The China trade shock of the 1990s and 2000s is widely blamed for hollowing out the US manufacturing sector. But anyone who thinks that unwinding trade with China will not result in price increases and significant political backlash is in for a rude awakening.
It is hard to think of an issue that brings together the United States’ deeply divided political class more than the need to contain China’s growing influence, whether through trade restrictions, tariffs on Chinese electric vehicles (EVs), or banning TikTok. But while the national-security argument for such protectionist measures is undeniably compelling, it is unclear whether US political leaders and the American public are prepared for the potential economic fallout.
The prevailing belief among policymakers is that the surge of Chinese imports into the US market during the 2000s hollowed out America’s manufacturing base, making the kind of rapid military build-up that enabled the Allies to win World War II all but impossible. In US policy circles, the “China Shock” is often portrayed as a massive error that devastated towns across the Rust Belt and led to a sharp increase in inequality.
Consequently, there is widespread agreement among policymakers and commentators that the US must prevent a “China Shock 2.0” by imposing massive tariffs and trade restrictions on Chinese technologies such as cell phones, drones, and, crucially, EVs, solar panels, and green-energy equipment. President Joe Biden and his predecessor, Donald Trump, the presumptive Republican nominee in November’s presidential election, disagree on most issues. When it comes to dealing with China, however, both appear to be competing for the title of America’s most protectionist president.
But the China Shock narrative that underpins current US trade policy is deeply flawed. While competition with Chinese producers has adversely affected some manufacturing jobs, free trade has undoubtedly created more winners than losers. Moreover, low-income US consumers have been among the biggest beneficiaries of low-cost Chinese imports. Policymakers who believe that unwinding trade with China will not result in price increases and significant political backlash are in for a rude awakening.
To be sure, the economic impact of US trade restrictions could be minimized by rerouting Chinese imports through third-country suppliers, enabling Americans to buy Chinese-made solar panels as though they were produced in India, albeit at a higher price. But while this tariff theater may be popular with voters, it is hard to see how this would improve national security any more than rerouting Chinese fentanyl into the US through Mexico helped solve the opioid crisis.
Moreover, it would take years for “friendlier” countries to develop their own manufacturing bases that can compete with China’s, especially at the low prices offered by Chinese producers. In some sectors like EVs, China’s production capacity has given it an almost insurmountable lead over Western countries. Given this reality, the United Auto Workers’ goal of having Americans buy electric cars produced in high-wage, unionized US facilities will be extremely difficult to achieve, no matter how much Biden or Trump may support it.
A more targeted approach would ideally distinguish between trade involving sensitive military technologies and other goods, but doing so is more complicated than many seem to realize. The convergence of military and civilian technologies has become painfully apparent during the Russia-Ukraine war, with low-cost drones originally designed for carrying packages being repurposed as bombers and private mobile networks playing a pivotal role in major battles. Additionally, as the COVID-19 pandemic has shown, the US and its allies depend on Chinese medical supplies.
For those of us who believe that multilateral cooperation is necessary to address the world’s most pressing problems, from climate change to regulating artificial intelligence, the escalating rivalry between the world’s two major powers is deeply troubling. From the US perspective, China’s authoritarian government undermines the foundational liberal values that underpin the global economic and political order. China’s relentless cyberattacks continue to pose an immediate threat to the US economy and American companies, and a potential Chinese blockade or invasion of Taiwan would have far-reaching global consequences.
From China’s perspective, the US and its allies are cynically trying to maintain a world order established through centuries of European and American imperialism. Much to the chagrin of US diplomats, many other countries appear to share this sentiment, as evidenced by the widespread disregard among developing and emerging economies for Western sanctions against Russia.
Some may hope that China’s economic slowdown will curb its geopolitical ambitions. But its ongoing difficulties are just as likely to push China toward a confrontation with the US as they are to foster cooperation.
Nevertheless, despite what many in the US may think, economic decoupling is not a viable option. Although the Biden administration’s trade restrictions and bellicose rhetoric are a response to Chinese provocations, both countries must find a way to compromise if they want to achieve stable, inclusive, and sustainable economic growth.
Kenneth Rogoff is a professor of economics and public policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics
To read the full commentary as it was published by Project Syndicate, click here.