By John F. DiLeo -
For over a year, the American business community has been disrupted by the current trade war. First the new tariffs on steel and aluminum from most trading partners – but then most significantly, the broadly-assessed new tariffs on products of China arrived, and shook the world.
We’ve seen wave after wave of China duties, until reaching the point at which most products from China – that’s both finished goods and components for American manufacturing too – are now another 25% higher-priced than they used to be. (and incidentally, there’s no reason to assume that 25% is the maximum. With 5.5 years left in the Trump administration, it’s entirely possible that we should think of 25% as a floor, not a ceiling).
These duties do hurt. While part of the intention is to put pressure on Mainland China to change its behavior, these duties do most directly inflict pain on the American purchaser; he’s the one who pays the tariffs, after all. They raise costs to distributors, wholesalers and the retailers who resell Chinese products. And they make American-made products more expensive, because even most things genuinely manufactured here do include some Chinese components. The longer the Bill of Material an American product has, the more of its components are likely to come from China… and often, only from China.
As a result, while American businesses have been suffering, paying these new tariffs and working on long-term re-sourcing projects, many of us find ourselves thinking this is the worst trade war ever. We’re scared of a repeat of Smoot-Hawley and the other famously destructive tariff acts from the past; we fear that these duties will jeopardize the otherwise robust economic recovery that Trump policies have brought us. We fear that our exports will diminish as foreign markets dry up in retaliation.
But we forget the reasons behind this trade war. It’s easy to see these high costs, and forget the reasons they’re being applied, the alternatives available, and the cost of inaction that has made the administration determine that they’re necessary.
There are two general reasons that these China tariffs are being applied, though the administration has only focused on talking about the first one:
Trade Barriers and Limited Options
Lots of countries have trade barriers; this isn’t unusual. Traditionally, most countries have acted on their protectionist instincts by raising their tariffs, either generally or by targeting industries… but this changed in the 20th century, as the World Trade Organization (WTO) and other efforts have pushed countries to lower their general duty rates across the board, removing high duty rates as an outlet for protectionist inclinations.
But WTO membership could never change countries’ instincts; it just redirected them into other applications.
If a protectionist country has to remove its high duty barriers, then it just finds another way to block imports.
- Brazil, for example, is notorious for making import clearance difficult, blowing documentation inconsistencies out of proportion; if your bill of lading says “10 cartons on 2 pallets” and your invoice says “2 skids s.t.c. 10 boxes,” Brazil will call that a discrepancy and hold up clearance for weeks. Eventually, importers decide to just buy locally.
- India is similarly protectionist, but their main approach is to have a vigorous post-importation audit process, digging deep into importers’ valuation calculations and similar Customs technicalities, often causing huge legal bills that discourage importing.
- Japan, Brazil, and sometimes others too now demand that foreign vendors declare the actual manufactures of parts or products they didn’t make themselves. By being forced to reveal their sources, this discourages foreign sellers from sales efforts in those destination markets in the first place, out of a reasonable fear that the importer will cut out the middleman next time.
The WTO has no way of punishing or discouraging such approaches.
So yes, there are other trade barriers besides tariffs, some much worse… and China is notorious for piling on many of them. For example:
- China requires that foreigners who seek to establish plants in China must have joint ventures with a Chinese-government-connected partner, essentially making Beijing the silent partner in every single business in the country.
- China subsidizes numerous industries to a level that the rest of the world defines as illegal predatory dumping.
- China has long refused to respect other countries’ patents, trademarks, or other intellectual property.
- China even sets complex approval processes so that American-co-owned plants in China have trouble moving plant machinery from their other factories into China; their used-equipment approval process is designed to ensure that most plants in China will unexpectedly have to buy new local Chinese-made machinery, often killing the savings projections that justified the outsourcing to China in the first place.
And that’s just the tip of the iceberg. So the Trump Administration has been negotiating with China to achieve some relaxations in these and other trade barriers; the duties are the cudgel that will hopefully drive at least some success in this effort.
But there’s another big reason for this battle, completely separate from the trade barriers:
Over the past 40 years or so, as American business schools have churned out millions of believers in the “lowest piece-price sourcing at all costs” model of procurement, we have seen more and more of our products – not just finished products, but critical parts as well – move production from the USA to other countries, primarily Mainland China. It’s shocking how dependent our supply chain is on that one country.
Now, if China were our best friend – if we were this dependent on allies like Canada or Australia or England – then this dependence might not be so dangerous.
