Select Committee Listens to Decoupling, Moderate Engagement Advocates

The House Select Committee on China, having heard from witnesses advocating a punitive approach to Chinese trade and investment (see 2305180064), asked to hear from advocates for both that approach and a more moderate one in a debate on Capitol Hill.

The first third of the debate July 19 addressed how the U.S. should treat Chinese imports. In May, former U.S. Trade Representative Robert Lighthizer said tariffs on Chinese goods should be hiked high enough that the U.S. no longer imports from that country more than its exports to it.

Elizabeth Drake, a lawyer with Schagrin Associates representing the pro-decoupling view, did not argue for tariffs that increase to control the trade deficit, but did say that not only should China not continue to receive most-favored-nation status (on goods not subject to Section 301 tariffs), but that the Column 2 tariffs would be a "blunt approach."

Drake opened her argument by describing hollowed out manufacturing sectors, such as solar panels and electric vehicle batteries, and saying that studies have estimated that the surge of exports from China that followed permanent normal trade status eliminated somewhere between 2.4 and 3.7 million jobs.

If we revoked PNTR, she said, it would shrink the U.S. trade deficit with China and rebuild domestic supply chains.

Economist Mary Lovely, a senior fellow with the Peterson Institute for International Economics who has studied how import competition with low-income countries' manufacturing affected domestic jobs, said ending PNTR would hike tariffs to 50% to 60% on many goods, and, for children's toys, 90%-100%. Laptops and cellphones, which were exempted from even the lowest 7.5% 301 tariffs, would be taxed at 35%.

Lovely acknowledged that manufacturing jobs have declined even as the value of what U.S. manufacturers produce has grown. "The issue is not whether workers have been hurt," she said, "the issue is whether revoking PNTR will help them."

She said it will not. Moreover, she said manufacturing would move to Thailand and Vietnam, not the U.S.

Drake responded by saying Congress should take a "considered approach," hiking tariffs on consumer goods but evaluating whether hiking tariffs on manufacturing inputs would hurt U.S. manufacturing employment.

Lovely reacted by saying, "Is Congress really going to begin to write line items for tariffs" for Chinese goods?"

Committee Chairman Rep. Mike Gallagher, R-Wis, in a brief interview after the debate, said that would be hard, but not impossible. "I mean, if it means we can't have an August recess, or any recess, so be it." He added: "No doubt it would be very, very difficult. But on any complex issue, Congress is subject to lobbying."

Drake agreed with Lovely's point that importers, not Chinese producers, pay most if not all of the costs of the tariffs. "That is the goal of the policy," she said. "That is the purpose, to change the incentives" on where to source.

Christopher Padilla, head of IBM's global lobbying, teamed with Lovely for the moderate point of view. He said he was glad to hear Drake didn't want to hike tariffs on intermediate goods as high as Column 2 would require, because IBM has looked to replace Chinese inputs for the mainframe computers the company builds in Poughkeepsie, N.Y., and could not find alternatives, so it has paid tens of millions of dollars in 301 tariffs as a result.

He said the Section 301 tariffs were a trial run for hiking tariffs on all Chinese imports, and they have not fixed the trade deficit with China, nor have they led to reshoring of manufacturing. So, he argued, why ramp up a failed policy?

The committee mostly listened during the debate, but a few members got to ask questions. Rep. Dusty Johnson, R-S.D., asked Drake if they did take this action -- which the moderate side called a declaration of economic war -- where would soybean farmers sell their products? He noted that 60% of the crop is exported to China.

Drake said they could sell to the customers of the country that took over their market share in China. She said the overall demand for soybeans would not fall.

"If that was the case, why did prices drop by $2 a bushel" when China retaliated for 301 tariffs, he asked. Drake said it was uncertainty about how long the trade war would last, but congressional action would provide certainty.

Lovely said dryly, "I think our opponents are quite willing to impose costs on others."

In the brief interview after the debate, Gallagher said one of the things that struck him on import policy was that "reasonable people can debate whether China should lose PNTR, or aggressively be forced to comply" with its World Trade Organization obligations. "But I don't think there's a debate that we need to have a more proactive positive agenda at the same time we have a more punitive agenda vis-a-vis China."

Gallagher said this came up at the edges of the debate. Rep. Jake Auchincloss, D-Mass., asked both sides if they supported renewing the Generalized System of Preferences benefits program. They both did, though Drake hedged that its rules of origin need to be tightened, and that eligibility should depend on whether the trade preferences are really helping workers and the environment in the developing countries that participate.

Padilla said it "makes a lot of sense" to renew GSP, and added that he wishes the U.S. hadn't withdrawn from the Trans-Pacific Partnership.

Gallagher said during the post-debate interview that he doesn't think "there's any prospect of reviving a big multilateral trade deal right now." But, he said, the administration should be negotiating a bilateral free trade agreement with Taiwan and the U.K., which he thought could get congressional approval.

When asked what he thought of Padilla's argument that the Section 301 tariffs didn't cause a manufacturing renaissance or substantially change the trade dynamic with China, and therefore hiking tariffs more would be counterproductive, Gallagher said: "I guess it depends on what you think the purpose of the 301 tariffs are. If the main purpose, as many of the Trump administration argued, was to rectify the trade imbalance, then I think empirically, no, that didn't achieve that purpose.

"That being said, if the main purpose was to shine a light on bad past behavior by the Chinese Communist party, whether it's intellectual property theft, take your pick, and deter future behavior, I thought 301 tariffs were useful in that regard."

He said he didn't think the Section 301 track record will dissuade him from future tariff hikes on Chinese goods. Raising the cost of Chinese goods is "trying to change market behavior in response to the distortion of the international market by the other side."