China Raises Real Concerns; Revoking Permanent Normal Trade Relations Would Address None of Them

  • December 12, 2023
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Scott Lincicome and Clark Packard

Today the House Select Committee on the Chinese Communist Party issued a lengthy report denouncing various Chinese government economic policies and recommending a wide range of US policy reforms to counter those policies’ alleged threats to US economic and national security.

As Cato scholars have long explained, China raises real economic and geopolitical challenges for the US government—challenges that some of the committee’s recommendations would directly address. However, arguably the most prominent of the committee’s recommendations—to revoke Permanent Normal Trade Relations (PNTR) with China—does not fall into that category. Here are four reasons why revoking PNTR is a bad idea.

Revoking PNTR Would Cause Significant Economic Harm to the United States

Revoking PNTR would impose new US tariffs on a wide range of Chinese goods, most of which raise no economic or security concerns, and would inevitably lead to China’s retaliation against US goods, services, and investment.

These harms are not just conjecture; they are exactly what resulted from the tariffs imposed by the Trump administration and maintained by the Biden administration, which today cover most imports from China at an average rate of about 21 percent. Countless academic studies have found that American companies and consumers, not the Chinese, pay these taxes—which totaled $46.5 billion in 2022—and the higher domestic prices that they cause.

The New York Federal Reserve, for example, estimates that the tariffs increased costs for average American households by about $830 per year, accounting for direct costs and efficiency losses, and this resulted in approximately $1.7 trillion in lost market capitalization for American firms. Moody’s Analytics estimates that the tariffs cost about 300,000 American jobs. Many other studies have found similar harms, including for the US manufacturers that tariffs are supposed to help. As Don Boudreaux and Phil Gramm noted in the Wall Street Journal, “total manufacturing output was 2% lower by the start of the pandemic than it was when [Trump] raised tariffs.”

Beijing, of course, retaliated against the US tariffs, hitting about 60 percent of American products at an average rate of 19.3 percent. To mitigate the political fallout from this predictable response, the Trump administration unilaterally sent billions of taxpayer dollars to US farmers and ranchers who lost market access in China. Those subsidies thankfully ended, but many Chinese tariffs remain and many US exporters still haven’t recovered (and probably never will).

Adding more tariffs would have a similar result: raise prices, inject more economic uncertainty into US trade and economic policy, and further weaken the US economy and American firms’ global competitiveness. Oxford Economics estimates that raising tariffs by revoking PNTR would cause a loss of $1.6 trillion to the US economy and cause a loss of 744,000 jobs over a five‐​year period. If Chinese retaliation is factored in, the study found that it would lead to a loss of $1.9 trillion and more than 800,000 fewer jobs over that same five‐​year horizon. Hamstringing our economy is no way to outcompete China in the 21st century, which should be the lodestar of US international economic policy right now.

This is especially the case given that many of the Chinese products not currently facing US tariffs have no connection to US national security. Instead, many of the newly taxed items would be basic consumer goods like clothing and toys, which means higher prices for American families already struggling from years of abnormally high inflation. Sabine Weyand, the European Union’s Director‐​General for Trade, recently noted in an essay for Internationale Politik Quarterly that 94 percent of EU trade with China is “unproblematic” and that only about six percent is the result of a one‐​sided dependency for EU member nations. A comparable analysis for the United States would almost certainly produce similar results. Holiday season aside, taxing Americans’ toys is not a serious way to counter China.

Tariffs Won’t Change the CCP’s Economic Abuses

The committee’s report acknowledges these potential economic harms and thus suggests additional taxpayer support for affected companies, farmers, and households. Yet there’s little reason to think that additional tariffs will give the United States new “leverage” (in the committee’s words) to convince Beijing to change course and thus potentially justify the tariffs’ additional pain and expense.

The Trump‐​Biden tariffs were ostensibly designed to push China to change its intellectual property and other legitimately concerning economic practices, but they simply didn’t work. After five‐​plus years, China’s abusive practices continue, and the so‐​called “Phase One” agreement signed in early 2020 and meant to address Washington’s concerns about Beijing’s structural economic practices has been discarded. Indeed, that the committee’s report identifies many of the same types of economic policies that US policymakers targeted in 2018 and have long complained about is a testament to the austere limits of a “tariff everything” approach to bilateral relations.

It is inconceivable that more tariffs—and the attendant economic harms to the US—will push Beijing to change its policies this time around.

Revoking PNTR Won’t Stop Chinese Products from Entering the US Market but Will Make It More Difficult to Track Them

Because of the proliferation of global value chains, in which finished goods contain content from many nations, trade data underestimate by a significant amount the extent to which US goods trade remains intertwined with China. In particular, these data assign imports’ and exports’ total gross value to a single country when in reality most manufactured products contain value added from other countries.

Thus, for example, an iPhone stamped “made in China” actually contains raw materials and parts from Japan, South Korea, the United States, and elsewhere, and this complexity is especially high for technology products on which the Select Committee has focused.

Given this issue, research is increasingly confirming that current US tariffs on “Made in China” goods have probably been less effective in restricting Chinese imports into the United States because Chinese content is being rerouted to third countries and embedded there in products legally labeled “Made in [Not‐​China].”

