President Joe Biden finally promises to lift some of his predecessor’s tariffs on Chinese imports, which is the correct approach. However, if the president wants to keep inflation low in the post-Covid economy, he will need to do more. The administration’s trade strategy must be completely reversed: it must stop boosting demand for US-made goods and instead seek out the lowest-priced commodities from across the world.
This will necessitate long-term investments in Latin America, Southeast Asia, and West Africa. It will necessitate the removal of “Buy America” clauses from federal contracts. In essence, it will necessitate a dramatic reordering of US trade objectives, shifting from safeguarding US manufacturers to fighting for US consumers.
Unilateral free trade with US allies would be the norm under such a strategy. For instance, the government may eliminate all tariffs and trade obstacles with Japan and then use soft power to persuade Japan to reciprocate. This would give the US less ability to defend its own exporting industries, but it would also result in larger and more widespread savings for US consumers. In a period when inflation is by far the most serious economic concern, keeping consumer prices low must be Job No. 1.
The difficulty with unilaterally lowering tariffs is that Washington has seen a fundamental bipartisan movement against free trade during the previous six years. On the right, Donald Trump spearheaded the charge, using the issue to help him defeat the Republican Party establishment in 2016. On the Democratic side, the Biden campaign’s 2020 economic policy platform included a set of initiatives aimed at bolstering the Midwestern vote.
To be fair, these moves were part of a long-overdue reassessment, not simply political. For decades, experts on both sides of the aisle supported free trade and disregarded claims that it jeopardized US employment development.
Even Nobel laureate Paul Krugman, who demonstrated that tariffs might be advantageous in some cases, criticized trade restrictions.
Ironically, economists were able to forge a bipartisan consensus in favor of free trade precisely as the conditions required to sustain their case were deteriorating.
The rapid growth in the Chinese export economy in the first decade of the 21st century delivered lower prices for consumers and freed up cash that could be spent on other things.
The theory was that this extra spending would create new jobs for the workers that were being laid off in the manufacturing industry
The premise was that the additional expenditure would create new employment for employees laid off in the manufacturing industry.
However, the rate of change — nicknamed the China Shock — was so quick that the job market was unable to keep up.
Job losses mounted in the Midwest, but demand for new workers soared on the coasts, where most of the newly available wealth was spent on personal services.
Many workers were too elderly to relocate, and those who did faced a housing crisis and quickly rising rents. These two consequences — rapidly declining labor demand in the industrial Midwest and a housing constraint on the coasts — have locked less educated but once middle-class workers in a nearly 20-year era of stagnating real incomes and persistent underemployment.
Then, just as the aftereffects of the China Shock began to fade, Covid struck. Demand for services fell, demand for manufactured items increased, and demand for warehousing and distribution employees increased faster than at any other time in US history. Workers who had been worst damaged by the China Shock were suddenly in high demand.