Global risks–including Chinese overcapacity–have increased, but government intervention should seek to minimize trade-offs.
It is hard to exaggerate the significance of President Joe Biden’s May 14 announcement of tariff increases on a range of imports from China. The move opens a new front in the Biden administration’s China de-risking strategy. It also puts into sharp relief the challenging trade-offs involved in the growing policy arena of economic security.
In the May 14 announcement, President Biden directed U.S. Trade Representative Katherine Tai to impose a set of staged tariff increases on about $18 billion worth of imports from China in an array of “strategic sectors”: steel and aluminum, semiconductors, electric vehicles (EVs), batteries, critical minerals, solar cells, ship-to-shore cranes, and medical products. The decision was based on the mandated four-year review of the tariffs imposed by former President Donald Trump in 2018 under Section 301 of the Trade Act of 1974.
The White House said the tariff increases were designed “to protect American workers and American companies from China’s unfair trade practices,” including forced technology transfers and theft of intellectual property. It also cited China’s “growing overcapacity and export surges that threaten to significantly harm American workers, businesses, and communities.” The products subject to the increased tariffs were “carefully targeted at strategic sectors—the same sectors where the United States is making historic investments under President Biden.”
The May 14 action marked a departure for the Biden administration. Its previous efforts to reduce risks and vulnerabilities in the U.S. economic relationship with China had been focused on the export side of the ledger, primarily denying Beijing access to sensitive U.S. technologies. The new measures target the import side, restricting China’s access to the U.S. market. Although Biden surprised many analysts after he entered office by leaving former President Trump’s earlier duties in place, tariffs had not been the favored arrow in the de-risking quiver of the current administration until now.
Few would argue with the diagnosis of the underlying problem that the Biden administration is trying to remedy. For at least two decades, China has tolerated or encouraged intellectual property theft and forced technology transfers from the United States and other advanced economies. There is a clear line from those practices to China’s development of competitive technology products such as telecommunications hardware and electric vehicles. Beijing’s massive industrial subsidies have also been well documented and have contributed to overcapacity in a number of key sectors. With domestic demand in China weak, overcapacity there will inevitably be offloaded onto world markets, creating the risk of a “second China shock.” One worrisome harbinger has been the surge of Chinese car exports over the past few years, from around one million vehicles in 2020 to nearly five million in 2023.
Nor can anyone fault the Biden administration for concluding that mere jawboning is unlikely to change China’s behavior. For years, successive U.S. administrations have challenged Beijing, directly and indirectly, on its problematic industrial and technology-transfer policies. As recently as last month, Treasury Secretary Janet Yellen was in Beijing warning her counterparts about the risks posed by Chinese overcapacity.
Nevertheless, the Biden administration’s approach to this intractable problem is rife with trade-offs. The least of these is arguably the direct cost to American consumers. In theory, tariffs represent a tax on downstream consumers of the targeted products (as starkly shown by a new paper from the Peterson Institute for International Economics, which finds that presidential candidate Trump’s proposed 10 percent across-the-board tariffs and 60 percent tariff on imports from China would cost the average American household around $1,700 a year). The Biden tariffs cover only $18 billion worth—or around 4 percent—of imports from China, reflecting limited existing trade in many of the targeted products: few Chinese EVs are sold in the U.S. market today, and steel from China accounts for only about 2 percent of total U.S. steel imports. So the immediate price impact is likely to be small. But will tariffs have to rise further to give domestic manufacturers more space to compete, and will this have the desired effect or just reduce competition in the U.S. market while ratcheting up costs to consumers?
Another trade-off that has been widely noted in the wake of the May 14 tariff announcement is between the Biden administration’s goals of reducing economic dependencies on China and mitigating climate change. While massive subsidies and forced technology transfers may have enabled their success, the fact is that many Chinese EVs, batteries, and other clean-energy products today are highly competitive in price and quality; allowing them into the U.S. and other markets could help the Biden administration’s efforts to reduce emissions. The administration has struggled with this trade-off throughout its term, excluding Chinese solar modules and cells from earlier tariffs to ensure a sufficient supply while domestic producers built up their capacity.
Alongside the economic trade-offs of the May 14 tariffs are significant diplomatic ones. The Biden administration has gone to great lengths to strengthen ties with traditional allies in Europe and Asia, and to win over new partners around the world. Since Chinese overcapacity has to go somewhere, a tariff wall around the United States is likely to produce trade diversion to Europe, Japan, Korea, and other markets, increasing the pressure on those countries to take similar measures to limit Chinese imports. These partners are also worried about retaliatory steps by China that could have global effects, such as further restrictions on exports of critical minerals like graphite and gallium that are mostly processed in China.
Allies are also worried about the implications for the international economic order of a U.S. drift toward protectionism. Unilateral Section 301 tariffs such as those announced on May 14 are generally viewed as inconsistent with U.S. obligations in the World Trade Organization (WTO). While this concern carries little weight in Washington, where the WTO is generally viewed as ineffective and not fit for purpose, the institution and the trade rules it notionally safeguards are seen in most other capitals as a critical underpinning of a rules-based order. The practical concern is that U.S. actions inconsistent with existing rules give other countries license to violate them as well.
As an aside, an official from a foreign embassy in Washington contacted for this article noted that, for all the suspicion with which Section 301 is viewed in her capital, it would have been more troubling if the Biden administration had used Section 232 of the Trade Expansion Act of 1962—which authorizes trade restrictions to address threats to national security—to justify the new tariffs, which were ostensibly designed to address disruptions to U.S. commerce, not national security. Ironically, Section 232 action would have been more likely to pass muster in the WTO, which historically has taken an expansive view of member states’ rights in national security.
Could some of these trade-offs have been avoided if the Biden administration had taken another tack? Given that China has long been pursuing a non-market, export-powered model of growth that is widely viewed as disruptive to the global economy, the administration might have worked through institutions like the G7, the Organization for Economic Cooperation and Development, and the International Monetary Fund to build an international coalition demanding that Beijing change direction and, once that proved ineffective, authorizing collective action to rein in China’s exports. This approach would have taken more time and had less immediate political benefit domestically but might have posed fewer trade-offs for broader U.S. interests.
There is little doubt that global risks—including ones stemming from China’s mercantilist policies—have increased in recent years, and that government intervention in markets to mitigate those risks is in many cases warranted. But as the U.S. government pursues economic security policies such as those announced on May 14, it needs to thoroughly weigh the costs and benefits and consider alternative approaches that could make the trade-offs less pronounced.
To read the full article as it appears on the Council on Foreign Relations’ website, click here.