Before discussing the effectiveness of various tools, we need to ask, "effective for what?" What is the problem we want to solve? Take EVs. What do, should we want?
I think the unstated assumption here is that China may suddenly cut off the west from basic goods it has become dependent on China for, e.g. to discourage defence of Taiwan or any other political goal. In other words that China sees trade as a weapon and their local economy as expendable, not merely as a way to get rich.
So the problem would be to retain enough local capacity for anything that is deemed important, such that it could be rapidly scaled up in case of sudden disruption.
In such a framework, actually electric cars wouldn't necessarily be important because they are relatively simple to make and have local substitutes in the form of ICE vehicles. The only risk would be if Chinese EVs became so much better via subsidies or otherwise that the west lost the ability to make cars entirely, as Musk fears.
I agree with this, but the response would not be to preserve "local" capacity, but non-Chinese (or non-Chinese blockable) capacity. And for THAT, tariffs specifically on Chinese (or blockable) strategic goods ARE probably the best instrument.
Do you think there's a possibility that Trump would tax and thereby punish American companies that do business in China? Not sure how such a tax would be structured or enforced, but it could be sold politically as aiding and abetting our enemy. To be clear, I think such a policy sounds unwise, even dangerous.
That sounds more like the sort of policy a Bush Jr hawk would come up with. Given trump's focus on deals it's hard to imagine him punishing companies making deals that's are good for America.
Really helpful article for us non-economists. I’d be interested in a future article that looked more closely at some of the new proposed ideas for this. For example, would using the tariff money gained to decrease prices of the domestic product be more effective? Or to somehow increase friendshoring (decrease their prices or invest in supply side there) ?
Very Good Article.... there is a reality of "dumping" on highly subsidized industries from China. They are trying to avoid a great depression...hope they make it. For the US/ROW, this is great for consumers, but disaster for competitive suppliers. At a country policy level, it would seem that one needs to take an approach of maintaining scalable competitive capability while taking advantage of the sale. Perhaps this can be achieved with a small tariff which funds the capability around competitive alternatives. It should be noted that this situation already exists in oil/gas with heavily subsidized O&G sector (through investment incentives) which act as a competitive alternative to OPEC.
If the Chinese build too much capacity, won’t that become a bubble that eventually pops at some point?
IE, at some point all those low prices mean their manufacturers have to take massive losses. This runs up a government deficit, forcing their currency to appreciate from crowding-out. Right?
Like, obviously they can do this a LITTLE bit, but if they go gung ho, it’ll just collapse like their real estate sector did. Except for this time, they’ll have TWO collapsed sectors, their most IMPORTANT two sectors, sitting at the heart of their economy. And they’ll be well and truly fucked - indeed, that looks like the sort of recipe that revolutions are made of.
There’s a difference between “the toilet” and “the sewer” or “past the sewer, through the treatment plant, and now it’s somewhere out there in the bay”.
Like, they’ve already wiped out a generation’s worth of accumulated middle class wealth. A manufacturing bust would plunge them back into less-developed status.
America’s Covid overstimulus really saved China and reversed its long downward trend in exports as pct of GDP. I can understand why China is loathe to give up those gains whilst its housing market is “readjusting”, even if the policy is unsustainable fiscally (bailouts will be needed eventually).
Fortunately for China, Biden has launched massive subsidies for renewables and EVs and batteries. His approach is focused on manufacturing employment rather than building US industrial expertise.
We are paying companies to build factories that will use Chinese IP and Chinese battery components but will get around local content rules (required for subsidy) via. labour and physical plant costs.
This creates a misallocation of skilled labour resources that might be better applied elsewhere (defense, assembling American chip IP). Foolish. And perhaps the subsidy money could have been plowed into basic research on nextgen battery tech rather than paying China for its current tech?
If Biden wants more EVs then allow China to export its low-end (<$20k) ones with no subsidies and no tariffs. His policies of paying rich people to buy expensive EVs assembled by expensive labor with Chinese battery IP and components seems sub-optimal- we need cheap EVs, not luxury ones, and we should take advantage of China’s excess as America produces no cheap EVs at scale.
Is it really that simple? When we build factories using Chinese IP isn't that exactly what China has been doing for years. Doesn't the act of building those factories and gaining the expertise on the IP lead to improvement in US capabilities including upgrading US skilled labor down the line?
Probably not that simple, no. Brief comments are polemics and entertainment - not in-depth and balanced analysis. I don’t charge for subscriptions! (I do charge for geopolitical and economic forecasting- which is what I do to stay active in retirement, but that is a different product that takes more than 30 seconds to write).
