Tariffs Are a Scalpel, Not a Hammer

Even before assuming office, U.S. President-elect Donald Trump has announced his intention to raise tariffs on his nation’s three biggest trading partners: China, Canada, and Mexico. Once in power, he has promised to go even further, claiming that he will boost duties on Chinese goods to at least 60 percent and raise them on all imports, regardless of origin, to 20 percent.

Trump’s numbers may be arbitrary, but his inclinations are clear. Given his rapturous description to Bloomberg of “tariff” as “the most beautiful word in the dictionary,” there is every reason to take his statements seriously.

Trump sees tariffs as a sort of Swiss Army knife: an all-purpose tool capable of fixing any problem. But large, across-the-board duties of the sort that he is proposing will not achieve the beneficial effects that he has ascribed to them. In a more targeted, tailored form, however, import taxes can play an essential role in helping to defend U.S. interests and push back against Chinese mercantilism.

The threat of higher tariffs will not force China to stem the export of fentanyl and other deadly drugs, something that a U.S. congressional committee report makes clear it could have done long ago had it really wanted to. By themselves, tariffs also won’t revive the fortunes of U.S. manufacturing or bring back industries that have moved abroad due to high labor costs, a paucity of suitably trained workers, or environmental regulations. Higher taxes on most imports could raise revenues for the federal government, but they would drive up costs to consumers and help to reignite inflation, potentially recreating the conditions that helped get Trump reelected in the first place.

Most importantly, higher U.S. tariffs will not compel the Chinese Communist Party (CCP) to abandon its distinctive mercantilist-Leninist approach to economics.

The ultimate aim of Beijing’s policies is not to promote the welfare of the Chinese people, but to ensure the party’s control at home while building China’s “comprehensive national power” on the world stage. If the CCP valued public prosperity over its own power, Beijing could slash wasteful subsidies to industry, reduce the role of inefficient state-owned enterprises, and put more money in the hands of ordinary consumers.

But Chinese President Xi Jinping clearly fears that such measures would encourage indolence and “welfarism,” weakening the party’s grip on China’s society and economy while slowing the growth of its massive manufacturing base and lessening the dependence of others on China-centered supply chains, which Xi sees as essential to the nation’s bid for superpower status.

The Chinese economy’s failure to rebound since the peak of the COVID-19 pandemic has caused Beijing to double down on its long-standing approach for sustaining growth: expanding subsidies still further and pushing out yet more manufactured goods. These policies are feeding a domestic deflationary spiral. Given China’s enormous size, the outpouring of underpriced exports is so vast that it also threatens to destroy existing industries in both advanced and developing nations.

The trend that some analysts—such as economist Noah Smith—have described as a second “China shock” could also choke off the ability of other countries to develop new industrial sectors, such as batteries and electric vehicles, while deepening their dependence on a potentially hostile and coercive foreign power for a widening array of manufactured goods and materials.

The existence of a clear and present danger to the prosperity and security of many other countries has created an opening for an effective collective response. Universal, unilateral U.S. tariffs on friend and foe alike could squander this opportunity.

Tariffs are not a magic weapon, but they are an indispensable tool in defending against the increasingly corrosive and dangerous effects of China’s mercantilist policies. Regardless of what others do, the Trump administration should take three targeted steps.

First, the United States should raise duties on a broad but still limited list of Chinese-made manufactured products, intermediate goods, and industrial materials. Targeted items should be chosen through an analytical process that identifies those that are essential to the nation’s defense, health, or economic functioning, and where supplies are susceptible to domination by China.

This step would involve an extension and expansion of some of the tariffs already imposed under Section 301 of U.S. trade law during Trump’s first term and, more recently, by the Biden administration. The aim would not be to block all Chinese imports or somehow quickly and completely decouple the U.S. and Chinese economies. Such drastic moves are unnecessary on strategic grounds, and the resulting widespread disruptions would provoke greater political opposition than a more measured and sustainable approach.

By raising the artificially low price of select imports, tariffs would create the chance for producers to emerge in other places, whether that’s at home; on the territory of highly developed allies; or in poorer, nonaligned nations. To cushion the potential inflationary effects and give time for supply chains to shift and diversify, these new duties could be phased in over time.

As it raises targeted tariffs, the new U.S. administration should give high priority to improving techniques for assessing the value of the Chinese content in products imported from third countries. Since the start of the so-called U.S.-China trade war in 2018, Chinese companies have sought to avoid U.S. tariffs by simply rerouting goods through places such as Mexico and Vietnam—or, in some cases, performing final assembly in other countries using low-cost local labor and Chinese-made parts and materials.

With improved tools for data collection and analysis, duties on selected imports could be adjusted according to the proportion of their value that actually originated in China. This would reduce tariff evasion and limit the possibility of hidden vulnerabilities embedded in what are marketed as non-Chinese products.

Such a system would also create incentives for the development of indigenous industrial capacity, including in so-called “connector countries.” These are typically developing nations (such as Morocco and Indonesia as well as Mexico and Vietnam) through which Chinese products pass, but which currently receive only a small portion of the profits from the sale of these goods because they add so little value to the finished product.

Along with its other virtues, improved content-tracing would help to highlight the fact that, despite frequent declarations of solidarity with the nations of the “Global South,” Beijing’s trade and industrial policies are actually harmful to the development prospects of many poorer countries.

Tariffs can help hold back underpriced imports, but especially in industries where “homeshoring”—bringing production back to the United States—is deemed essential to national security, government will need to provide additional inducements for investment in domestic production. These incentives may include tax breaks, procurement guarantees, and—in some cases—direct subsidies.

Outgoing President Joe Biden took some initial steps in this direction by offering federal support to the makers of semiconductors, batteries, and electric vehicles. The new administration will likely have to lengthen this list to include, among other things, robots, pharmaceuticals, and telecommunications equipment. To reduce waste and promote the development of genuinely competitive industries, such assistance should be phased out over time.

The policies proposed here will be more effective and less costly if they are implemented in conjunction with other countries. Ideally, this would be done on a cooperative basis, with the United States and other advanced industrial nations working together to impose common tariffs on select Chinese exports, share data, and develop techniques for content-tracing.

What I have described elsewhere as a trade defense coalition could be augmented by closer coordination on export controls and investment screening, among other measures. Rather than replicating each other’s efforts, coalition members could also collaborate in developing common sources of supply for critical minerals and other essential goods.

If its friends are reluctant to act to protect their own markets, Washington could resort to more coercive techniques, including following through on Trump’s promise to tax allies’ exports as well as China’s. Given his track record and his reputation as an enthusiast for tariffs, such threats may produce results. But they could also provoke retaliation and put the United States in the position of having to fight a two-front trade war against both its traditional allies and its most dangerous opponent.

Regardless of what measures Trump takes against U.S. allies and major trading partners, imposing steep tariffs on China could still put pressure on them to fall into line. With access to the U.S. market constricted, some of China’s outpouring of exports will spill over into other countries, accelerating the erosion in their own industrial capacities and perhaps compelling them to act in self-defense.

Yet the problem with twisting the arms of democratic allies or pursuing unilateral policies that threaten their interests is that even if it forces grudging compliance, such methods can breed bitterness, mistrust, and resistance. This would complicate efforts to achieve cooperation on other aspects of the China challenge and make it easier for Beijing to drive wedges between the United States and like-minded countries, perhaps drawing some of them closer to its own orbit.

Rather than leading a coalition, Washington could then find itself isolated and at a disadvantage in the rapidly escalating struggle to reshape the global economy.