Virtual Media Briefing: U.S. Tariffs on Chinese Imports

GOODMAN: OK. Thank you. Well, good afternoon from Washington, everyone. This is an opportunity for us to tell you what we think or know about this move on Tuesday by the Biden administration, which, as you know—and we won’t belabor the facts—but the White House announced a series of stage tariff increases on about $18 billion worth of imports from China covering a wide range of goods—strategic goods from electric vehicles to syringes. And this is pursuant, obviously, to the four-year mandated review of the Section 301 tariffs imposed by President—former President Trump in 2018. So those are the basic facts, most of which I think you all know.

I will let my colleagues here in a second talk about the why and the so-whats of this announcement, and we’ll do that just in a second. But just to say from me that, you know, this move was widely—was I think not a surprise to most people, but it did mark a pretty significant departure for the Biden administration in their approach to de-risking from China in the sense that the focus to date has been mostly on trying to limit China’s access to sensitive technologies, and this move was more trying to limit their access to the U.S. market. So that is a pretty significant sort of addition to the de-risking strategy the Biden administration has pursued.

But beyond that, I’m going to come back in, but I want to go straight to Brad Setser, who has been thinking and writing and talking a lot about this move. And, Brad, if you could give us a sense of why this happened and why it matters.

SETSER: Well, in some sense it happened at least in part because it’s mandated by law. As you mentioned, there’s a four-year review which had taken—you know, there’s no statutory requirement that it be completed within a specific timeframe, but there was sort of an expectation that it would eventually be completed. And with that review you could, broadly speaking, come to three conclusions. One is that the tariffs were no longer serving their initial purpose and pull some of them off. You could conclude that they were perfect as designed and keep them as is. Or you could make some adjustments, and those adjustments could include increasing the tariffs to better serve the goal of the 301 but also to reflect current conditions.

And so I think the administration made a decision to update the tariffs to reflect current conditions. There’s no doubt that China never met its phase-one commitments—its own import targets, our export targets—so you always had a legal basis for raising tariffs if you wanted to because the—that was the enforcement mechanism if China didn’t live up to its phase-one commitments.

And then there’s an overlay of concern that behind very protective policies—I mean, China doesn’t allow much access to its market unless you invest in China and produce in China for the Chinese market, and it only subsidies domestic production. But inside China, there’s often a very—a lot of internal competition. Different provinces, different parts of the government back different champions, and out of that strong companies emerge with a lot of capacity. And I think there was a very clear concern that China’s export success in a range of clean technology products could undercut the Biden administration’s efforts to stand up an American and a North American clean energy supply chain. So if you look at the targets, they’re pretty targeted. And we can go back and talk about syringes, which is actually a very smart and important tariff in my view. But they’re basically targeted at the same sectors that have been the focus of the Biden administration’s Inflation Reduction Act, the focus of the bipartisan CHIPS Act, sectors that are sort of viewed as defining industries that are critical for America’s economic future; for the green industrial—the hope for a green industrial revolution; and semiconductors, which are a very core foundational technology.

So in a lot of ways I think this was a very expected move by the time that it emerged. If you were going to conclude the review with tariff changes, these were the sectors where you would say in response to China’s own policies some response by the United States was warranted.

GOODMAN: OK. Before bringing Zoe in, let me just ask, can you give a sense of what you expect the sort of economic significance of these measures to be, what—you know, whether they’re going to change patterns of trade with China, whether they’re going to have an impact on prices in the United States? Any other economic implications?

SETSER: Look, we don’t currently import many electric vehicles from China. We import right now electric vehicles predominantly from Korea, Japan, and Germany. So the immediate effect is on the—of the electric vehicle tariff is very modest.

The long-run effect is that there is not the competitive pressure from low-cost China supply, so that it may—it may have the effect of keeping prices higher. But it’s not going to lead to any incremental new increase in prices on the vehicle side.

There are more imports of batteries, so it could raise the cost of batteries, and that could have some knock-on effects on EV prices through that channel. But there’s a lot of battery production capacity that at least in principle will be coming online in the U.S. to meet projected electric vehicle batter demand. And for the other batteries, there was a phase-in period until 2026.

So in aggregate, 20 billion is not big of a number in the context of the U.S. economy. It is modest relative to the initial 301 tariffs. And so I don’t think you’re going to see any significant macroeconomic effects.

