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Tariffs Pose Threat to U.S. Tech Competitiveness, Research Shows

· June 1, 2018

The news that a trade war with China may be averted was short-lived. The Administration had decided to delay the proposed $50 billion in tariffs as a result of the Section 301 investigation, and the joint statement by the U.S. and China, while vague, was an encouraging sign that cooler heads may prevail. However, officials have since changed course yet again with Tuesday’s announcement from the White House that the U.S. would be moving forward with the tariffs after all. This is bad news for the U.S. tech sector and its consumers. A policy brief by the Peterson Institute for International Economics (PIIE) shows just how detrimental to U.S. tech competitiveness a broad imposition of tariffs would be to address China’s current practices, calling them “a commercial own goal.”

The Trump Administration directed the U.S. Trade Representative (USTR) to conduct an investigation into China’s practices regarding technology transfer and intellectual property under Section 301 of the Trade Act last fall. USTR delivered a report in March detailing its finding and proposed an additional duty of 25 percent on a list of products from China. The announcement was followed immediately by China threatening retaliatory measures, which the Administration then responded in kind by announcing an additional $100 billion in tariffs. USTR wrapped up its public comment process with a marathon three day public hearing on the Section 301 tariffs in May, hearing from over 120 witnesses from multiple sectors of the American economy.

Industry in general was unified in viewing the practices that launched the Section 301 investigation as a concern. However, most are also in agreement that the current Administration’s proposal to implement up to $150 billion in tariffs is not the appropriate response and will not effectively address the threat posed by China.

The PIIE study illustrates just how the tariffs actually hurt the industries that they are designed to protect. Authors Mary E. Lovely and Yang Liang argue that the product list produced by USTR to direct tariffs may prove more harmful than effective and will “hit bilateral trade in fast-growing, knowledge-based sectors the hardest.” They also predict that “to the extent that the tariffs land directly on productive input, the tariffs will raise the costs of manufacturing goods in the United States, push American firms offshore, and handicap US-based exporters selling in foreign markets.”

Methodology

First, the study examined whether the targeted industries in USTR’s list of products would help sectors that are hit by China’s forced tech transfer practices. Using U.S. Department of Commerce numbers, they identified industries that are “patent-intensive US industries.” The most “patent-intensive industries” are found to lie within five NAICS Sectors – 325 Chemicals; 333 Machinery, except electrical; 334 Computer and electronic products; 335 Electrical equipment, appliances and components; and 339 Miscellaneous manufacturing commodities. These sectors are then compared to USTR’s proposed tariff list. There was an 80 percent match-up, showing that USTR did effectively target Chinese exports in sectors where American firms were affected by China’s practices.

However, the study carefully observes that this does not mean that the tariffs will have the intended effect and will not help these sectors because the tariffs do not account for today’s world of global supply chains. In addition to being “patent-intensive”, they are also sectors who engage heavily in supply chain trade. The study illustrated this by looking at factors such as the share of exports to the U.S. by “foreign-funded enterprises” (FIEs) operating in China. The study notes that when comparing Chinese customs data in conjunction with U.S. import data, over half of U.S. imports in the top five NAICS Sectors, other than chemicals, originate in an FIE. The study goes on to say that while there is a marginal value added by domestic Chinese suppliers to the FIEs, the trade itself is the result of multinational sourcing and supply decisions, therefore the impact of the tariff will not be felt greatest by China, but the FIE.

Therefore, the study noted it was “fair to describe the tariffs as taxes on American productive inputs purchases from affiliates of foreign firms operating in China, many of them wholly owned foreign subsidiaries.” Tariffs on part of these trading relationships have significant adverse impacts to the entire production cycle. This would significantly impact a U.S. firm’s ability to compete in the world market as it is not easy to quickly resource manufacturing.

China has long taken advantage of U.S. firms’ need to operate in the Chinese market to remain globally competitive, and they have increasingly pursued discriminatory regulations. However, the U.S. would be wise to carefully consider the risk of an all-out trade war. Threats of tariffs can be an effective tool, but when the tariffs are the tool itself, escalation quickly follows. Tariffs as proposed will do little to address the concerns about forced technology transfer while significantly harming U.S. competitiveness in high technology industries and disrupting global supply chains.

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