Biden’s China tariff threats are more bark than bite, economists say

The Biden administration this week sent several signals of a toughening of the American economic strategy against China.

President Joe Biden met with Japanese Prime Minister Fumio Kishida in Washington on Wednesday to announce increased military collaboration between the two countries and to demonstrate the strength of the U.S.-Japan economic relationship.

“We agreed that our two countries will continue to respond to challenges regarding China through close coordination,” Kishida said at a joint press conference with Biden after their bilateral discussions.

Earlier in the week, Treasury Secretary Janet Yellen imposed stricter economic red lines during a visit to China.

Yellen amplified a concern shared by the United States and EU members that Chinese companies are producing overcapacity of cheap, clean energy products, such as solar panels and electric vehicles. If there are not enough buyers to respond to this offer, Beijing could sell them on world markets.

The United States is not ruling out future tariff hikes on Chinese imports if Beijing does not address the overcapacity problem, Yellen said in an interview with CNBC’s Sara Eisen following sessions with his Chinese counterpart, Vice Prime Minister He Lifeng.

China has so far denied the overcapacity accusation as “baseless” and countered that the United States was threatening protectionist trade policies to stifle global competition.

The prospect of new economic tensions between the United States and China comes as the two countries try to stabilize their already strained relations after several years of minimal communication, triggered in part by a years-long tariff war.

“It’s still unclear how this relationship will last in the months and years to come,” Yellen said at a news conference in Beijing on Monday.

Taken together, the administration’s moves translate into useful talking points for Biden on the 2024 campaign trail, where he and Republican Donald Trump both express a hawkish worldview toward China.

But they also risk refreezing bilateral relations between the two superpowers.

Economists largely view Biden’s threat to impose higher tariffs against China as a political rather than economic tool.

“It’s not going to solve the problem. It’s just for show,” said Christopher Tang, a professor of global supply chains at the University of California, Los Angeles. “In my opinion, this is about voters rallying their support for Biden.”

Biden has stepped up his economic aggression toward China, just as Trump is doing the same, both vying for the votes of American workers.

Trump said he would consider a 60% tariff on all Chinese imports and a possible 10% tariff on all imports across the board.

Biden has imposed his own tariffs on Chinese electric vehicles and other clean energy products. The outgoing president doubled down on his threats, pledging to protect the green American jobs his 2022 Inflation Reduction Act helped create.

“Tariffs cannot solve the underlying problem, which is that the Chinese system has structural problems that are not resolved,” said Daniel Rosen, co-founder of research firm Rhodium Group.

Rather, Rosen views tariff hikes as an “interim measure” to temporarily curb surges in overcapacity when they occur. He added that the increases also serve political purposes by showing voters that “the people currently in power are not asleep at the wheel” when it comes to global economic threats.

Tariffs can have unintended economic consequences that end up hurting U.S. importers and consumers more than the targeted Chinese exporters.

For example, U.S. importers bore almost the entire cost of Chinese tariffs imposed under the Trump administration and largely maintained under Biden, according to a report from the U.S. International Trade Commission.

“U.S. importers absorbed the costs of the tariffs through a combination of less favorable margins for sellers and higher prices for downstream consumers or buyers,” the report said.

This is partly because of loopholes that Chinese exporters can use to circumvent tariffs.

“You can impose more tariffs, but there are workarounds,” said Professor Tang of UCLA.

For example, the Office of the U.S. Trade Representative lists tariff exemptions for certain products if stakeholders prove that the tariffs caused some form of economic harm or if the product could not be imported from elsewhere.

Chinese exporters can also circumvent tariffs by shipping their products to another country for the final stages of manufacturing before their final destination in the United States. For example, China could ship battery components to Mexico, where the battery would be fully assembled and then exported to the United States, thereby avoiding the levy.

Overall, tariff increases could have negative short-term consequences for the U.S. economy.

Goldman Sachs estimates that each percentage point increase in the effective tariff rate would directly reduce GDP by 0.03%, increase consumer prices by 0.1%, and increase inflation for a year.

“We’ve seen the consequences since Trump’s tariffs…a lot of manufacturers have passed on increased costs to consumers,” Tang said. “So the question is: What exactly are we trying to accomplish?”