GOODMAN: OK.

Let me bring Zoe Liu into the conversation. Zoe’s also—I guess I didn’t introduce everyone. (Laughs.)

I’m Matt Goodman, and Brad Setser and Zoe Liu, all fellows or senior fellow or distinguished fellows, I guess, in the—in the Greenberg Center for Geoeconomic Studies here at CFR.

Zoe, same question that I just asked Brad: What is the likely economic impact of this to be on China? And you know, and then we’ll get into sort of China’s reaction to date and what they’re likely to do about it.

LIU: Sure. Thank you, Matt.

I agree with Brad. You know, he correctly identified earlier that really we are not seeing a lot of EVs imported from China right now. And we can—we can debate, you know, to what extent Polestar is or is not a Chinese company, but even if you count Polestar as a Chinese company—which some people might say it’s a British company—you know, we really do not import a lot of EVs from China. So from that point of view, I would second what Brad said. You know, really, this is not about current existing trade, but really it has a lot of potential damage, if you will, in the sense that—for two—for two measures. The first part, it might be continue to increase—encourage companies to diversify their supply chain out of China. And then on the other hand, it could also accelerate or even incentivize Chinese companies, many of which are very smart and innovative, they might move their factories and manufacturing facilities to areas where they might benefit from free trade agreement with the United States such as Morocco or Mexico.

And then I guess in terms of the immediate political response from China, I think—I would say that, you know, President Xi Jinping and Chinese policymakers, they are not surprised, right, because the Biden administration and Secretary Yellen, you know, people have clearly communicated to the Chinese counterparts to say that, well, if—you know, if you are not doing any—we are not trying to make a macroeconomic policy for China, but these are the measures going to come if things are not changing, right? So from that perspective, you know, they are not surprised.

However, we do see that the Ministry of Commerce and the Foreign Ministry, they already criticized, saying that this is unilateral actions; if America has any beef with or any complaints about Chinese measures—and by the way, they do not think China has an overcapacity problem. (Laughs.) So they basically said that, you know, you should bring it to WTO, but then at the same time, basically, Brad will know better than I do in terms of how the Trump administration basically made WTO appellation court not functioning at all, right?

But I—you know, apart from this immediate sort of political rhetoric, I do think that the longer-term implications is even stronger. On the one hand, it would reinforce China’s—or, the Chinese government goal to pursue self-sufficiency both technologically and trying to expand China’s so-called sphere or friends circle by further developing trade or free trade agreement with the global—with developing countries. And then on the other hand, China probably will also try to attract a rapport—broader rapport from Southeast Asia and even Russia. I mean, right now President Xi—or, President Putin is visiting China.

GOODMAN: OK, great. I should have mentioned at the start the two other fellows here in the Greenberg Center could, unfortunately, not be with us today, but both would have interesting things to say about this. And I would commend them to you if you’re interested in more of their perspectives: Rush Doshi, who’s our new senior fellow for China studies here in the Greenberg, and affiliated—been with us as well working on a big project on China, unfortunately couldn’t be with us—and Inu Manak, who’s our fellow for trade. So I would commend either of them to you.

But I was going to ask Rush if he were here the sort of broader implications for U.S.-China relations, and let me just ask, Zoe or Brad, if you have any thoughts about that. And then, Brad, also, to tack onto that—well, actually, for both of you—kind of what this means bigger picture for, you know, bifurcation of the global economy. So sort of U.S.-China relations and also kind of the state of the global economy as a result of all of this.

LIU: Brad?

SETSER: Zoe? Do you—do you want to start, Zoe?

GOODMAN: Zoe, go ahead.

LIU: No, Brad, why don’t you start? Because you just did this long study, which I highly recommend for people who haven’t read it. I mean, Brad very rarely write(s) long pieces, but if you haven’t read it you should read it. Brad, why don’t you talk about it?

GOODMAN: It’s harder to write short pieces, but that is a good piece. So go ahead, Brad.

SETSER: Well, I mean, that piece is on financial flows, and this measure is not going to change the fact that the U.S. runs an enormous trade deficit and China runs an enormous trade surplus.

