As America turns to protectionism, the world turns to China

Dr Eric Crampton
The Post
20 May, 2024

Pierre Elliot Trudeau, Canadian Prime Minister for most of 1968 through 1984, and father of the current Canadian Prime Minister, had a wonderful quip about being neighbours with the United States.

In a 1969 state visit with President Nixon in Washington, Trudeau said, “Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt.”

Put another way, Americans often do not really notice the effects of their policies on places farther afield.

America might be missing something important about the effects of its trade policy choices – like its tariffs on Pacific countries and on its NATO allies.

If Americans and their government increasingly see China as a strategic threat to be countered, trade policy that inadvertently encourages others to maintain and deepen trade links with China are counterproductive.

American economist and policy commentator Noah Smith recently argued that “Protectionism is now the consensus economic policy of both major political parties in the United States. There is currently no major party or presidential candidate that you can vote for in America that is even remotely interested in free trade.”

For a small open economy like New Zealand that depends on rules-based orders and free-trade, it isn’t ideal.

Smith canvasses potential justifications for the latest round of American tariffs against Chinese electric vehicles; the full set of tariffs against China includes steel, aluminium, semiconductors, solar panels, lithium-ion batteries, medical products and more.

Setting 100% tariffs against Chinese-made electric vehicles, 50% tariffs against Chinese-made solar cells, and 25% tariffs on other critical materials for electrification, like batteries and magnets, will obviously hinder American efforts to reduce greenhouse gas emissions. It makes a green transition more expensive in the short term and is unlikely to improve things over the longer term.

Smith concludes that this tariff round is less about normal protectionism than about protecting American defence manufacturing capacity so that, in case of conflict, it could be repurposed.

President Biden has previously described climate change as “the ultimate threat to humanity.” So the Biden administration must view potential conflict with China and the need to shift production to friendlier places as very important indeed – something more important than an ‘ultimate threat’.

Unfortunately, much of the rest of American trade policy works against that purpose.

New Zealand has a strong bilateral free-trade agreement with China, now our largest trading partner. In the year ended September 2023, China was the final destination for 27% of New Zealand’s exports by value. Exports to China exceeded exports to Australia and the United States combined.

Every trade barrier that America sets against imports from New Zealand risks distorting trade away from America and toward China. So does every trade barrier that America sets against other members of the Regional Comprehensive Economic Partnership agreement, which includes China.

Membership of the RCEP overlaps substantially with the Trans-Pacific Partnership, the CPTPP. America has chosen not to join that agreement, instead promoting a new Indo-Pacific Economic Framework for Prosperity – the IPEF.

Whatever the merits of the IPEF, the Biden administration has maintained the Trump administration’s hefty ‘strategic’ tariffs against imports from New Zealand and other countries: 25% on steel and 10% on aluminium.

If Americans hope the new tariffs will support manufacturing capability in friendly places – ‘friend-shoring’, as they call it, how then should we view tariffs on New Zealand steel that match US tariffs on Chinese batteries?

American protectionism generally hurts American consumers while encouraging other countries to deepen trade links with countries with China.

For example, America’s critical shortage of baby formula in 2022 ultimately stemmed from America’s complicated mess of tariff and non-tariff barriers. When one American producer faced production difficulties, shelves ran empty because regulation made imports impossibly hard.  

The American government temporarily eased restrictions during the crisis, but reimposed barriers when the crisis ended.

China remains the largest export destination for New Zealand’s largest category of exports: milk powder, butter, and cheese.

On one hand, then, America sees trade with China as being so risky that even climate goals should be set aside to reduce it. On the other, it is not seen as risky enough to be worth triggering sensitive senators from farm states by encouraging Pacific countries to shift trade links from China to America, even when doing so would make infant formula more affordable.

Alternatively, Americans simply have not made the connection between general American protectionism and other countries deepening trade links with China. For whatever discussion of ‘friendshoring’ there has been, America continues to set tariffs on its allies and friends.

The elephant might eventually figure out that setting tariffs on its friends makes trade with China more attractive to them. Until then, small trading countries will continue to flinch at America’s every twitch and grunt.

To read the full article on The Post website, click here.

Stay in the loop: Subscribe to updates