Why Alternatives To Tariffs Can Be More Effective

Jun 21, 2018
Originally published on June 21, 2018 9:53 pm
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AUDIE CORNISH, HOST:

Starting tomorrow, the European Union will start taxing imports of goods from the U.S. Harley-Davidson bikes, peanut butter, bourbon, even orange juice are among the targets. It's the EU's response to President Trump slapping big tariffs on imports of steel and aluminum. Trump also announced more tariffs on goods from China.

Cardiff Garcia of our daily economics podcast The Indicator has been keeping track of it all. He says the thing is, tariffs usually don't work out as planned. Cardiff, welcome back to the studio.

CARDIFF GARCIA, BYLINE: Hey, Audie. And, no, they don't.

CORNISH: Well, here's the thing. Tariffs are a tax on imports, which is supposed to make imports more expensive and domestic goods at least relatively more appealing, right? Why doesn't it work out that way?

GARCIA: For a few reasons. But for starters, companies and countries can find ways to get around them. So I spoke to Jared Bernstein. He's an economist who used to be with the Obama administration. He's been looking at trade issues for years. And so one option is to very slightly alter your product to get around the way that the tariff is written.

JARED BERNSTEIN: I remember that - when we put a tariff on Japanese motorcycle engines that were 700 centimeters and the Japanese quickly started making motorcycle engines that were 699 centimeters.

GARCIA: And not only that, but countries can also find ways to assemble their products in another country so that it ends up getting shipped from that second country to the United States, and it avoids the tariff that way. So, yeah, there are ways to get around them.

CORNISH: All right, so first you can be slick with the production. The other thing is something called the boomerang effect. Can you explain that?

GARCIA: Yeah. It essentially means that the point of a tariff is to hurt another country that you might think is not playing by the rules and trying to send more of their products to the United States and then not let the United States send as many of its products over there, right? And what ends up happening with the tariff is that you put it in place, and instead of just harming the country that's not playing by the rules, you end up harming yourself.

Take a company like Boeing, right? It imports Chinese products in order to make airplanes, OK? But what if China also retaliates? Well, then you end up in a situation where Boeing ends up importing more expensive products from China, and it has a harder time selling its airplanes back to China. And so you end up in a situation where the tariff just ends up harming yourself and not the other country you were trying to target.

CORNISH: All right, Cardiff, so what's the alternative to tariffs that would work better? I mean, what do you do if you feel like a country is being unfair in their trade dealings?

GARCIA: You got a couple of options. The first one is to actually do nothing about the trade war itself and instead just recognize that the United States benefits from free trade. It helps the economy grow more. And so it should just invest a little bit more money in those parts of the country that are hard-hit specifically by trade.

There's a second option, and it has to do with how to offset the effects of what's called currency management or, if you want to be less diplomatic about it, currency manipulation. And here we're specifically talking about China. It has to do with the way that China, the Chinese government, buys U.S. dollars in global currency markets in order to make the dollar more expensive and its own currency, the Chinese yuan, cheaper. And that has the effect of making Chinese goods cheaper inside of the United States, but it makes it more expensive for American companies to sell goods inside of China.

CORNISH: So is there a way to counteract that?

GARCIA: Well, one possibility is that we could essentially do what the Chinese are doing but going in the other direction. So if the Chinese are buying American dollars to make their currency cheaper, we could buy the Chinese yuan to make the American dollar cheaper. And in that sense, the United States won't itself be engaging in currency manipulation necessarily. It'll just be offsetting the currency manipulation that the Chinese have been engaging in for a while.

CORNISH: OK, got it. Cardiff Garcia, thanks so much.

GARCIA: You got it.

CORNISH: And you can hear more about this and all things trade and economics in the short daily podcast The Indicator from Planet Money. Transcript provided by NPR, Copyright NPR.