I actually don’t think it is helpful to think about this as bifurcating the world economy. Why? Because auto trade has generally been fairly fragmented across geographies and across regions. The Chinese market historically has been a make it in China for China market, very low levels of imports and, until a couple years ago, very few exports. The U.S. market is mostly a North American market with some imports from Korea, Japan, and Europe. And Europe is more of a regional market, although there is a little bit of trade. But this is not—the global auto market was not a market where there was one global center of production—be it China, be it Europe, be it the United States—that was serving all regions of the world economy; it was a market defined by different regional centers of production. And I think what this measure does is says we’re going to maintain separation between the Chinese market, which has some very unique dynamics right now, and the U.S. market.

But there had always been separation. There was just new pressure for integration, and the U.S. concluded that in the current conditions integration would be very one-sided. It would be a flood of Chinese imports into the U.S. market. Why? Well, because there’s some really profound things happening in the domestic Chinese auto market. Five, six years ago, Chinese auto demand was closer to 30 million cars a year; now it’s down to under 25 (million). China’s economy is not doing that well. Five, six years ago, China had enough capacity to meet that higher level of demand with internal combustion engine—your standard cars—and then some. It has massive capacity in internal combustion engines. With the creation and very rapid growth of the electric vehicle industry sector inside China, backed by some important subsidies but also by some significant innovations inside China, and with a weak Chinese currency and relatively weak Chinese demand, China had added 10 million electric vehicles—ballpark—production capacity to 40 million of traditional-car production capacity with an internal market of 25 (million), and it had suddenly gone from exporting 1 (million) to exporting 5 million cars a year. That put it as the number-one global exporter of autos, when three or four years ago China was trivial; it was not a significant exporter of autos.

So I think what this measure does is, in effect, maintain a relatively bifurcated auto market between the United States and China. Why? Because the U.S. made a decision that right now the trade would be one-sided, and the U.S. made a decision that it wants time for the measures in the Inflation Reduction Act to take effect and build up America’s competitive strength in electric vehicles and vehicle batteries before allowing, if ever, a wave of Chinese autos.

So that’s kind of my take. I think sometimes people assume we operate in a fully integrated global economy, not a regionalized global economy. But I think for the auto sector, it is more useful to think of it as a mostly regional set of markets with some global trade.

GOODMAN: OK, that’s great.

Zoe, do you want to add anything, or get your perspective on this?

LIU: Sure.

GOODMAN: Go ahead.

LIU: I think in terms—I think Brad really brings back a healthy dose of isolationism, even from a political economy point of view. And I do—I would also recommend our colleague Shannon O’Neil. Shannon’s book, The Myth of Globalization (sic; The Globalization Myth), she basically explained how much globalization is very much about regionalization. And this applies I would say not only to the United States to the auto industry, but also, you know, very—to a very large extent applies to China and East Asia in general as well.

And as of last year, you know, we tend to think U.S.-China trade relationship, very important. Yes, very much so. And even, if I remember—and, Brad, you can—you can correct me if I’m—if I’ve gotten the number wrong—but I remember—if I remember correctly, China’s export to the United States was slightly above $5 trillion last year. And if we just do a quick sort of like on the back of the envelope in terms of, you know, China’s export to the U.S. versus the—how much is at risk in terms of U.S. tariff, the new slash tariff on China is really trivial in terms of the monetary amount, right?

But I think the implications in terms of—for global trade and regional trade, trade patterns, could be—could be interesting in the sense that on the one hand it—you know, we used to—this is something that bothers me a lot in terms of, you know, the East Asia economic miracle, the idea that how countries—developing countries at the lower level of the value chain can climb up—you know, transform rice farmers to, you know, officer workers and in factory—in the factory. It is through this global distribution or regional distribution of supply chains, but I’m afraid that with this—the strong incentive embedded in the industrial policies as well as the protectionist tariff it might diminish the application of East Asian economic development model going forward.

And then, finally, obviously, in term—the rise of China in terms of promoting an alternative trading system by developing bilateral trade free trade agreements, combining that with the use of renminbi in bilateral—in international trade settlement. Basically, what we are saying is China is going to become this giant Walmart for a certain segment of the global market. And that is something, once China galvanize enough support, is difficult to change.

GOODMAN: OK. Well, there’s a lot more, I think, to say here. I do want to take questions. So if you have a question, please raise your hand.

