China is flooding the world with cheap goods (aka dumping) to reboot its economy, threatening the jobs and survival of competing industries in other countries. This week, President Joe Biden, speaking to a group of union workers in Pennsylvania, called for increasing the U.S. tariffs on steel and aluminum from China from 7.5 percent to 25 percent. He should have known that talking and making a symbolic gesture would be insufficient to stop China from flooding the U.S. market with cheap goods.
Communist dictator Xi Jinping’s socialist economic policies and his brutal and protracted “Zero Covid” measures have caused the Chinese economy to experience the worst slowdown in decades. Xi stopped boasting about his China dream of surpassing the U.S. as the world’s No. 1 economy after “China’s gross domestic product, which was 75% the size of the U.S.’s in 2021, had slipped to 64% in the third quarter, roughly where it was in 2017,” according to The Wall Street Journal.
Xi has resorted to China’s old playbook to stimulate the economy — subsidizing the manufacturing sector and incentivizing exports — hoping to export China’s way out of this slump. It was what China did in the early 2000s after joining the World Trade Organization (WTO). China quickly became a trade powerhouse with an ample supply of low-wage labor, undervalued currency, and generous government subsidies and export incentives. The U.S. trade deficit with China has increased from $80 billion in 2000 to $418 billion in 2018.
Americans paid a high price for cheap imports. Unable to compete against cheap Chinese imports, many U.S. manufacturers were forced to relocate their factories to China or Mexico and shut down operations in the U.S. for good. At least 2.4 million good-paying manufacturing jobs in the U.S. were lost during the process. Economists labeled all these adverse effects on the U.S. economy as “the China Shock,” which sowed political discontent among working-class Americans. Not surprisingly, during the 2016 Republican presidential primary, Donald Trump, who touted an anti-free trade message, won 89 of the 100 counties most affected by the China Shock.
World Can’t Absorb All the Goods
China is still overflowing the global market with cut-rate goods, and the latest economic data shows China’s exports volume reached a 10-year high last month. Some economists argue that the adverse effects of “China Shock 2.0” will be worse than the last one because the categories of Chinese exports have expanded to include high-tech goods such as electric vehicles and solar panels, and the world’s ability to absorb Chinese goods is more limited than two decades ago.
For example, Brad Setser, a senior fellow of the Council on Foreign Relations, pointed out that China’s capacity to produce solar panels exceeds even the most optimistic global demand. If China keeps its current pace of exporting, it will not only drive non-Chinese solar panel producers out of business but also “force Chinese suppliers themselves out of the market” in the end. No wonder governments worldwide, including both developed and developing nations, have reportedly already taken more than 70 import-related measures targeting China, including launching antidumping investigations and imposing tariffs on Chinese goods.
What’s also different this time is that Beijing seeks not only to revive China’s economy but also to cement China’s global dominance in high-tech manufacturing in critical sectors that the government identified in its “Made in China 2025” industrial blueprint. Not surprisingly, while Treasury Secretary Janet Yellen was in China recently, the Chinese government and state media dismissed her complaint about China’s dumping as promoting trade “protectionism” and “a pretext to suppress China’s rise.” The Biden administration shouldn’t expect that nagging Beijing about dumping will somehow convince Beijing to change its behavior and abandon its strategic goals.
The Need for More Tariffs
If President Biden is serious about stopping China from dumping its goods in the U.S., the first thing he needs to do is to increase tariffs on a broad range of Chinese imports, including electric vehicles, lithium-ion batteries, and solar panels.
Higher tariffs on a wider range of imports from China will indeed increase prices of goods and services in the U.S. But Donald Luskin, chief investment officer at Trend Macrolytics, LLC, compared raising tariffs to a drinking contest at a fraternity: The game is not about avoiding inflicting harm on yourself but about being able to stomach the pain longer than your competitor in order to induce a change of behavior.
Such an approach worked before. When the U.S. trade deficit with China reached a historical high of $418 billion in 2018, the Trump administration kicked off a trade war with China by imposing new tariffs on $200 billion in Chinese imports that year. China initially acted tough and retaliated by imposing tariffs on $60 billion in imports from the U.S. But after three rounds of back and forth, China ran out of U.S. goods to put levies on because China didn’t import as much from the U.S. The Chinese government was forced to make concessions and signed a new trade deal with the U.S. After Biden came into office, he kept most of the Trump-era tariffs in place. As of 2022, the U.S. trade deficit with China was about $382 billion, an 8 percent decline from 2018.
Precondition of Reducing Financial Repression
Besides tariffs, the Biden administration should set preconditions for future meetings. The Chinese Communist Party (CCP) usually demands concessions before agreeing to any meetings. Since China clearly cannot get out of its economic slowdown on its own and desperately needs access to the U.S. market, the Biden administration ought to demand the CCP lift its “financial repression” against the Chinese people as a precondition before agreeing to the next summit between Biden and Xi. “Financial repression” refers to the CCP’s policies of redirecting the Chinese people’s capital for the sole benefit of the state by intentionally limiting individuals’ investment opportunities in China, while encouraging people to put most of their money in state-owned banks.
Under the party’s directive, the state-owned banks pay ultra-low to negative interest rates to Chinese depositors. The CCP has been tapping these savings as cheap funding sources for its political projects and keeping China’s currency undervalued to incentivize exports. The Peterson Institute for International Economics estimates, “Financial repression costs Chinese households about 255 billion renminbi (US$36 billion), and 4.1 percent of China’s GDP.”
The Biden administration should demand China relax its “financial repression” against the Chinese people and let them decide how and where to deploy their capital best. Such individual financial freedom will stimulate domestic demand to absorb some Chinese manufacturers’ overcapacity and reduce the pressure on these companies to dump their goods worldwide.
Drop the EV Mandate
Last but not least, the Biden administration must pause its green mandates on electric vehicles. The Environmental Protection Agency’s new emission standards were designed to force Americans to switch from gas-powered vehicles to electric ones and to ensure that more than 50 percent of new car sales in the U.S. will be EVs by 2030.
The EV mandate ignores the market reality that less than 8 percent of new auto sales last year were EVs, and American automakers such as GM and Ford are losing money on their EV businesses due to a lack of consumer demand. Tesla announced that it would lay off more than 10 percent of its global workforce due to steep competition from Chinese EV makers. Biden’s EV mandate only creates artificial market demand that will benefit China the most because even with the U.S. government subsidies, American EVs will cost more than Chinese EVs selling at bargain-basement price. The more the Biden administration pushes America to transition to green energy prematurely, the more China is incentivized to dump its green energy products in the U.S.
Unless the Biden administration takes action, the China Shock 2.0 will cause more harm to the U.S. economy than the last one.