Saturday, May 18, 2024

Experts React: Energy and Trade Implications of Tariffs on Chinese Imports

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The Clash of Systems Continues

Scott Kennedy, Senior Adviser and Trustee Chair in Chinese Business and Economics

If the other side won’t even admit that there’s a problem, what is one to do?

That is the position Biden administration officials find themselves in. China has continuously claimed that its economy operates according to market principles and that any restrictions against China are unjustified protectionism. In the past few months, as the European Commission, the United States, and others have expressed deep worries about Chinese overcapacity and surges in exports, Beijing has asserted that overcapacity is a figment of everyone’s imagination and meant to serve the West’s goal of keeping China from successfully developing its economy.

Earlier this spring, Chinese officials in discussions with the author emphasized that if there is a problem, it is not with China but with a global economic downturn, which has depressed demand. Moreover, given the long-term forecasts for green technologies and current challenges with inflation, the world, in fact, should welcome growing Chinese production of inexpensive, quality EVs, solar panels, and other goods, rather than attacking them as a threat. They suggested that if the United States and others had a beef with Chinese practices, they should go to the World Trade Organization (WTO). Predictably, given that WTO cases can take several years to reach a decision and that the Appellate Body is defunct, that is not the course the Biden administration or other jurisdictions have taken.

The Biden administration’s actions share many similarities with those of the Trump administration. They have left in place the original tariffs (along with the exclusions), and although they routinely criticize the Trump tariffs as being ineffective, the Office of the U.S. Trade Representative’s (USTR) May 14 report defends the original tariffs against outside scholarly studies that found they either harmed the U.S. economy or brought little benefit. At the same time, the new announcement is consistent with the administration’s “small yard, high fence” strategy. The new tariffs are targeted at a small number of products, which together account for $18 billion in 2023, or only 4.2 percent of all of U.S. imports from China. They are part of a broader swath of both defensive measures (such as export controls, investment screening, and data security) and offensive investments in these same technologies. Moreover, the administration also is attempting to coordinate its policy steps with those of like-minded countries in Europe, Asia, and elsewhere.

The administration’s actions are geared toward responding to the broader challenge of China’s state-driven economic governance model as opposed to imposing tariffs in response to identifiable injuries that American firms or the U.S. economy have already suffered. The United States already imports substantial amounts of Chinese solar cells, EV batteries, critical minerals, and medical supplies, but it still imports very few Chinese EVs—only 12,362 in 2023, of which about 10,000 were from a single firm, Polestar. And concerns about legacy chips are heavily based on recent Chinese investments for new fabs which have yet to come online. The U.S. government is concerned about unfair trade practices, but it also simply wants to the United States to be less dependent on Chinese high-tech products.

China’s initial response, predictably, was to criticize the new tariffs. The Ministry of Commerce said that “China will take resolute measures to defend its rights and interests.” If proportionate, these measures would penalize roughly $6.2 billion of its $148 billion in U.S. imports. Regardless of any specific retaliation, today’s move likely just reinforces China’s aim to gain greater technology self-reliance and reduce dependence on the United States, and at the same time try to attract support from countries in Europe, East Asia, and the Global South.

Whether today’s actions will be remembered as part of a smart and careful strategy to protect the United States and the market-based world economy or as a politically motivated protectionist gambit that further leads to the unraveling of the global economy remains to be seen. Much will depend on how the United States, China, and others act—at home and abroad—in the coming weeks and months.

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