I’m just going to say one thing while you’re thinking of your questions and figuring out how to raise your hand about the sort of international and diplomatic implications of this. I mean, my own take is that our allies—you know, Japan, Korea, Europe in particular—you know, share a lot of the concerns that underlie this move by the Biden administration; that is, concerns about forced technology transfer, about massive subsides, about overcapacity coming out of China. In fact, you know, several of them—and not just allies and partners—are looking at responses to that, like in Brazil for example. So I don’t think this will come as a shock, surprise, or concern on that level. I, by the way, also am confident—I’ve talked to a couple of these countries’ representatives—that they were consulted and this is not, in that sense, something that was a surprise, either.

But you know, I suspect that allies are going to be concerned about a few things, you know, starting with their companies that operate in the United States. To the extent they’re reliant on some of these Chinese inputs, that could affect their operations. I think that effect—and Brad may have thoughts on this as well—is probably relatively minimal if you think of the Japanese or the—or the Europeans in that they—first of all, this doesn’t hit that much trade, but also they’re not that reliant on—you know, the production facilities here on these particular items; they’ve diversified a lot away from China anyway.

A second concern, maybe, is trade diversion, that, you know, if we’re not going to buy stuff from China, China’s going to try to sell it somewhere else, and that could add to the sort of problems that everyone’s concerned about with overcapacity shifting or moving into other markets. So that’s a concern.

I think there will be concerns about U.S. pressure to take their own actions in this area. I think, as I mentioned, Europe and others are considering some of these actions. Japan, I think, is probably unlikely to put tariffs on, but they might put stricter conditions on the kinds of subsidies and incentives they offer to Chinese companies in Japan, which would, you know, potentially be significant. I’m not—I have no evidence of that, but I’m just guessing that that might be the kind of thing that they would look at.

There will be concerns about Chinese retaliation, not just that that could affect things that affect everyone—like if China put export controls on more critical minerals, that could affect everyone—but also China has a history of targeting some of our friends when we do things that China doesn’t like in order to put pressure on our friends to put pressure on us. So I think that’s another probable—likely area of concern.

And then—and then, finally, there will be concerns about the consistency of all of this with our WTO—our World Trade Organization obligations, and you know, I think there will be concerns about the direction of U.S. policy in that sense. But I go back to my first point: All of that said, I think—I’m guessing most of the allies are going to be fairly patient and understanding about this. They have their own concerns. And I think they probably understand what’s behind the U.S. action.

So, with that, I am looking to see if there are hands and I don’t—at least on my screen, unless I am missing something, Isabelle, I don’t see hands yet.

OPERATOR: There are currently no questions in the queue.

GOODMAN: OK. Don’t be shy. There’s a big group here, and I’m there—I know some of these people and you’re not shy people, so—(laughs)—feel free to jump in.

I mean, I guess while you’re thinking, let me ask Brad another question about sort of the timing of all this that’s been asked by a lot of people: Why now? Why in May of 2024, when this has been lingering for a long time, when there’s an election later this year? Is there any, you know, significance to the timing here?

SETSER: Look, I think it was a confluence of two things, setting the fact that, you know, you’re not going to be in office forever; you know, there’s some risk that your time in office may be coming to an end. But the confluence was it took some time for the administration to reach consensus around this set of tariff measures. And then I think the second factor that probably pushed for consolidation of a consensus was the fact that Chinese auto exports have just grown like crazy, and they’re not coming to the U.S., but there was a sense that China’s electric vehicle industry had achieved escape velocity. It was going out from China at an incredible pace. And firms like BYD, which produce very good by all accounts electric cars, very competitive with Tesla inside China, they were adding to their export capacity at a very, very significant pace. They’re planning to export a couple million cars, which is a lot in global auto trade, and so I think there was a sense that the time to get ahead of this move was now.

GOODMAN: OK. I think that that’s all—that all makes sense, and you know, it certainly has been something that has been under great debate in the administration for some time, and it is complicated as well. You know, I mean, it is an election year, and I think that has to be considered part of the fact behind—as part of the—you know, the—one factor behind this, but I don’t think probably the predominant one. I think there were some underlying concerns here for a long time.

Again, encourage people to ask questions, but let me ask Zoe if you think that the Chinese in general feel that they have even more incentive now to produce for their own market, to be less dependent on us. Is this going to be—is this going to change any of those calculations? And not so much the actual, you know, $18 billion—that’s also in the Chinese economy a trivial amount of money—but in specific sectors is it going to imply things for the trajectory of their growth that they—that may change their—you know, their approach, you know, for good, or not good from our point of view?

