Tariffs have not succeeded in reducing the U.S. trade deficit with China. A much better way for the U.S. to tackle this problem and rebuild domestic production is a cap-and-trade system similar to the one for greenhouse gas emissions. The beauty of such a system is its insulation from political favoritism and bureaucracy: Market forces would determine who buys licenses and what gets imported. The cap’s level can be managed relative to a target such as GDP or the size of the trade deficit.
Three years of trade war and supply disruption from the pandemic have the United States looking to reverse decades of migration of American production lines to China and the resulting loss of industrial capability and manufacturing jobs.
The U.S. government wants to rebuild domestic production, especially of critical items, and reduce dependence on an increasingly hostile strategic rival, and U.S. corporations are rethinking their sourcing risks given that China President Xi Jinping could shut down shipments to the United States at any time.
The one policy tool that would do both is a cap-and-trade system that would entail the U.S. government issuing rights to import certain dollar amounts of Chinese goods and then allowing those rights to be traded.
The Need for a New Approach
Other tools have failed: U.S. imports from China continue to rise and in 2021 will likely exceed the pre-trade war 2018 peak of $539 billion. If the United States were to raise existing tariffs on Chinese goods or impose new ones, China could easily follow suit as it has in the past; tariffs also create uncertainty for buyers in terms of their duration and the likely tit-for-tat responses they provoke. The United States has won the lion’s share of the complaints it has filed with the World Trade Organization against China for issues involving individual products, but by the time the WTO has completed the long adjudication process and levied a penalty tariff, the damage has been done.
Complete Article at HBR