But China is not our best friend. The third rail of American foreign policy has long been the fact that China is on a war footing, and is moving to become the dominant country in the Pacific, if not the world. They have gradually grown the largest conventional military on earth, to go along with their huge nuclear arsenal… and their saber-rattling has never abated. It doesn’t make the news in the USA, but it’s well known on the other side of the Pacific, where news coverage is more comprehensive. They aren’t satisfied to just fully subsume the former western colonies of Macau and Hong Kong; the Chinese politburo intends to eventually take over Taiwan R.O.C. and as much of Asia and Oceana as possible. Not today, maybe not tomorrow, but someday. Beijing plays the long game, and America rarely thinks past the next election, or even past the afternoon’s closing bell on Wall Street.
So, the Trump administration arrived in office and faced two choices: either allow these issues to continue to fester unaddressed, as past administrations of both parties have done for decades… or address them at last.
For the first time, the United States has an administration that recognizes that American business is largely dependent – if not for complete products, then for critical components of many products that we think of as American-made – dependent on vendors located in a hostile country with which we will almost certainly be at war at some point in the future.
This fact – not theory, not fear, but fact – is an unprecedented risk to the American way of life.
Consider: when WWI and WWII broke out, we suddenly lost access to trade with numerous countries, but we were not at that time dependent on those countries in any way. If we couldn’t buy cars, wine, beer, or clothes from Germany or Japan, we could buy them locally or from other allies. And we could ramp up domestic manufacturing to make up for the loss.
Today, by contrast, if we suddenly lost access to our Chinese vendors, because China annexed Taiwan or took some other unacceptable act of war, we would not be able to ramp up domestic manufacturing. By contrast, much of American manufacturing, to everyone’s shock, would shut down. We would find, in no time flat, that almost everything we make depends on parts that we can no longer obtain, parts that we’ve forgotten how to manufacture, parts dependent on machinery, molds and talent that we’ve long since driven abroad.
The Trump administration’s tariffs are forcing American manufacturers to look themselves in the mirror and recognize their long-term error in allowing themselves to become so terribly dependent on a sole source.
But… the reader asks… But for those of us libertarians who detest tariffs on principle, didn’t the administration have other options to consider?
Well, yes, it did. So, let’s look at them too:
Quotas: The administration could set import quotas, a practice popular for generations, until we started reducing our dependence on this tactic in the 1980s. When a government limits the number of products allowed in, it raises their cost and causes fighting – and sometimes risk of antitrust violations – among the purchasers. It generally reduces the amount of those products available, almost immediately. Imposing such quotas would quickly force people to establish other suppliers, but it would also create immediate shortages and manufacturing shutdowns. As painful as tariffs are, import quotas are worse.
Sanctions: The administration could use the Export Controls to issue sanctions, either against specific foreign entities, product classes, or even the entire country of China. Sanctions are absolute, and while individual licenses are sometimes allowed, as a general rule, the door is absolutely closed the day they are implemented. Such sanctions would certainly be a wakeup call, but they would instantly shut down American manufacturing. Yes, we have let ourselves become that dependent on Chinese components.
War: Yes, in the end, if absolutely necessary, we could go to war. That’s another way to deal with trade issues, and it’s far from unprecedented. The American Revolution, after all, grew primarily from a trade dispute; King George III and his Parliament restrained our trade and inflicted crippling tariffs on our imports and exports until we went to war and declared our independence. Trade prompted the Barbary wars of the Jefferson administration as well. But this is certainly not the route we would want to take today. In fact, one of the key reasons we need to deal with our dependence on China is the fact that we fear that an undesired war is coming, and we want to be in a safer position when that regrettable time eventually arrives.
As we see, tariffs are far from the worst tool that a presidential administration has to apply. As painful as these tariffs of ten, twenty-five, or more percent may be, at least they don’t limit the importers’ access to needed parts while undergoing their re-sourcing efforts. And they’re a lot less painful, costly, and destructive than quotas, sanctions, or war would be.
Even if China eventually grows more peaceful and the war risk is reduced – if our prayers are answered – our government must address the very real risk we have today. We must admit to ourselves that, as painful as these tariffs are, they are the least painful of the available options.
Of course, the administration can’t quite put it that way out loud. It wouldn’t be diplomatic.
But this problem began in the 1970s, when the USA started trading with China… in fact, one could argue, it began in the 1940s, when Chairman Mao took over the country. Just like many other problems, the Trump administration inherited this powder keg, it didn’t create it.
But no matter when we decide to assign the starting point of this problem, the important thing is where we are now. We finally have an administration doing something to address the issue instead of continuing to sweep it under the rug, as our risks continue, year after year, to grow, and grow, and grow.
And grow.
Copyright 2019 John F. Di Leo
John F. Di Leo is a Chicagoland-based trade compliance trainer and Customs broker, actor and writer. His columns are regularly found at Illinois Review.
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