LIU: Right. I mean, that is really the core issue here. You know, the Biden administration has communicated that we hope that we can encourage China to change its macroeconomic policy behaviors and try to encourage the Chinese government to take measures to boost domestic consumption. I think there are two issues here.

The first one is it’s not that the Chinese policymakers do not know that boosting consumption is important. Since last year, and actually throughout—even throughout the era of Hu Jintao to Xi Jinping, over the past twenty years or so, they’ve been mentioning about expanding domestic demand. But the issue is they never really prioritized household consumption up until last year in terms of the policy document. Last year, for the first time, they put prioritizing domestic consumption ahead of state-led investment, efficient investment, as part of the overall expanding domestic demand drive. But the reality is—again, it’s not that we do not know this is a problem, but the reality is that the Chinese banking system as well as the entire state-led, state-choosed prioritized sectors, the system is not designed to promote private household consumption. I mean, literally, it’s easier to go into the Chinese bank to get a mortgage loan these days than to get a consumer financing loan, right? (Laughs.) So from that point of view, I don’t think this is going to necessarily change the Chinese government policy or the macroeconomic environment anytime soon.

But then, that being said—that being said, I do see that for the Chinese economy to continue to grow, it’s very important to unleash domestic consumption capacity. But again, there is a difference between what are the right policy move versus to what extent there is enough political will to do it.

SETSER: Can I—can I jump in here, Matt?

GOODMAN: Please. Please do.

SETSER: I think despite sometimes talking about wanting to increase consumption and sometimes indicating this is a direction that one would like to go, sometimes with kind of policy measures that feel modest like expanding internal tourism and, you know, not taking meaningful structural steps, the reality as I see it is that China actually hasn’t adopted the kind of policies that would be needed, which are big, large, and significant changes to the structure of China’s system of taxation, which is incredibly regressive—gets most of its revenue from that and paid-in social contributions, which are kind of like a lump-sum social security payment that is quite large if you’re at the low end of the labor scale—wage scale—and then a relatively modest social safety net, not enough spending on public health. And you know, Xi just has consistently indicated he doesn’t want to change that. He’s worried about, quote/unquote, “welfarism.” He didn’t want to do checks during the pandemic, doesn’t want to send out checks now. He doesn’t want to expand unemployment insurance. He’s pretty restrained in the policies that he’s adopted to support consumption, and I think that shows. China has not experienced the wave of consumption after the end of the pandemic that many expected.

And then I guess I would make a further point which is a little controversial. You know, certainly, China wants to engineer U.S. and other inputs out of its market. That has been Xi’s stated aim pretty much since he took office. The only real constraint is how quickly he’s able to achieve that goal. But I mean, there’s no—there’s no ambiguity there, and I don’t think these kinds of measures are going to change something that Xi views as a strategic imperative.

Moreover, structurally China has become much more dependent on exports than it was four or five years ago. China is now exporting about 3.3 (trillion dollars), $3.4 trillion of manufacturing. It imports about 1.5 trillion (dollars). The surplus is not quite 2 trillion (dollars), but kind of in that range—10 percent of China’s GDP. It was 6, 7 percent of GDP before the pandemic. And as a share of world GDP, China’s manufacturing surplus is bigger than the surpluses of Germany or Japan were in any time in the post-war period. There isn’t any comparable economy of China’s scale exporting this much of its GDP in manufactures.

So I think the core question China faces is how much growth can it—more growth can it get out of its manufacturing sector if its own economy is not generating demand for its manufactures. And, you know, I think the U.S. has been clear that we don’t want to become more dependent on China, and China is clear it doesn’t want to become dependent on us. But China still needs outlets for its manufacturing capacity in the absence of some much more fundamental reforms.

GOODMAN: OK, let me just ask Isabelle again, just to be sure that my raise hand function is not broken. Nobody—there are no questions in the queue.

OPERATOR: There are no questions in the queue.

GOODMAN: OK, I am again really surprised because I know most of these people and they are not shy people, but maybe they know everything already.

So let me—I mean, Zoe, did you want to say anything in response to what Brad just said, or—

LIU: No, I think along those lines we are very much aligned in terms to what extent China’s—Chinese policies have been trying to boost consumption.

