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The rest of the world traded in its belief in tariffs two decades ago, putting faith in open markets and free trade – a bet that has paid off well. China is betting we’ll remain faithful to that.

Doubting Ourselves

Many other nations share our faith in free markets. China thrives on a contrarian strategy, trusting that our faith will prevent any deviation from our principles.

In frustration at the current commotion over threatened U.S. tariffs on this or that from here or there, a friend suggested the old adage: “When the only tool you have is a hammer, then every problem is a nail.” The point was that the threat to impose tariffs seems to be the Trump Administration’s first and only instinct in any trade dispute, sparking controversy and depressing financial markets. In my view, the frustration is even more personal. Some businesses are genuinely harmed by the imposition of tariffs, but most of us recoil from disbelief that any intelligent person would believe in the efficacy of tariffs any longer. 

Let me first acknowledge from my own belief: tariffs are unfair and counterproductive. A tariff is meant to punish the party selling a product, but it punishes the buyer (or would-be buyer) too. He or she pays a higher cost, or loses the chance to buy that product. Tariffs are a blunt instrument in negotiation, one that had more salience some decades ago, when domestic and regional markets had more than just one or two suppliers in any product or service category — as we have now. Before 2001, the issue of tariffs lingered in U.S. politics, with labor and some business groups regularly demanding market protection, arguing against other businesses and consumers urging open markets.

The rise of China as a global industrial force, following its entry to the World Trade Assn. in 2001, changed our debates. Since then, industrial and consumer markets together have been effectively internationalized, and most of the one-time advocates of tariff protection have little or nothing to preserve. Free and open markets prevailed. Or so we believed.

The remnant proponents of tariffs generally represent industries producing commodity-grade goods (like steel) that prosper when some competitors are blocked or hampered. Or they are renegade investors and economists who have gravitated to tariffs as a contrarian strategy, because just as the global economy has been fully realized and standardized, the principle of free and open markets has become conventional, in the U.S., in Europe, and across most of the world.

If you are younger than 40 you may not appreciate why this is remarkable. Tariffs have become an abstraction: something that may be discussed (similar to the rehabilitation of “socialism” among the younger set) but which is entirely unrealistic, illogical, and impractical. Sensible people simply don’t believe in tariffs. And because tariffs are such a remote possibility we don’t have to reconsider our principles. Yet, tariffs are in discussion, and they are being proposed by the man elected to lead the most prosperous nation in history.

We many not view tariffs as plausible, but apparently some trade partners take such a prospect seriously — and are willing to negotiate from that sense of danger. In the past year, negotiations with Mexico, Canada, and the E.U. have progressed from tariff threats to ongoing negotiation.

All this has been stage-setting for Chinese negotiations. These other nations share or acknowledge our faith in free and open markets. The Chinese economy has thrived on the contrarian belief, trusting that our faith would prevent any deviation from our open-market principles.

The rest of the world traded in its belief in tariffs two decades ago, putting faith in open markets and free trade – a bet that has paid off well.  China’s commitment to free trade is limited to the foreign markets where it does business. Its domestic economy benefits from globalization even though it’s not truly open to foreign goods. The nation regularly promotes and subsidizes domestic businesses, disregards intellectual property rights, and compels foreign businesses to transfer technology to its local enterprises. This is all part of the balance that new U.S. tariffs would upend.

We may not personally believe in the validity or effectiveness of tariff policies, but our faith, nominal though it may be, is not motivating any of the negotiation now. We may yet learn whether introducing doubt about our commitment to fair trade can bring to realization the principles we have already accepted.

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