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A misguided move on Chinese tariffs

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With six months to go until the presidential election, Joe Biden showed this week that he is willing to put America’s longstanding championship of free trade further on the line in order to prevent Donald Trump from returning to the White House. On Tuesday, his administration unleashed a series of protectionist measures, designed to court blue-collar workers and nurture America’s industrial base. This included a quadrupling of the tariff rate on Chinese electric vehicle imports, doubling the levy on solar cells and more than tripling the fee on Chinese lithium-ion EV batteries. At this stage, any political gains are unclear. But for America and the world, it will probably do more harm than good.

Biden’s $18bn of additional trade tariffs on Chinese goods builds on the $300bn slapped down under Trump. The new 100 per cent levy on EVs carries more bark than bite, since the US imports just 2 per cent from China. But the tariffs will raise costs for battery makers, which are already struggling with expenses. Other manufacturers will be pinched by higher input costs. In the long-run, the tariff ratchet insulates American industry from competition, stymying innovation and raising costs for consumers. That is before considering any retaliation from China, which dominates supply chains essential to America’s economy.

Bar chart of Share of US imports by value and source for Q1 2024 showing Biden Section 301 tariffs will hit batteries hardest

The administration would argue that heavily subsidised Chinese exports are a threat to its efforts to nurture US-made green and strategic technologies, under its Inflation Reduction Act and Chips Act. There is a certain logic to that, but lumping on tariffs is not the answer.

First, investments under the IRA and Biden’s Chip Act, which seek to boost American semiconductor production, are also throttled by skills shortages, lengthy permitting processes and political uncertainty. Second, global supply chains are notoriously nimble. After earlier US efforts to block cheap solar panels, some Chinese firms began rerouting panels via south-east Asia. This raises the question of how well America enforces rules for transshipped and lightly processed Chinese goods from third countries.

The political logic may also, unfortunately, drive Washington towards even more tariffs: Trump has already said he would put a 200 per cent levy on Chinese automotives produced in Mexico. Biden’s move pressures Europe to follow suit too, lest it face a flood of redirected Chinese products. This threatens to spread the ills of tariffs farther and wider.

The measures are a blow to the green transition at home and potentially abroad. With households already pressed by the high cost of living, lower prices for EVs and solar panels now look like a missed opportunity.

As for concerns over unfair trade and any national security risks, Biden could have laid out conditions for his actions. Beijing has pursued a cocktail of protectionist measures to tilt trade in its favour. But it seems there is nothing China has been called to do to comply that would produce a lowering of tariffs. Biden’s catch-all approach risks turning a pragmatic policy of de-risking into a dangerous one of decoupling.

But this is mostly about optics. Biden’s approval ratings, particularly faith in his handling of the economy, are slipping. The tariffs are targeted at appeasing voters in industrial heartlands, including Pennsylvania and Michigan — both swing states. The measures risk turning the election campaign into a bidding war on China hawkishness, which Trump has made his own. Biden’s flurry of support for manufacturing could, however, rally support from uncertain voters and help him edge out a second Trump presidency that some say could be more capricious than the first. Even so, it is regrettable that global growth and progress on climate change has to be held hostage in the process.

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2024-05-17 16:38:14

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