Reportedly, the White House will announce new tariffs this week on imports from China. But do trade sanctions work?
Since January, President Trump has followed up on campaign promises to get tough on China by raising tariffs on a number of Chinese products — including washing machines, solar panels, steel and aluminum.
Though not the sole target of Trump’s “America First” trade restrictions, China clearly is a major one. The Trump administration also is considering the possibility of initiating a separate Section 301 investigation against China’s intellectual property rights (IPR) practices.
My research on Washington’s track record shows that U.S. unilateral pressure on China to address its unfair trade practices often is far less credible and effective than efforts to press other trading partners.
Why is this? To understand this scenario, we need to look at the underlying structure of trade between the United States and China.
Not all U.S. firms back China sanctions — and that’s a problem.
During the past 20 to 30 years of China’s rapid economic growth, Chinese producers took advantage of the country’s cheap labor and natural resources to focus on exports of labor-intensive products to developed-country markets such as the United States. This created a complementary trade relationship: The U.S. specializes in the production of technology-intensive products (such as aircraft, passenger cars and medical equipment) in return for imports that it can no longer produce at a reasonable cost at home.
This means that when the United States threatened to impose trade restrictions against China, sanction threats enjoyed support only from firms pushing for expanded market access in China (e.g., businesses seeking to end copyright, patent or trademark piracy) or industries hurt by Chinese import competition (e.g., the U.S. steel industry).
There were virtually no U.S. industries that directly competed with Chinese imports that welcomed the threat of China sanctions. Instead, U.S. businesses, including such retailers as Walmart, J.C. Penney and Toys R Us that developed a high level of dependence on labor-intensive products made in China (such as toys, footwear and apparel), actively lobbied against such moves.
Strong opposition from such import users frequently undermined the arguments of sanctions proponents, creating domestic divisions that substantially eroded the credibility of U.S. threats in the eyes of the Chinese.
Competitive trade relations bolster domestic unity and the credibility of the U.S. position.
This contrasts with situations in which the United States and a trading partner such as the European Union or Japan compete in the production of a similar range of products. With a competitive trade relationship, the United States is likely to have large export-seeking and import-competing sectors specializing in the production of the same commodities as its partner country.
In some cases, the firms seeking exports may even be the same as those competing with imports in the home market. Here’s how this plays out. For instance, when the United States threatened to impose sanctions on Japanese-made computers, television sets and other electronics products unless Japan opened up its market to U.S. semiconductor products in the late 1980s, semiconductor manufacturers seeking expanded access to the Japanese market stood firmly behind the sanctions threats.
But industries targeted by the tariffs (such as computer and electronics manufacturers) also came out in favor of the trade restrictions. Why? They faced stiff competition from Japanese imports themselves and would therefore benefit from limitations on Japanese exports.
When U.S. sanction threats enjoyed much more unified support from affected parties, the crackdown was more credible and effective vis-a-vis the target country. These domestic political dynamics largely explain why U.S. unilateral market opening pressure against countries with which it has complementary trade relations — such as China and India — has not been nearly as successful in eliciting concessions as similar moves against countries with which it has a competitive trade relationship (such as Canada, the E.U. and Japan).
What does this mean for the current trade spat with China?
Here’s what this analysis suggests for Trump’s expected tariffs, specifically targeting China. While China has gradually moved up the value chain to produce more technology-intensive products, such as semiconductors, industrial machines, and automobile parts and accessories, the U.S.-China bilateral trade relationship retains broad complementarities.
According to the Foreign Trade Highlights published by the Census Bureau, the two countries now have five commodities that show up on each country’s list of top imports/exports. This is up from just two overlapping products in 1996. While that number indicates an increasingly competitive trade relationship, it still falls below that for other U.S. trading partners such as Japan (eight overlapping products) and Britain (nine).
Furthermore, as many of the more sophisticated Chinese exports to the United States are produced by American multinational companies such as Apple operating in China as part of an integrated global supply chain, a trade war is also likely to encounter strong opposition from this group of companies, further eroding the cohesiveness of the U.S. position and reducing its bargaining leverage.
After word leaked last week that new tariffs on Chinese goods would be announced, U.S. retailers and trade associations pushed back to lobby Congress and the administration to consider the negative impact of such measures on a wide range of U.S. businesses. If a sufficiently large number of businesses that make extensive use of Chinese imports or are heavily dependent on the Chinese supply chain are able to effectively mobilize against the tariffs, this may create domestic fissures that both reduce the credibility of the American stance and increase the pressure on the Trump administration to provide compensatory measures or even scale back the scope of the trade restrictions.
In this scenario, sanctions could backfire for the administration but, potentially, lead to less damage to both the U.S. economy and to U.S.-China trade relations.