Preparing for the Second China Shock

Donald Trump is an old-fashioned protectionist, and he has been suggesting for a while that if elected he will quickly impose tariffs of 10 percent or more on all imports — a “ring around the collar” for the U.S. economy.

But President Biden is by no means a free-trade purist. His signature legislative achievement, the Inflation Reduction Act — which is actually mainly about fighting climate change — contains several nationalistic provisions designed to limit subsidies primarily to manufactured goods produced in North America. And the Biden administration is now imposing tariffs as high as 100 percent on Chinese exports of electric vehicles and taxes on other imported goods, including semiconductors and batteries.

The immediate impact of these tariffs will be small, because the United States currently imports very few of the affected goods from China. But Biden’s moves are more than a symbolic gesture. They’re a shot across the bow — a signal that the United States won’t accept a second so-called China shock, a surge of imports that could undermine crucial parts of the administration’s agenda.

To understand what I’m talking about, it helps to review some economic and intellectual history.

China’s exports of manufactured goods to the United States surged beginning in the 1990s. I think it’s fair to say that most economists, myself included, weren’t initially too worried by this development. There’s an old line in economics that if another country wants to sell you a lot of useful stuff at low prices, you shouldn’t protest — if anything, you should send them a note of thanks.

OK, even the most orthodox of economists knows that it isn’t that simple. Cheap imports may make a nation as a whole richer, but they can also hurt significant numbers of workers. There was in fact a fierce debate in the 1990s about whether imports from low-wage countries were a major reason for rising U.S. income inequality, with most economists — again, myself included — agreeing that imports were a cause of rising inequality, but not the main cause.

It has also been clear for a long time that trade deficits can be damaging if the economy is persistently depressed, with insufficient demand to produce full employment. This wasn’t a big issue for most of the initial era of surging imports from China, but it did become an important consideration after the 2008 financial crisis, which kept U.S. employment depressed for years. For what it’s worth, during that era I became quite hawkish on China, unsuccessfully urging U.S. policymakers to threaten tariffs unless China acted to reduce its trade surplus by increasing the value of the yuan. But that concern gradually faded away.