Meanwhile Tesla is complaining because they can’t take advantage of US EV subsidies for their Model 3 vehicles, since the batteries are sourced in their Chinese factory. Doesn’t seem compatible with your “IRA is just paying for Chinese batteries” criticism.
Not whole batteries- components to be assembled in US to meet local content rules.
And IRA is not “just” for Chinese batteries- never said that. It is mostly about assembly jobs. Just happens that Chinese battery tech very competitive and cells are very cheap even the S Korean and Japanese battery manufacturers use Chinese JVs and Chinese factories.
There is a grand bargain to be had with China. The Americans and Europeans agree to continue buying their cheap clean energy exports and prop up their unstable economy. In return, China leaves Taiwan alone, stops supporting Russia and agrees to end forced labor in Xinjiang. The alternative? A more protracted and expensive energy transition, a destabilizing cold war and a potentially catastrophic US-China direct military confrontation.
“But politicians rarely pay attention to famous theoretical results in economics, especially politicians like Trump.”
Trump can’t even do basic math. Note his appearance on the Howard Stern Show with Don, Jr., and Ivanka. Stern gave them a simple math problem. Both Trump and Don, Jr. couldn’t do the math. Ivanka chirped: “That’s not a practical question!”
Government industrial policy should incentivize companies to build-out trailing-edge chip fabs in the Rust Belt/Great Lakes area. There are multiple benefits: reduce dependence of auto and appliance manufacturers on China (no more parking thousands of unfinished autos), reduce logistical costs by sourcing trailing-edge chips locally, use the U.S.’s largest source of fresh water for fabs, provide jobs to where most needed, create an ecosystem of vendors serving chip fabs, etc.
Most politicians can't do simple math problems. Years ago there was a survey done of UK MPs who were asked to compute the probability of flipping heads twice in a row, and most couldn't do it.
Before you make assumptions about trump and ideology though, iirc in the UK it was Labour whose MPs struggled with this question the most.
So, we send China gazillions of dollars -- which gives China gazillions of reasons to root for the success of the dollar and the American economy-- and they send us all this relatively cheap stuff that materially improves our lives in a gazillion ways and we're getting the bad end of the deal? Do I need an advanced degree in economics for this idea to make sense?
Agree that retaining manufacturing capacity is a valuable insurance policy. Tariffs and trade wars don’t seem to be effective for that though. Inflation Reduction Act and Chips Act are all about subsidizing domestic manufacturing, we’ll see if that approach works.
Can the tariffs be on a value-added basis? Is it too administratively complicated?
If the thing you want to tax really is the % of the sale price that was made in China, just taxing that seems obvious. If it's not being done, I assume there are non-obvious reasons it's hard.
I tend to believe another facet of the trade war, besides tariffs, is that of the carry trade which has been occurring since 2022. Billions of foreign capital have moved out of China partially creating a deflationary recession for them, a fall in their currency value and, once repatriated, propped up the US equities and debt market.
Will this over-production speed up the drop in the price of EVs?
Will tariffs or other mechanisms successfully block Chinese vehicles from being sold in the US and EU?
Will US & EU auto-makers not use Chinese batteries to reduce their EV manufacturing costs?
Will developing nations also block cheap Chinese EVs? Like would South American, African and Pacific Island nations block them for any reason?
I gather EVs are already cheaper in China than combustion vehicles. 40% of new vehicle sales there last year had plugs. Will that number hit 100% in 2025?
How much cheaper would EVs become in other countries?
Let’s say Chinese EVs become 25% cheaper than combustion vehicles by 2025. What happens to international auto sales? And oil sales/prices?
I’m asking for the sake of civilization. Can you do a deep dive on this, Noah?
As the global economy grows more interconnected, with our semi-allies also semi-allies of others, I would think that any trade wars would be like a giant boomerang tournament. Implement policy at your own caution. The best growth policies for the US is not to try and hamstring the world, but to look hard and long at the policy interventions that limit innovation and growth within the US. Further distortions of a distorted market are not the answer.
I disagree. If a country like China is subsidizing industry to such an extent that it is impossible for non-subsidized producers to compete, it is no longer entirely about growth and innovation.
No country wants to have their manufacturing economy uber-ized. There is obviously a balance to be struck here, but it is more complex than the most innovative or competitive companies.
Before discussing the effectiveness of various tools, we need to ask, "effective for what?" What is the problem we want to solve? Take EVs. What do, should we want?
I think the unstated assumption here is that China may suddenly cut off the west from basic goods it has become dependent on China for, e.g. to discourage defence of Taiwan or any other political goal. In other words that China sees trade as a weapon and their local economy as expendable, not merely as a way to get rich.
