assertion, trade wars have not, in fact, proven “good, and easy to win.” Certainly this one hasn’t. Yet, while the Chinese Communist Party shoulders much of the blame for the shoddy state of U.S.-China relations, U.S. policy is also at fault, weakening our nation at home and abroad while failing to influence Chinese government behavior.
A change of course is sorely needed.
THE TRUMP-BIDEN APPROACH to China is not entirely wrongheaded. After a decades-long economic reform agenda in China that lifted hundreds of millions of people out of grinding poverty by centering on property rights, privatization, and market liberalization, Chinese policy in the mid-2000s began to reverse on several fronts. By the mid-2010s, Chinese President Xi Jinping was accelerating this unfortunate regression—reembracing Maoist socialism and heavy-handed central planning, boosting subsidies and state-owned enterprises, cracking down on entrepreneurship and dissent, and fomenting international hostilities.
These and other actions raised serious concerns for the United States and its allies around the world and indeed demanded a strong U.S. government response.
The response that came, however, has been reflexively hawkish, economically illiterate, oftentimes incoherent, and woefully inadequate for the economic challenge that China presents. Fearing that China will inevitably become the world’s leading economy (and that the United States is in perpetual decline), U.S. policymakers have embraced indiscriminate tariffs, inbound and outbound investment restrictions, export controls, and domestic subsidies to favored industries. The collective impact of these actions easily exceeds $1 trillion.
Their results have been at best meager and at worst counterproductive.
Indeed, the New York Federal Reserve estimates the tariffs increased costs for average American households by about $830 per year, accounting for direct costs and efficiency losses. Meanwhile, Moody’s Analytics estimated as early as 2019 that the trade war had already cost about 300,000 American jobs.
Not only did the tariffs impose enormous costs on Americans, they also failed to change Beijing’s predatory behavior—and in some respects worsened it—while alienating allies that Washington needs to rally in defense of market-based democracy against twenty-first-century mercantilism.
FORTUNATELY, THERE IS a sound alternative to the current knee-jerk China hawkishness—one that recognizes the real challenges that China poses yet relies less on self-flagellation and beggar-thy-neighbor bellicosity and more on America’s traditional, proven strengths.
First, the United States should embrace unilateral tariff reform. Most obviously, the administration should immediately lift the Trump-Biden tariffs on imports from China, which cover goods wholly unrelated to national security, harm the U.S. economy, and fail to discipline China’s mercantilism, all while emboldening CCP hardliners. Other tariffs on industrial inputs, raw materials, and capital goods—which undermine both American manufacturers’ global competitiveness and relations with key allies—should also be lifted.
Policymakers should also reauthorize the Generalized System of Preferences (GSP), which cuts tariffs on products from more than 100 developing (non-China) countries, yet expired in 2020. Now that GSP’s tariff savings are gone, companies that relocated China-based manufacturing to GSP beneficiary countries like Indonesia, Thailand, and Cambodia are moving production back into China. Reauthorizing this program, which enjoys broad bipartisan support, would halt this troubling trend while boosting GSP countries’ economies and their relations with the United States.
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Second, U.S. policymakers should rediscover trade agreements, which can boost economic growth and extend U.S. soft power. As James C. Capretta and Stan Veuger recently noted in Foreign Policy, Washington’s newfound hostility to trade is deeply misguided. Given China’s ascendency in recent years, the strategic case for trade liberalization and strengthening alliances is stronger today that at any time in recent memory. In particular, the United States should join (or in a sense, rejoin) the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the agreement that arose after President Trump withdrew the United States from the Trans-Pacific Partnership. The CPTPP includes eleven Pacific Rim countries and will soon welcome the United Kingdom.
By eliminating trade barriers with key AsiaPac nations like Vietnam and Malaysia and by promulgating U.S.-backed disciplines on core issues (digital trade, industrial subsidies, state-owned enterprises, etc.), participation in the agreement would strengthen the United States’ economic and geopolitical positioning in a critical region heavily influenced by China’s gravitational pull. It also would serve as a platform for engaging with other countries that have expressed an interest in joining the CPTPP, with or without the United States.
Washington should also pursue other trade agreements, including by restarting talks with the European Union and Kenya. It has been more than a decade since the United States last inked a free trade deal—a record that stands in stark contrast to continued efforts by China and other nations to liberalize trade and investment on a preferential basis. Our absence from the arena has put U.S. farmers, companies, and diplomats at a major disadvantage.
Third, U.S. policymakers must find a way to break Congress’s current immigration impasse and expand the lawful entry of foreign nationals into the United States. High-tech industries like semiconductors—and by extension U.S. innovation leadership—depend on access to the smartest people in the world, regardless of the nation on their passport. And new research shows that past U.S. immigration restrictions have pushed these innovative firms offshore, including to China. Continued restrictions on immigration are, therefore, not only antithetical to American values and in conflict with reams of evidence on immigrants’ economic effects, but also risk undercutting an asymmetric advantage the United States has long held over China: the ability to attract and retain talented foreigners.
FINALLY, BOTH REPUBLICANS AND DEMOCRATS need to reevaluate their hostile relationship with “Big Tech” and affection for antitrust and other regulations that would throttle these companies’ U.S. businesses. According to a 2022 PricewaterhouseCoopers analysis, 63 of the top 100 global firms by market capitalization are American, including four of the top five (Apple, Microsoft, Amazon, and Alphabet). China, by contrast, ranked second in 2021, with only 11 of the top 100, including tech giants Tencent and Alibaba.
U.S. companies also hold a greater percentage of total market capitalization than Chinese firms across all sectors, but particularly in technology. Likewise, even at a time of layoffs in the tech sector, major tech firms are investing heavily in researching and developing the technologies at the forefront of U.S.-China technological tensions, like artificial intelligence. Google, Amazon, Microsoft, Apple, and Facebook collectively spend over $200 billion annually on R&D and nearly another $200 billion in capital expenditures. Microsoft is reportedly investing upwards of $10 billion in OpenAI. IBM and Google recently announced a $150 million joint effort between the University of Chicago and the University of Tokyo to accelerate the progress of quantum computing research. Kneecapping America’s most innovative and globally competitive technology firms by hitting them hard with costly new regulations or antitrust prosecutions will not only dim their R&D intensity, but also benefit heavily subsidized Chinese competitors.
In the years ahead, China will continue to present very real challenges for the United States and the world. But, as the last few years have shown, walling Americans off from the world and mimicking Beijing’s economic interventionism is exactly the wrong approach for policymakers concerned about China’s high-tech industrial policies and mercantilism.
Instead, policymakers should trust America’s historical strengths: openness to international trade and immigration and a devotion to dynamic, market-based innovation. Reembracing these policies will help ensure that America’s next fifty years can be as prosperous and harmonious as the last.
Clark Packard is a research fellow at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies. Scott Lincicome is vice president of general economics and the Herbert A. Stiefel Center for Trade Policy Studies.