But I do—I do want to second the other point that Brad mentioned in terms of changing—to what extent China’s manufacturing sector can drive further growth. I mean, the model of Chinese growth, in a way, is really—it is, you know, the state set a five-year plan, and when you set a five-year plan, you are good at studying the supply side; you really cannot plan for the demand side. And once the supply side is set, the—you know, the manufacturing, the target is set, then you have all this local government and local incentives to basically contribute to the target. And that inevitably lead to overcapacity. An even a byproduct of the race to reach the production sector is the local government trying to find innovative ways to raise money, which is bad. (Laughs.) And I would say that a lot of this overcapacity issue and that issue, they are very much interrelated.

Again, the Chinese government—while at an international stage, the Chinese government never—or officials, they really don’t—they don’t say that this is a(n) overcapacity problem; they do say this is market efficiency, innovation, and all that. But there are serious discussions inside of China among scholars to talk about how to address this overcapacity problem.

GOODMAN: OK, let me just say that unless we’re going to have any questions, I’m going to wind this down after two more questions myself to you guys—or Brad, really to you first. First of all, there was some expectation there would be some recalibration of the tariffs, perhaps some tariffs that were not deemed—and so some products that were not deemed strategic but that were tariffed by the Trump administration might be reduced. That didn’t happen. Can you—do you have an explanation for that? Does it matter?

SETSER: I think the explanation that the administration has provided is that there was a decision not to give up the future leverage from the possibility of bringing down some tariffs by bringing them down unilaterally. So it was a decision to maintain some tariffs that were perhaps not as strategic as some of the others.

You know, with that—you know, it’s a choice between a modest reduction in the price of imported goods if you took off some of the tariffs versus maintaining your negotiating leverage and not giving a gift to China. I think China made it harder because it was clear that China wasn’t meeting its Phase One commitments. Whatever you think of those commitments, China wasn’t meeting them, but it was also more broadly clear that China was in no way moving away from a problematic economic model so there was perhaps a sense you weren’t going to reward China when China hadn’t done anything that really warranted a gift.

The other thing I wanted to just talk about briefly is some of the other tariffs. So rare earths and permanent magnets were not covered by the Trump 301, in large part because we are very dependent on them, but also because in the past there was WTO litigation aiming to prevent China from imposing export restrictions in those sectors. So I think there was a needed recalibration to reflect the fact that we know we are at risk, and we know we need production capacity. Permanent magnets actually have a ton of military uses, so there should be no debate about their strategic importance. That’s been very clearly established.

And something like needles sounds a little strange, but during the pandemic the Department of Defense, because it has certain spending authorities, actually provided a hundred million dollars to expand domestic production of needles and syringes because there was a bottleneck, and an insufficient supply of syringes was limiting the ability of the U.S. to supply vaccines to our own population, but also to the world. So it actually turned out, from experience, that that is indeed of strategic importance when you broaden the definition of threats to national security to include threats to our health. And so I think those—and they’re not the headline, but those were actually important, well-thought-through recalibrations of the tariffs.

GOODMAN: OK, but let me just ask a final thing, and then, Zoe, I’ll let you—if there is anything else you want to cover, and then I think we’ll wind it down unless there are questions from the audience.

Just to, you know, be maybe provocative because I suspect this will get a response from you, Brad. And I do see there is a brave question coming in just one second. But let me just say, you know, arguably could we have done something different here, like when you talk about the syringes and needles? Are tariffs the right answer, or could we, should we be, you know, trying to find supplies from elsewhere, investing in them ourselves, stockpiling them, or something?

For something like that, it feels like—it doesn’t feel quite right that we are putting tariffs on, you know, one supplier of a thing like that, no matter how important it is in certain scenarios, but maybe that’s the wrong way to think about it.

SETSER: I actually think that’s the wrong way to think about it. If there was a pandemic that broke out in China, like the pandemic that broke out in 2020, we would not want to rely on China for our supply of syringes and needles. China would prioritize—as we would—its available production capacity to meet its own domestic needs. So you actually do need a diversity of supply. Putting a tariff on China encourages that diversity of supply. It favors alternative production sites that don’t face the tariff, and it also helps sustain some of the other policy measures that have already been adopted, like the investment I mentioned in expanding domestic syringe and needle production. So I think it actually was the right policy.

