Biden's Tariffs on Chinese EVs: Economic Setback or Necessary Measure?
The global trade system, once a pillar of economic growth, is showing signs of disintegration. One of the most significant achievements of the past fifty years has been the dramatic reduction in global tariffs, from over 10% in the 1970s to just 3% today. This decline in tariffs has facilitated a boom in international trade and nearly tripled global GDP per person. However, this progress is now at risk as President Joe Biden imposes 100% tariffs on electric vehicles (EVs) made in China.
The political costs of trade have always been high because, while it benefits consumers broadly, it harms specific workers and companies. This dynamic has made trade a contentious issue for politicians. The consensus supporting an open trading system is crumbling, influenced by China's unfair trade practices and the rise of protectionist sentiments epitomized by former President Donald Trump’s America-first policies.
The Political Landscape
Politicians in the U.S. argue for higher tariffs on various goods, citing China's heavy subsidies to its manufacturers, which give them an unfair advantage in global markets. They also point to security concerns, as Chinese EVs could be easily tracked and monitored. While these concerns have some merit, Biden’s tariffs are a blunt instrument that could have significant economic repercussions.
Economic Principles at Stake
Economic theory, dating back to David Ricardo, suggests that even when other countries impose barriers, it is beneficial for a nation to open its borders to imports. This openness leads to lower prices, greater variety for consumers, and allows companies to specialize in their most competitive products. Conversely, tariffs protect inefficient firms and harm consumers.
The U.S. experienced the drawbacks of protectionism in the 1980s when Japanese carmakers faced quotas. This led to higher prices without improving the competitiveness of American carmakers. Today, American firms fear competition from affordable Chinese EVs like BYD’s Seagull, which costs less than $10,000 in China. The tariffs allow American firms to sell lower-quality cars at higher prices, reducing incentives for consumers to adopt greener technologies.
Policy Implementation and Its Flaws
The Biden administration’s approach to imposing these tariffs has been problematic. Ideally, tariffs should be justified through a rigorous process that demonstrates how Chinese EVs benefit from unfair subsidies or pose security threats. Instead, the administration simply extended Trump-era tariffs, initially justified by claims of Chinese technology theft, without addressing current realities. This approach undermines the rules-based trading system and sets a dangerous precedent.
Global Implications
Domestically, this tariff policy may encourage more firms to seek protectionist measures. Politically, both Republicans and Democrats are competing to propose even higher tariffs, with Trump suggesting a 200% tariff on cars from Chinese-owned plants in Mexico. Internationally, other countries are likely to follow America’s lead. Brazil is already increasing tariffs on EVs, and the European Union may soon do the same, further straining the global trade system.
America’s 100% tariffs on Chinese EVs represent a significant shift in global trade policy, with potentially far-reaching consequences. While aimed at protecting domestic industries and addressing security concerns, these tariffs risk undermining economic efficiency and escalating trade tensions worldwide. As the global trade system faces increasing pressure, it is crucial for policymakers to balance protectionist impulses with the broader benefits of open markets.