Tariffs remain an integral part of US negotiators' toolkit

Tariffs remain an integral part of US negotiators' toolkit
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The debate over escalating tariffs on Chinese imports — and who ultimately pays them — obscures the strategic scope of U.S. trade negotiations aimed at restructuring global supply chains to create jobs and lower prices for consumers.

U.S. negotiators are trying to replace outdated trade agreements with more flexible and limited trade agreements. They believe that such pacts, combined with country-specific tariffs, will motivate U.S. importers to shift their supply chains to the U.S. or to countries that are not subject to tariffs.

The re-alignment will allow the administration to redistribute the overall U.S. trade balance in ways that lower costs and create jobs for Americans.

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The United States-Canada-Mexico Agreement (USMCA) illustrates the administration’s strategy. The trade pact requires 75 percent of auto parts and components be manufactured in North America, bringing automakers’ supply chains closer to home.

Separately, the agreement eliminates rules requiring companies to build data processing and storage facilities in countries where they do business.

In the first case, moving carmakers’ supply chains to North America will create jobs in the U.S. auto industry. Likewise, the new rules for digital processing and storage will enable American overseas operations to store their data in “the cloud” in U.S.-based data centers. Keeping the servers in the U.S. ensures data security and increases business for domestic tech companies.

Although aggregate saving and investment policy sets the size of the overall trade balance, shrinking U.S. trade deficits with specific countries, and China, in particular, will allow more imports from and exports to other trading partners.

The ultimate goal is to attract a larger share of high-paying jobs to the U.S. Realigning trade relationships isn’t enough by itself. U.S. companies must do their share by investing in productivity enhancements to upgrade domestic operations, a move that will, in itself, create jobs.

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Higher tariffs don’t necessarily mean that American consumers will pay higher prices for imported goods.

Many factors influence how tariffs affect consumer prices and the profits of importing and exporting businesses. One widely cited study shows consumers may initially bear the brunt of the cost for a few months, but the authors acknowledge that over time, some of the burden may shift back to foreign exporters.

Another recent study estimates that Chinese exporters ultimately pay 75 percent of the tariff burden. A third influential study shows that the anti-dumping duties imposed on South Korea in 2012 and China in 2016 led to significant and rapid supply chain relocations that lowered prices for the Korean imports and left Chinese import prices unchanged.

Some U.S. companies are already relocating their supply chains. U.S. shoemaker Brooks Sports CEO Jim Weber said last month that the company plans to move China production to Vietnam to avoid raising prices. Google reportedly is moving some production of electronics components to Taiwan.

While the U.S. has favored tariffs to redirect trade flows, China has relied on regulatory and legal provisions to limit U.S. inflows. Over time, as both countries recognize their co-dependence and need to achieve global scale in their key industries, the justification for trade barriers will diminish.

The challenge for negotiators is to put in place credible incentives promoting mutually beneficial trade without the overhang of tariffs and non-tariff barriers. Until then, tariffs will remain an integral part of the U.S. negotiators' toolkit.

William Lee is chief economist at the Milken Institute. The views expressed are the author’s and do not necessarily reflect those of the Milken Institute or its affiliates.