As Scott Lincicome documented a few months ago, this activity is evident when examining US Customs and Border Protection rulings sought by multinational corporations to confirm that their proposed manufacturing processes could “substantially transform” (in legal parlance) Chinese inputs into non‐​Chinese finished goods. In the five years preceding the trade war (2013–2017) there were 152 customs rulings mentioning “substantial transformation” and China. But the five years since the trade war (2018–2022) have seen a whopping 1,039—or nearly a seven‐​fold increase in rulings on substantial transformation involving Chinese inputs.

Anecdotes and economic research show a similar trend. Earlier this year, for example, Bloomberg detailed how Indian manufacturers are in a “Catch‐​22 […] the more they try to ramp up production in competition with China, the more dependent they become on their northern neighbor for components and raw materials.” The Financial Times reported that Vietnam is facing a similar situation. A new study from a team of trade economists, meanwhile, finds that the non‐​China countries exporting more to the United States between 2017 and 2022 were also importing more from China in the same industries. Other studies have since revealed the same things, while also revealing that these new still‐​Chinese supply chains are more costly and opaque than their predecessors—further undermining US economic and security objectives.

The difficulty of truly removing China from the US market should not come as a surprise, given the sheer size of the economy and its globalized manufacturing sector. A recent National Bureau of Economic Research working paper by Drs. Richard Baldwin, Rebecca Freeman, and Angelos Theodorakopoulos finds that when taking into account “the Chinese inputs into all the inputs that American manufacturers buy from other foreign suppliers […] we see that US exposure to China is almost four times larger than it appears to be at face value.” It is worth noting the authors found that Taiwan, Korea, and Japan also have a much larger share of the supply chain than it initially appears.

Revoking PNTR would surely stop some finished Chinese products from entering the United States (at great expense to US consumers), but it would still allow a significant amount of Chinese content to enter the United States through alternative supply chains. That superficial reduction in “China” trade volumes might make for a few good headlines, but it would still leave the economies intertwined in ways that the tariffs were supposed to prevent.

Revoking PNTR for “National Security” Would Open Door to Protectionist Abuse

The committee’s report indicates that new tariffs applied in the wake of PNTR revocation might only apply to “PRC imports in sectors important for national and economic security.” But this possible limitation is cold comfort for anyone aware of the long, bipartisan history of abusing such “security” rationales.

Policymakers should be especially wary of revoking PNTR for a to‐​be‐​defined list of “national security”-related products. As recent bipartisan history shows, doing so would inevitably lead to a flood of new, unsubstantiated, and highly questionable claims that certain products are critical to national security—and thus to new and unjustified protectionism.

The Trump administration, for example, used a tortured definition of “national security”-related trade powers under Section 232 of the Trade Expansion Act of 1962 to restrict imports of commodity steel products with no national security nexus (e.g., rebar or semi‐​finished slab) from longstanding allies like Canada, the United Kingdom, or Japan. The Biden administration, meanwhile, has abused the Defense Production Act (DPA) to target products—such as baby formula, COVID-19 rapid tests, or heat pumps—that similarly have nothing to do with national security.

Other dubious examples abound. The Department of Justice once suggested in federal court that the vaguely‐​worded Section 232 would permit the executive branch to restrict peanut butter imports if the president unilaterally determined as much; the Trump administration investigated European and Asian cars under the same law; and it attempted to use the DPA to convert the film company Eastman Kodak, into a pharmaceutical company. Members of Congress have been even more brazen.

Given this long history, revoking PNTR and applying tariffs to only “security”-related products would inevitably lead to a flood of new, unsubstantiated, and highly questionable claims that certain products are critical to national security—and thus to new and unjustified protectionism. In such a case, the only winners from the resulting process will be Beltway lobbyists and their US clients, certainly not the American people.

Conclusion

As the last year has vividly demonstrated, the once‐​trendy belief that central planning, industrial policy, and protectionism would supercharge China’s economy past that of the United States has been revealed—like Japan before it—to be a naked emperor. China’s economy is today plagued by debt, low productivity, capital misallocation, and declining growth prospects. Misguided CCP crackdowns on private businesses, individuals, and information have spooked foreign investors. And external policies like the Belt & Road Initiative have struggled.

For these and other reasons, foreign direct investment in China turned negative during the third quarter of 2023 as more capital left the country than came in, and investment from G7 countries into China has fallen by half since 2014. Many independent analysts now believe that China’s economy may never be larger than its US counterpart, even with a billion more people. While the reasons for this shift are myriad and complex, it is nevertheless clear that Chinese industrial policy is not the existential threat that many in Washington claimed it was just a few short years ago.

Fortunately, the committee’s report is only recommendations. There are ideas the committee put forward that Congress should embrace (to be discussed in a forthcoming blog post), but revoking PNTR is not one of them. Doing so will weaken the US economy, fail to change Beijing’s legitimately concerning practices, won’t do much to prevent Chinese products from entering the US market, make the customs process more opaque, and will not enhance US national security.