Tariffs are coming
A global trade war looms. But tariffs are not necessarily the best weapon for that war.
A trade war is probably coming to a planet near you. Tariffs are inevitably going to be one of the main weapons used to fight this trade war, so it’s important to understand what tariffs do and don’t accomplish.
One spark that could ignite the fire of global trade war is Donald Trump. Trump is currently leading in most presidential polls, and he’s promising to enact far bigger and more sweeping tariffs than he did in his last term — a 60% tariff on Chinese goods, and a 10% tariff on all imported goods from all countries. The latter move would almost certainly provoke retaliation from countries across the globe.
But there’s an even more important reason we’re facing a global trade war, and that’s China’s response to its economic slowdown.
China is using an export glut to fight an economic slowdown
The property industry, which made up over a quarter of China’s economy, has basically collapsed, taking much of the country’s domestic demand down with it. In that sort of environment, one obvious move is to try to pump up export manufacturing.
Just glancing at where Chinese banks are making their loans makes it clear that this is exactly what China is doing:
China’s government is making this happen by dishing out massive subsidies and cheap loans to favored export-oriented manufacturing sectors, and ordering companies in those sectors to produce more:
[China’s leaders] are obsessed with lithium-ion batteries, electric cars and solar panels. These sorts of technologies will, Xi Jinping has proclaimed, become “pillars of the economy”. He is spending big to ensure this happens…
Mr Xi’s manufacturing obsession is explained by the need to offset China’s property slump…[O]fficials now hope that manufacturing can pick up the slack. State-owned banks—corporate China’s main source of financing—are funnelling cash to industrial firms.[E]xporters in powerhouse provinces have been told to expand production. During the first 11 months of 2023 capital spending on smelting metals, manufacturing vehicles and making electrical equipment rose by 10%, 18% and 34%, respectively, compared with the same period in 2022…
[T]he country’s steel giants produced more metal even as the property industry suffered.Steel mills, which have access to cheap capital, are willing to take considerable losses in order to preserve market share.
It’s not just EVs, batteries, and solar panels, though. Chris Miller points out that although China’s leading-edge chipmakers are being hurt by export controls, it’s trailing-edge chipmakers are expanding production massively, and selling much of it overseas:
[It] may defy business logic but, helped by generous subsidies, China’s chipmakers are ramping up production capacity despite concerns about oversupply. According to one consultancy, the country’s chip production capacity will grow by 60 per cent in the next three years, and could double over the next five. Since western restrictions on the exports of chipmaking equipment to China mean that it can’t produce the most advanced processor chips, much of this production will be of foundational processor chips, which are widely used in cars, household goods and consumer devices.
The problem is that thanks to the real estate bust, Chinese consumers aren’t really in a mood to consume much. That means that all the extra cars and batteries and chips and steel that the Chinese government is pushing companies to manufacture will be dumped on the global market for very low prices. Brad Setser, the most dogged and perspicacious observer of Chinese trade imbalances, has a good thread showing that this is already happening. Here are a couple of key charts from that thread:
Whether or not this technically constitutes “dumping”, it’s clear that China’s subsidies have reduced the price of Chinese export goods well below what an un-distorted market would bear.
Of course, everyone around the world knows that China is doing this, and they’re afraid that competition from the flood of ultra-cheap Chinese exports will decimate their own domestic manufacturing industries. I already wrote about this in the context of the European auto industry:
But a move toward tariffs to counter China’s export glut could be much broader than that, and could be swiftly followed by Chinese retaliation:
In November Britain launched a probe into Chinese excavators, after JCB, a local firm, alleged that Chinese rivals were flooding the market with cut-price machines. The EU is conducting an anti-subsidy probe into Chinese electric vehicles and an anti-dumping probe into Chinese biodiesel. The Biden administration has asked the EU to tax Chinese goods, offering to drop American tariffs on European steel in return. On January 5th China decided to hit Europe where it hurts, announcing an anti-dumping investigation into brandy…In September India imposed fresh anti-dumping duties on Chinese steel; in December it introduced new duties on industrial laser machines. Indeed, almost all the anti-dumping investigations that India’s trade authorities are now conducting concern China…In December the [Mexican] government announced an 80% tariff on some imports of Chinese steel.
Competition from Chinese EV makers may be starting to get to Elon Musk and Tesla. After a long battle for market share in China, Tesla’s CEO issued a warning to his fellow automakers: On a level playing field, Chinese carmakers will outcompete almost everyone else.
“Our observation is generally that Chinese car companies are the most competitive car companies in the world,” Musk said Wednesday, during Tesla’s earnings call. “If there are no trade barriers established, they will pretty much demolish most other car companies in the world,” he continued.
When even Musk wants trade barriers, there just isn’t much of a constituency for free trade left.
So even if Trump doesn’t get elected this November, a wave of tariffs is probably about to sweep across much of the world. The next questions are:
How effective would tariffs be in stemming the tide of Chinese imports?
Who will be hurt by tariffs?
Fortunately, thanks to Trump’s tariffs, we now have some recent experience to help us answer both of those questions.