My understanding is maybe a bit rusty, but I gather that there are concerns about indefinite stockpiling of certain goods, and I don’t think any stockpile that had been—was realistically contemplated actually would have been big enough to handle the surge in demand associated with the pandemic. So I think for some subset of goods, having latent capacity to expand, knowing how to make it, and then being able to scale up is in fact the right response.

GOODMAN: Well, when you talk about rust and needles, that doesn’t sound like a good combination, so maybe that’s the problem with stockpiling.

Seriously, Isabelle, we have a question?

OPERATOR: We’ll take our first question from Patrick Blennerhassett.

GOODMAN: Please go ahead.

Q: Hi. Can everybody hear me?

GOODMAN: Yes.

 Q: I apologize—this is a little bit off topic, but I’m very curious about it. I was wondering if you guys—I guess this is a question for anybody—could talk about where Japan fits into all of this in terms of the intersection of geopolitics and trade given Japan’s history—sort of frosty history with China and Japan sort of cozying up to the United States, and obviously trade being used as a geopolitical mechanism—more so as of late.

Do you guys have any thoughts on Japan’s sort of role in this whole battle?

GOODMAN: Well, I’m sure Brad has views and Zoe may, as well. Let me take a first crack.

I mean, I think Japan is, as I mentioned, I think quite aligned with the U.S. on some of the concerns that underlie this action by the Biden administration. I think they’ve long been concerned about forced technology transfer, theft of intellectual property, industrial subsidies in China—which, by the way, there is no irony in that. Japan subsidizes a lot less than it used to, and China is far and away a much more massive user of industrial policy. And they are certainly concerned about overcapacity.

And then there are a whole bunch of other things Japan is concerned about with respect to China, from territorial challenges to coercion of Japan through Japanese businesspeople being detained, and targeted restrictions of certain exports. Some of these minerals that have been talked about in the press—germanium, gallium, graphite—well, not just in the press, by the Chinese—as subject to new export licensing. There have been, you know—Japanese companies have found it harder than other companies from around the world to get those licenses to import that important, critical stuff. So Japan has a lot of shared concerns of its own about China.

But on the other hand, of course, Japan is a neighbor of China’s. That’s not going to change. It has massive trade—more dependence on trade with China and with the world than we do, and Japan doesn’t want to decouple fully from China. It certainly doesn’t want to get into some sort of real hostility with China. But I think fundamentally they—and Japan, you know, certainly wants to—you know, to support an open, rules-based trading system and, you know, is concerned about unilateral actions by the U.S. or others in that regard.

But, you know, I do think, you know, the bottom line is I think Japan is in a very similar position, and that’s why you said, cozy up. I mean, I think Japan has actually, first of all, been leading the U.S. on some of these things, and furthermore, it’s got its own reasons for its concerns about China that, you know, our alliance helps support, but that’s not—it doesn’t start with just cozying up to us, so I think it’s more their own concerns.

I don’t know if Brad has anything to add.

SETSER: I’ll add two general thoughts. One thought is that, you know, there’s this—it’s a little theoretical, but it will get back to your question—there’s a model of international trade called gravity, and it basically says you trade more with countries that are closer to you, and you trade more with countries that are bigger. So a big country close to you will generally generate more trade than a big country further from you.

One exception to gravity is actually Japan’s auto trade with China. There wasn’t very much, even though China is the world’s biggest auto market. But that auto market was pretty closed, to be honest, to outside exports into China. So Toyota and others supply China inside China. They didn’t export from Japan to China.

Japan, by contrast, exports way more to the U.S., every though we’re a slightly smaller overall market for vehicles, because we’re a more open market, despite all the actions that have been taken and because of some of the historical ties. So for Japan, the U.S. market still actually matters a lot. The yen is currently very weak, and that should encourage Japanese producers to be exporting more.

There’s another variable, though, which is that Toyota, as a company—and it’s by far the biggest Japanese auto manufacturer—has been a little slow to embrace electric vehicles. So this does actually give Toyota a bit of time if it decides to make a sort of sprint to add to its electric vehicle lineup.

The direct effect of the electric vehicle tariff on China is that it favors those who have better access to the U.S. market, and for now, that includes Korea, that includes Japan, that includes Europe. But they all also have a very particular concern because the Inflation Reduction Act doesn’t provide the incentives for EV purchases to cars produced outside North America as a general matter. But a lot of cars have been coming in because there was an exception under the law that allowed the import of commercial vehicles. And the Treasury allowed leased vehicles to qualify as commercial vehicles. And work by Chad Bown, who is now at the State Department and was previously at Peterson, has shown that this was a very, very significant boost to trade.

