Opinion | History shows trade wars serve no significant purpose

By Augustus K. Yeung

Introduction

The United States has a tradition of imposing trade tariffs to address bilateral trade imbalance: Washington did that to Japan; and has been doing it to China since former US President Donald Trump assumed power.

This article examines the effectiveness of US trade restrictions from a historical point of view based on Japan's and China's current experience.

We employ the intellectual work of one US economist, Christopher Tang, a professor of supply chain management at the UCLA Anderson School of Management.

"Survey conducted in March revealed that 71 per cent of Americans continued to support the trade war against China that began in 2018. After four years, who is winning?" Asked Christopher Tang. ("When no one wins". South China Morning Post. Saturday, May 7, 2022)

Is it former president Donald Trump, who started the trade war against China by imposing an additional 25 per cent import tariff in 2018?

Is it current US President Joe Biden, who has so far refused to end the trade war?

Is it the American firms that have labelled their Chinese imports as coming from Mexico, which attracts no import tariff under the United States-Mexico-Canada Agreement? Is it some of the Chinese manufacturers who have dodged increased tariffs by changing the "country of origin"?

US and China are No Winners in this Trade War

This trade war has benefitted the consulting firms, law firms and shipping companies that are helping Chinese exporters and US importers find workarounds to avoid the increased tariffs.

The US trade war against China has proved to be futile at best and self-defeating at worse. The reality is that the US will continue to rely on products imported from China for now.

According to data from the US Census Bureau, the value of US imports of Chinese goods in January and February this year have returned to pre-pandemic levels – as has trade deficit, which grew by 14.5 per cent to reach US$355.3 billion last year.

"In short, US tariffs on Chinese imports are hurting American consumers directly and indirectly when US firms pass on the costs." Cried out Prof. Tang.

History Shows Tariffs Are Ineffective in Addressing Trade Imbalance

Most economists agree that tariffs are ineffective. But many US politicians have traditionally used tariffs as trade policy instruments to protect domestic industries and jobs, and to reduce trade deficits. Well before Trump, there was concern about Japanese firms displacing American companies through "unfair trade" in the 1980s.

The Ronald Reagan administration imposed a wide range of trade restrictions on Japan, including "voluntary export restraints" on Japanese cars that were equivalent to a 60 per cent import tariff. These trade restrictions proved to be ineffective--and the trade deficit with Japan continued to increase from 1980s to the 2000s.

History repeats itself: When China surpassed Japan to become the second-largest economy in 2010, the US shifted its target from Japan to China. As the trade war has dragged on, many US companies and Chinese manufacturers have used different strategies to reduce import tariffs on products of Chinese origin.

Some US firms have shifted just enough production away from China to countries such as Vietnam to be able to change the label from "made in China" to "made in Vietnam".

Other American firms have changed the location for their final assembly operations. Consider a Vietnamese factory that assembles solar cell and solar glass, imported from China, into solar panels. This final assembly operation may qualify as a "substantial transformation" so that the factory can declare Vietnam as the country of origin for these solar panels.

In this case, if an American firm imports these solar panels from this Vietnamese factory, it pays a tariff of 14.75 per cent, as opposed to duties of more than 200 per cent for direct Chinese imports.

US Firms can Reduce the Import Tariff by Leveraging the Nafta

US firms can reduce the import tariff further by importing products from a Mexican factory, by leveraging in the United States-Mexico-Canada Agreement, or the North American Free Trade Agreement (Nafta).

When the so-called substantial transformation step qualifies the import to change its country of origin from China, substantially reducing the tariff to be paid, that makes it a smart move for Chinese exporters and American importers to change their supply chain operations.

But this tariff avoidance and evasion also disadvantages other American firms, and some are fighting back. California-based solar module manufacturer Auxin Solar Inc, for example, has asked the US Commerce Department to investigate whether Chinese solar producers are circumventing import tariffs by illegally changing the country of origin to Vietnam and three other Southeast Asian countries.

Some American solar panel manufacturers are also pressing the US government to impose tariffs on solar cells and modules from Chinese companies operating out of Cambodia, Thailand, Vietnam and Malaysia.

The tariff game has forced companies to find workarounds, making global supply chains even more complex. At the same time, the US Customs and Border Protection's case-by-case determination of country of origin based on so-called substantial transformation has been criticized by some as subjective, inconsistent and opaque.

Conclusion

This excerpt has well-argued that US policies of imposing trade tariffs are ineffective weapons of coercion, a traditional and one-dimensional way preferred by US politicians that play down the importance of building healthy bilateral ties.

The trade war against China has cost as many as 245,000 American jobs and jacked up inflation in the United States. It is time for America to end this senseless trade war.

In his extensive visits to the American farmers in the mid-West, China's proactive Ambassador Qin Gang also made a point to urge the US to cancel tariffs and stop politicizing trade and business, reported China Daily.

"At the end of the day, this trade war has no winners. It's time to call it quits," concluded Prof. Tang. Most economists would agree.

 

The author is a freelance writer; formerly Adjunct Lecturer, taught MBA Philosophy of Management, and International Strategy, and online columnist of 3-D Corner (HKU SPACE), University of Hong Kong.

The views do not necessarily reflect those of DotDotNews.

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