President Trump’s tariff war with China is based on a very simple formula: “Made in China” bad; “Made in the USA” good.
What makes this formula simple is that very few of the products targeted by Trump’s tariffs are made entirely in China, and many products putatively made in America actually include components made elsewhere, including (horrors!) in China.
These are the ramifications of the global production chains serving manufacturers in the U.S. and around the world. Globalization is a reality, and among its major beneficiaries are American manufacturers, workers and consumers. A new paper from David Dollar and Zhi Wang of the Brookings Institution makes the case that ignoring the reality, as Trump’s trade policies do, is tantamount to “shooting oneself in the foot.”
Tariffs are a very poor instrument for punishing China for any unfair trading practices.
The list of roughly 1,300 items Trump proposes to slap with 25% tariffs include hundreds that fall into these hybrid categories, Dollar and Wang observe. High-tech products such as computers and electronics are the main targets of Trump’s trade war, which is based partially on his conviction that China engages in wholesale theft of intellectual property and the exploitation of technology from the United States. But these are “made in China” products that actually have the lowest share of China-made components. On average, computers, cellphones and the like comprise only about 45% of China-made components; some, according to Dollar and Wang, have only 10%.
The Chinese products with the highest domestic content, they add, are textiles, which are typically 75% made in China. But while Trump’s tariff list includes some textile-manufacturing machinery, it doesn’t mention textiles or clothing themselves.
Another aspect of globalization that has been overlooked in the White House discussion of China trade is that much of it involves multinational companies headquartered in the U.S. Products assembled in China or imported from there by U.S. multinationals is categorized as Chinese domestic-made goods, “but the firms earn substantial profits from these operations,” which benefits their U.S. shareholders and customers.
The bottom line is that “tariffs are a very poor instrument for punishing China for any unfair trading practices,” write Dollar and Wang. “Some of the cost will be borne by American consumers; some by American firms that either produce in China or use intermediate products from China; some by firms in countries (mostly U.S. allies) that supply China; and some by Chinese firms.”
The U.S. content of “made in China” goods isn’t a new story by any means. In 2011 it was the topic of a paper by Galina Hale and Bart Hobijn of the Federal Reserve Bank of San Francisco. They pointed out that about 45% of what Americans paid for ostensibly Chinese products went directly into U.S. hands.
In the case of, say, a pair of Chinese-manufactured sneakers, this represented the cost of “transportation of the sneakers in the United States, rent for the store where they are sold, profits for shareholders of the U.S. retailer, and the cost of marketing the sneakers, including “the salaries, wages, and benefits paid to the U.S. workers and managers who staff these operations.” Hale and Hobijn, like Dollar and Wang, also observed that a portion of spending on “made in the USA” goods paid for imported intermediate goods and services.
In an essay for the Huffington Post, he challenged their minimal estimates of the share of American gross domestic product spent on Chinese goods. He complained that they hadn’t factored in the Chinese content of goods America imported from other countries, such as Indonesia-made clothing using Chinese cloth or “valuable rare earth metals” mined in China and used in high-tech products from Japan and Korea.
“In truth,” he wrote, “it simply isn’t possible to accurately calculate total Chinese imports!” (Then how does he know?) And he lamented that China’s industrial growth was driving up prices of industrial commodities worldwide—“China’s insatiable demand for commodities — China just became the world’s largest energy consumer and is just getting started — increases the cost of nearly everything, regardless of the source of production.”
In writing that, however, Navarro prefigured the main problem with his and Trump’s approach to trade with China: It’s aimed fundamentally at undermining China’s economic growth. There’s no way China would sit still for such an overt attack on its own welfare, which means that it’s a quest doomed to failure. In Trump’s war to achieve it, American workers and consumers will be the people getting trampled.