Tariffs would work — if Trump could build an economy like China’s

FROM THE WASHINGTON POST | JULY 28, 2018

A radical reinvention of our economy would be possible if — if — the president and Congress emulated China’s infrastructure investment.

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In recent weeks, President Trump has threatened tariffs on $500 billion of Chinese imports, on $200 billion of auto imports from various countries and on any nation he perceives as ripping off the United States. “We are being taken advantage of,” he said, adding, “and I don’t like it.”

While the legal basis of such tariffs remains tenuous, and while (for now) these are closer to threats than policies, Trump’s goal appears to be restoring a domestic manufacturing base that has long since been globalized. If a few tariffs are the only tools, that will fail. But a radical reinvention of our economy is possible if — big if — Trump and Republicans in Congress decide to do what China does.

As it stands, alone, the level of tariffs being levied can’t come close to compelling that change. Unless they’re matched by massive public and private spending on domestic infrastructure, physical plants and training, those tariffs will amount to a de facto tax on American consumers. If Trump wants these tariffs to have their desired effect, he’ll need somehow to erect high barriers on a wide range of goods and then galvanize Congress to undertake a domestic spending program unparalleled since the New Deal and the retooling of domestic industry during World War II. And that spending will need to be channeled and focused on building a manufacturing and transportation infrastructure on a scale that only one country in the world has done in the past 50 years: China. If Trump wants to make America self-sufficient in all key aspects of its economy, he’ll need to emulate not just Franklin D. Roosevelt, but also Deng Xiaoping and Xi Jinping.

Turning the United States into a state-run economic powerhouse would make for debatable policy, to put it mildly, but it would at least be a coherent and compelling vision that has a chance of success, though at great economic and systemic cost. Out would be any pretense of free markets and small government — staples, until now, of GOP ideology. In would be long-term planning, trillions in domestic investment fueled by deficit spending and economic walls of high tariffs keeping the world at bay far more effectively than the physical wall that Trump so craves on the southern border.

If you add up the estimated tariffs against $50 billion in imports from China; 25 percent tariffs on steel and 10 percent on aluminum imports from Canada, Mexico and the European Union; plus the reciprocal tariffs levied against the United States, the total remains pretty small compared with overall trade.

Even this relatively modest wave of tariffs has had a negative impact on select American industries in select states. It’s the reason for the president’s announcement this week that the administration plans to dedicate $12 billion to making farmers whole, in a sense, for losses they’ve incurred from tariffs levied by other countries in retaliation — a pittance compared with what a comprehensive industrial policy would cost.

Right now, the administration has nothing resembling this kind of coherent approach.

The Constitution gives Congress “Power to lay and collect Taxes, Duties, Imposts and Excises,” but the 1974 Trade Act gives the executive power to retaliate against foreign governments that violate trade agreements, and the Trade Expansion Act of 1962 grants the president power to impose tariffs to protect national security. But a few tariffs here and there don’t amount to an industrial policy that will reconfigure globalized commerce. Consider: Trump’s relatively amiableWhite House meeting Wednesday with European Commission President Jean-Claude Juncker was a step toward ironing out an assortment of trade issues with European trading partners, but it yielded nothing concrete. It was, as CNN described it, “a deal to make a deal.”

What, then, could meaningful reform look like? Tariffs on somewhere between $1 trillion to $2 trillion of exports combined with an equivalent level of domestic investment spurred by the federal government and then amplified by state and local initiatives. It’s not unheard of. After all, the February 2009 emergency spending bill — known both affectionately and derisively as the “stimulus,” was about $800 billion and was used for both short-term, shovel-ready projects and long-term investment in research and development. The multiplier effect of, say, a $1.5 trillion infrastructure and capital spending bill, even in the current low-unemployment, low-interest-rate environment, could be substantial, particularly if some of it were structured to spur public-private partnerships and directed federal matching funds to state and local projects.

Would that really happen? On election night in 2016, Trump said: “We’re going to rebuild our infrastructure, which will become, by the way, second to none.” Days later, the Hollywood Reporter’s Michael Wolff reported that now-former White House adviser Stephen Bannon told him: “I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Shipyards, ironworks, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.” But Bannon left the White House, and there’s been little movement by the administration or Congress on this front.

That’s what’s called for, though. The U.S. electrical grid needs an overhaul, potentially costing trillions, money which China has already spent building its own modern grid. To retool hundreds of factories with just-in-time floors — those adaptable to assembling multiple products — expensive, high-end robotics are called for. Apple reportedly plans a $30 billion capital expenditure in the United States over the next five years, but that pales in comparison to what it would take to re-shore the entire Apple supply chain centered in Shenzhen. To keep the next generation of its products, such as iPhones, affordable, significant federal subsidies would be needed along with the expected tax incentives to match Apple’s own investment. And that is just one of the most well-known of hundreds of companies making everything from auto parts to washing machines that would need to do the same.

World War II provides some precedent, as the federal government took control of large chunks of the manufacturing sector and retooled it for the assorted essentials of war. Such an endeavor is a group effort, however, and that one knew few partisan boundaries and required coordination, patience and sacrifice (rationed consumer goods, for instance). To replicate something on this order takes more than a presidential tweet or dashed-off tariffs justified by narrow clauses of obscure laws. Not long ago, Trump tweeted:

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Not so.

China’s government has spent decades honing a long-term industrial policy with legions of technocrats overseeing it. In Washington today, we have an administration making up policy on the fly. That may shake things up, but it can’t be the foundation of an economic revolution.

State-driven industrial policy worked in World War II in the United States and in China because government enjoyed high levels of legitimacy and control. Such policy can be inherently coercive, as it often has been in China, with the government picking winners and losers, and is inherently in tension with the free market. That may or may not be what either America’s political class or its body politic want, but it would mark a sharp break with the policies of recent years and force a necessary debate about who we are as a nation and who we collectively want to be. Little of that thinking, or will, is evident just now.

Current trade policy is incoherent because it suggests simplicity and ease — Trump hallmarks — focusing on dramatic gestures aimed at transforming everything without making tough choices about where to prioritize resources. If only. The problem with the president’s tariffs isn’t that they can’t be defended, but that they’re detached from all that would be required to make them good policy. If Trump really went big, it would open a vital and needed debate about the future. Instead, we’re left with the illusion of bold policy, full of bombast and void of substance.

Source: https://www.washingtonpost.com/news/postev...