Making the China Tariffs More Effective

A regular series on the choices faced by international economic policymakers

On May 14, the Joe Biden administration announced $18 billion of new tariffs on Chinese products—including electric vehicles (EVs), batteries, and solar panels—to offset Chinese subsidies, give U.S. industry breathing space before having to compete with Chinese firms, and pressure China to end its theft of intellectual property (IP) and unfair trade practices. 

Given the costs to the American economy of existing tariffs—which the office of the U.S. trade representative (USTR) acknowledges in its May 2024 Section 301 report [PDF], even as it downplays them—it is important that the tariff measures are as effective as possible. To increase the chances of success, the Biden administration should consider tweaking the announced measures by using a tariff rate quota rather than a straight tariff, as well as making all the tariffs time limited. 

Tariffs are costly to American consumers and producers. In its review of the Donald Trump administration’s 301 actions against China, USTR concludes that the weight of academic studies indicate that tariffs and Chinese retaliation resulted in a net loss of U.S. jobs and income, small across the entire American economy but concentrated in certain regions and industries. The report suggests that those losses were more than outweighed by the benefits of reducing trade with China to make U.S. supply chains more resilient and recommends doubling down on the Trump tariffs with additional duties. 

The White House announcement of the new tariffs does not mention the detriment of the new tariffs to American climate goals, but solar panel tariffs have already slowed the deployment of solar power in the United States by raising costs. U.S. EV and battery prices will drop more slowly with Chinese products excluded from the market, and that will slow the uptake of EVs. That “made-in-America” protection could be the economic cost of forging a political consensus in the United States behind decarbonization, but it is a cost nevertheless.      

The rationale that those additional trade measures will keep pressure on China to change its trade and industrial policy is problematic. USTR acknowledges that the Trump tariffs did little to affect Chinese actions. It is not clear how additional tariffs, particularly on products such as EVs, which are not being exported to the United States, will move China to reform. Also, the items chosen have little if any link to IP theft, as China has a technological lead over the United States in EVs, batteries, and solar panels. As in the controversy over Contemporary Amperex Technology Ltd’s licensing of battery technology to Ford, the flow of technology transfer in green industries is increasingly from China to the United States. 

However, there is an argument to be made that the U.S. industry needs some breathing room to develop EVs, batteries, and solar panels, particularly in the face of Chinese competitors who have the advantage of massive state subsidies and a substantial head start. When Japanese auto imports threatened a vulnerable American car industry, the Ronald Reagan administration mitigated the threat through a voluntary restraint agreement (VRA) that gave American auto companies a chance to adjust and Japanese companies a strong incentive to invest in the United States. The VRA had unintended consequences and costs, but it at least was an effort to strike a balance between protection and keeping the U.S. auto market dynamic and competitive. Imports were regulated, not prohibited, and foreign direct investment was encouraged. 

A tariff rate quota (TRQ) would have a similar impact to a VRA, allowing limited competition to American companies to keep them on their toes without permitting the Chinese to dominate. Keeping some competitive pressure on the American companies is vital to maximizing the possibility that the U.S. taxpayer money being invested in EVs, batteries, solar panels, and semiconductors does not become wasteful corporate welfare.      

There are several options for executing TRQs. The Biden administration could set a quota of vehicles—which could have a relatively low tariff of, say, 10 percent and then a much higher or even prohibitive tariff, such as the proposed 100 percent, for anything above that tariff—or it could allow imports under the quota duty free but keep the quota low. The U.S. government could monitor the imports to ensure that quota is honored. It could use a first-come-first-serve approach, or it could license a couple of Chinese firms to import under the quota and levy the high tariff on all others. Alternatively, the United States could agree with China to have its government administer the quota, with the understanding that failure to regulate properly could result in elimination of the quota. If the Chinese agreed (and they could, as it would give them power to decide which Chinese companies would benefit), that would save the U.S. government from the burden of administering the quota. 

It should be noted that quotas are violations of World Trade Organization (WTO) rules, but arguably, so are the newly announced tariffs. In any case, the U.S. refusal to allow the appeals process to operate at WTO voids its ability to pass judgement on the measures.

A time-limited tariff would also help better balance the costs of that protectionist measure. The Biden administration could limit the tariffs to, say, five years, to allow U.S. companies to develop technology and manufacturing capability to compete on an equal playing field with the Chinese. The administration should set strict conditions for renewal, including extensive consultation with Congress and the public, making the process much more difficult. As in the current review of the Trump tariffs and the persistence of the infamous sixty-year-old chicken tax, which distort the U.S. auto market to this day, rolling back existing tariffs is virtually impossible.

Make no mistake, the China tariffs are regressive taxes that run the risk of encouraging complacency in industry and the waste of U.S. taxpayers’ money. Those drawbacks can be at least somewhat mitigated by a more targeted and nuanced approach that would include TRQs and a time limit. Finally, the United States and China need to sit down and engage in serious, detailed trade talks with a list of specific demands. USTR has many legitimate complaints about Chinese industrial and trade practices, but the Chinese government no doubt believes it could satisfy every concern raised in USTR’s annual Trade Barriers Report and still not see elimination of the tariffs. Both sides need to at least forge a long-term road map for exiting the current trade mess. 

Ambassador Larry Greenwood is an advisor to the RealEcon initiative.