So the problem would be to retain enough local capacity for anything that is deemed important, such that it could be rapidly scaled up in case of sudden disruption.
In such a framework, actually electric cars wouldn't necessarily be important because they are relatively simple to make and have local substitutes in the form of ICE vehicles. The only risk would be if Chinese EVs became so much better via subsidies or otherwise that the west lost the ability to make cars entirely, as Musk fears.
I agree with this, but the response would not be to preserve "local" capacity, but non-Chinese (or non-Chinese blockable) capacity. And for THAT, tariffs specifically on Chinese (or blockable) strategic goods ARE probably the best instrument.
Great, informative article. Thank you.
Do you think there's a possibility that Trump would tax and thereby punish American companies that do business in China? Not sure how such a tax would be structured or enforced, but it could be sold politically as aiding and abetting our enemy. To be clear, I think such a policy sounds unwise, even dangerous.
That sounds more like the sort of policy a Bush Jr hawk would come up with. Given trump's focus on deals it's hard to imagine him punishing companies making deals that's are good for America.
That painting of the cars coming over the wall is really fantastic!
Would I be wrong to conclude that it's an AI produced image?
Did you not notice the "Art by GPT-4" caption?
Whoops. Mea culpa.
Really helpful article for us non-economists. I’d be interested in a future article that looked more closely at some of the new proposed ideas for this. For example, would using the tariff money gained to decrease prices of the domestic product be more effective? Or to somehow increase friendshoring (decrease their prices or invest in supply side there) ?
Very Good Article.... there is a reality of "dumping" on highly subsidized industries from China. They are trying to avoid a great depression...hope they make it. For the US/ROW, this is great for consumers, but disaster for competitive suppliers. At a country policy level, it would seem that one needs to take an approach of maintaining scalable competitive capability while taking advantage of the sale. Perhaps this can be achieved with a small tariff which funds the capability around competitive alternatives. It should be noted that this situation already exists in oil/gas with heavily subsidized O&G sector (through investment incentives) which act as a competitive alternative to OPEC.
If the Chinese build too much capacity, won’t that become a bubble that eventually pops at some point?
IE, at some point all those low prices mean their manufacturers have to take massive losses. This runs up a government deficit, forcing their currency to appreciate from crowding-out. Right?
Like, obviously they can do this a LITTLE bit, but if they go gung ho, it’ll just collapse like their real estate sector did. Except for this time, they’ll have TWO collapsed sectors, their most IMPORTANT two sectors, sitting at the heart of their economy. And they’ll be well and truly fucked - indeed, that looks like the sort of recipe that revolutions are made of.
Well, their stock market is already in the toilet...
There’s a difference between “the toilet” and “the sewer” or “past the sewer, through the treatment plant, and now it’s somewhere out there in the bay”.
Like, they’ve already wiped out a generation’s worth of accumulated middle class wealth. A manufacturing bust would plunge them back into less-developed status.
Stock markets are significant as indicators of opinion about the future, but price movements do not create or destroy wealth.
America’s Covid overstimulus really saved China and reversed its long downward trend in exports as pct of GDP. I can understand why China is loathe to give up those gains whilst its housing market is “readjusting”, even if the policy is unsustainable fiscally (bailouts will be needed eventually).
Fortunately for China, Biden has launched massive subsidies for renewables and EVs and batteries. His approach is focused on manufacturing employment rather than building US industrial expertise.
We are paying companies to build factories that will use Chinese IP and Chinese battery components but will get around local content rules (required for subsidy) via. labour and physical plant costs.
This creates a misallocation of skilled labour resources that might be better applied elsewhere (defense, assembling American chip IP). Foolish. And perhaps the subsidy money could have been plowed into basic research on nextgen battery tech rather than paying China for its current tech?
If Biden wants more EVs then allow China to export its low-end (<$20k) ones with no subsidies and no tariffs. His policies of paying rich people to buy expensive EVs assembled by expensive labor with Chinese battery IP and components seems sub-optimal- we need cheap EVs, not luxury ones, and we should take advantage of China’s excess as America produces no cheap EVs at scale.
Is it really that simple? When we build factories using Chinese IP isn't that exactly what China has been doing for years. Doesn't the act of building those factories and gaining the expertise on the IP lead to improvement in US capabilities including upgrading US skilled labor down the line?
Probably not that simple, no. Brief comments are polemics and entertainment - not in-depth and balanced analysis. I don’t charge for subscriptions! (I do charge for geopolitical and economic forecasting- which is what I do to stay active in retirement, but that is a different product that takes more than 30 seconds to write).
Touché
Meanwhile Tesla is complaining because they can’t take advantage of US EV subsidies for their Model 3 vehicles, since the batteries are sourced in their Chinese factory. Doesn’t seem compatible with your “IRA is just paying for Chinese batteries” criticism.
