"They are a powerful economic-policy weapon."
Tariffs are arguably the most powerful component of a country’s foreign-policy weaponry. It is also the most risky. The reason for this is that governments that resort to tariffs have two kinds of politics to reckon with. One—the obvious one—is geopolitics. The other, less obvious one is domestic politics.
In the geopolitical arena the risky and frightening aspect of the use of tariffs in the conduct of foreign economic policy is the ‘R’ word—retaliation. Countries that find themselves at the receiving end of tariff action are not in the habit of rolling over and playing dead. They retaliate, and when they do, they pick economic areas where damage to the tariff-raising country’s economy will be greatest. As in boxing, “Hit him where it hurts” will be the battle cry of the retaliator.
To really “hit him where it hurts,” all that the trade strategists of a retaliating country have to do is study two maps, namely, (1) a map showing the geographical distribution of the tariff-raising country’s productive facilities and (2) a map indicating the areas where the ruling party of the tariff-raising country was victorious in the most recent election. Such maps are easily obtained. In the US, the states that went for Donald Trump in 2016 were the so-called Red states, augmented by the Blue (Democratic) states that ended up being counted for Mr. Trump because of the Electoral College system.
In the geopolitical sphere the implications of tariff-raising are clear: it’s country-versus-country. In the domestic political sphere the implications are less clear because the tariff-raising country does not know the direction and the coverage of the retaliatory action. This can be particularly grievous for agricultural industries: a crop of, say sorghum, that cannot be sold because of loss of an overseas market will appear as a loss in a farmer’s income statement.
Going by the hit-them-where-it-hurts strategy, the Chinese, the Canadians and the European Union members were bound to target—and have in fact targeted—the industries and exports of the states that put Donald Trump over the top in 2016. These mainly are the states of the South and Midwest.
The Chinese are retaliating by imposing or raising tariffs on manufactured products originating from states that went for Donald Trump in 2016. Of late Mr. Trump has been called out by Senators and Representatives representing states that are big producers of corn, sorghum, pork and kindred products as well as by Congress members who represent states producing industrial goods. The Chinese—as well as the Canadians and EU members—know how to effectively retaliate against the US.
Tariffs are a very powerful economic-policy weapon, and countries should wield this weapon with moderation, judiciousness and a clear eye for the political fallout.
(ERRATUM: The eighth to the last sentence of my June 20 column should have read as follows. “If such Chinese exports are price-elastic or income-elastic, the Trump tariffs or tariff increases will be absorbed—and paid by—American consumers.”)