So I think the Japanese, on one hand, see an opportunity. The U.S. is saying no to EVs from China, but not no to EVs from friends and allies. But the Japanese also are a little worried that the letter of the law in the Inflation Reduction Act doesn’t include support for cars made in all friends and all allies.

GOODMAN: Good. Good points.

Isabelle, I believe one more questioner and then—

LIU: Can I just quickly chime in here? Can I chime in here?

GOODMAN: Oh, go ahead, Zoe. Sorry.

LIU: Yes. I agree with, you know, what you and Brad said, but I also wanted to point out another area of convergence between Japan and the United States in terms of the entire EV supply chains. You know—yes, you know, the United States basically said no to Chinese EV, but then at the same time, on the other hand, the critical mineral part is also very important in terms of sort of sort of friendshore or trying to make sure that America has its own critical mineral supply chain, which is all the part of the tariff.

It's worth—I think it’s worth remembering that the Biden administration has this America Battery Mineral (sic; American Battery Materials) Initiative, and that there is also this critical mineral partnership of which Japan is a member, right? So bringing all these pieces together with the—a lot of U.S. policies, including the Inflation Reduction Act, basically make Japanese companies can be qualified for a lot of these tax breaks here in the United States. And on top of that, Japan, following its—the Diet passed the Economic Security Promotion Act, which—and the Diet also modified the law for Japan Bank for International Cooperation, which basically also allowed JBIC—the Japanese government—to basically the finance companies that can be supportive or be part of the Japanese supply chain. They don’t have to be Japanese. As long as they are part of the Japanese supply chain, that is good. And so I would say that there are some convergences in terms of U.S.-Japan policies along those lines.

GOODMAN: Great—more than you ever thought you needed to know about Japan, but good points all of that. Thank you.

One more, Isabelle, and then we’ll probably wind down.

OPERATOR: We’ll take our next question from Trevor Hunnicutt. And as a reminder, please state your name and affiliation, followed by your question.

Q: Hey, Trevor Hunnicutt at Reuters here. Thanks.

Do you have a sense for what the Biden administration is going to do about Mexico and Vietnam in terms of Chinese product coming through there?

GOODMAN: Good question. Brad?

SETSER: I don’t know that there is anything in particular planned with respect to Vietnam. I know the administration has mentioned that goods coming through Mexico—and more generally, the embedded Chinese content question will be taken up as part of the USMCA review, which is coming up in a couple of years.

As of now, there is no major Chinese company producing EVs in Mexico to qualify for the U.S. market, so it’s a future issue, not a current issue. To be fair, it’s also an issue of Tesla uses a 90 percent Chinese supply chain, a Chinese battery—you know, its existing Chinese supply chain to make a small car in Mexico that has very little U.S. content. And that would also pose some questions.

The Inflation Reduction Act has embedded in it a North American content requirement that BYD would never meet, but production in Mexico—and the USMCA has a North American content requirement that BYD would also not meet. So the issue is whether the 2 ½ percent tariff would be—you know, that would remain, but it’s not that high. And so I think that issue will come up with Mexico. I’m pretty sure it could come up with Hungary because BYD is building a factory there.

I’m not convinced that the Vietnamese electric vehicle company, which will—you know, it’s Vietnamese but has a substantial Chinese tail and supply chain—will actually be producing competitive vehicles. We’ll see. But some of the same considerations would apply there.

GOODMAN: Great, thank you. And I—

SETSER: But a good question—a good and important question.

GOODMAN: It is—it is a very important question and one to definitely watch as this unfolds. I think something the White House is conscious is another piece of this story that they have to address going forward.

With that I just want to thank everyone and say please do check out the work of the—of CFR’s Greenberg Center on Geoeconomic Studies, and I guess in my introduction I didn’t also say that I’m director of the RealEcon initiative here at CFR, and we would encourage you to follow that and give us advice and input on this new initiative on Reimagining American Economic Leadership, into which this topic falls neatly.

So delighted to have had you on board. Thank you for joining us, and I’ll turn it back to Isabelle.

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