Not whole batteries- components to be assembled in US to meet local content rules.
And IRA is not “just” for Chinese batteries- never said that. It is mostly about assembly jobs. Just happens that Chinese battery tech very competitive and cells are very cheap even the S Korean and Japanese battery manufacturers use Chinese JVs and Chinese factories.
There is a grand bargain to be had with China. The Americans and Europeans agree to continue buying their cheap clean energy exports and prop up their unstable economy. In return, China leaves Taiwan alone, stops supporting Russia and agrees to end forced labor in Xinjiang. The alternative? A more protracted and expensive energy transition, a destabilizing cold war and a potentially catastrophic US-China direct military confrontation.
“But politicians rarely pay attention to famous theoretical results in economics, especially politicians like Trump.”
Trump can’t even do basic math. Note his appearance on the Howard Stern Show with Don, Jr., and Ivanka. Stern gave them a simple math problem. Both Trump and Don, Jr. couldn’t do the math. Ivanka chirped: “That’s not a practical question!”
https://m.youtube.com/watch?v=iMIKzUAY8n4
Government industrial policy should incentivize companies to build-out trailing-edge chip fabs in the Rust Belt/Great Lakes area. There are multiple benefits: reduce dependence of auto and appliance manufacturers on China (no more parking thousands of unfinished autos), reduce logistical costs by sourcing trailing-edge chips locally, use the U.S.’s largest source of fresh water for fabs, provide jobs to where most needed, create an ecosystem of vendors serving chip fabs, etc.
Most politicians can't do simple math problems. Years ago there was a survey done of UK MPs who were asked to compute the probability of flipping heads twice in a row, and most couldn't do it.
Before you make assumptions about trump and ideology though, iirc in the UK it was Labour whose MPs struggled with this question the most.
So, we send China gazillions of dollars -- which gives China gazillions of reasons to root for the success of the dollar and the American economy-- and they send us all this relatively cheap stuff that materially improves our lives in a gazillion ways and we're getting the bad end of the deal? Do I need an advanced degree in economics for this idea to make sense?
I think most of this discussion exists under the framework that this dynamic is not sustainable for China or for the US in the long run.
Retaining domestic manufacturing capacity is preparation for when this dynamic becomes too unstable.
Agree that retaining manufacturing capacity is a valuable insurance policy. Tariffs and trade wars don’t seem to be effective for that though. Inflation Reduction Act and Chips Act are all about subsidizing domestic manufacturing, we’ll see if that approach works.
I'll be interested in your commentary. on Greg Ip's tariffs column today.
There are about 235 EVs made in China. https://apple.news/AIncdnnGoR2Ko-OX5SkhDYA
The average price is about $35,000, compared with more than $53,000 in the U.S.
Can the tariffs be on a value-added basis? Is it too administratively complicated?
If the thing you want to tax really is the % of the sale price that was made in China, just taxing that seems obvious. If it's not being done, I assume there are non-obvious reasons it's hard.
I tend to believe another facet of the trade war, besides tariffs, is that of the carry trade which has been occurring since 2022. Billions of foreign capital have moved out of China partially creating a deflationary recession for them, a fall in their currency value and, once repatriated, propped up the US equities and debt market.
Will this over-production speed up the drop in the price of EVs?
Will tariffs or other mechanisms successfully block Chinese vehicles from being sold in the US and EU?
Will US & EU auto-makers not use Chinese batteries to reduce their EV manufacturing costs?
Will developing nations also block cheap Chinese EVs? Like would South American, African and Pacific Island nations block them for any reason?
I gather EVs are already cheaper in China than combustion vehicles. 40% of new vehicle sales there last year had plugs. Will that number hit 100% in 2025?
How much cheaper would EVs become in other countries?
Let’s say Chinese EVs become 25% cheaper than combustion vehicles by 2025. What happens to international auto sales? And oil sales/prices?
I’m asking for the sake of civilization. Can you do a deep dive on this, Noah?
As the global economy grows more interconnected, with our semi-allies also semi-allies of others, I would think that any trade wars would be like a giant boomerang tournament. Implement policy at your own caution. The best growth policies for the US is not to try and hamstring the world, but to look hard and long at the policy interventions that limit innovation and growth within the US. Further distortions of a distorted market are not the answer.
I disagree. If a country like China is subsidizing industry to such an extent that it is impossible for non-subsidized producers to compete, it is no longer entirely about growth and innovation.
No country wants to have their manufacturing economy uber-ized. There is obviously a balance to be struck here, but it is more complex than the most innovative or competitive companies.