United States Trade Representative Katherine Tai defended the Section 301 tariffs on imports from China in a Senate Appropriations subcommittee hearing on Wednesday. It was one of Tai’s best hearings since taking over the USTR. She held steadfast to the idea that tariffs needed to be part of the government’s leverage against China and was a way to incentivize domestic growth of important industries in the U.S. over the long term. China tariffs were the backbone of that strategy.
“We have to play both defense and offense. Frankly, when I look at tariffs, I see them mostly as defense,” Tai said in a response to a question by Senator Jeanne Shaheen (D-NH). “Defense is not going to be enough. We need offense. What I mean by offensive tools is that they are tools that we need to invest in ourselves and give our industries and our workers a chance to shine in a competitive field that we have not considered fair in a very long time, and this is critical to our success in the future,” she said. “Our tariffs are used to build platforms. They are used to level the playing field and entice enforcement in other areas.”
The Biden administration has been tossing around the idea of eliminating more tariffs in order to ease inflation. Tai didn’t think that would have an impact on inflation in the short term.
“We need to be keeping our eye on the bigger picture. With respect to all the economic pinches that we are experiencing right now…it is our responsibility to do what we can to provide relief, but I will be very clear that with respect to tariffs, we can impact the competitiveness of our economy long term. But with respect to tariffs in the short term, there is very little it can do with respect to inflation.” – Katherine Tai, Senate Appropriations subcommittee hearing, June 23, 2022.
At first, Tai was grilled back-to-back by Senators, led by Shaheen, who wanted more action on tariff exclusions. Others who wanted action were representatives of agriculture or commercial fishing. Both Senators Lisa Murkowski (R-AK) and Susan Collins (R-ME) argued that China is not holding up to its phase one purchase agreement. Seafood exports have collapsed, they said.
Tai held firm, saying that exclusions were an ongoing process and that the Section 301s – as far as she was concerned – were not going away anytime soon.
“I know inflation is impacting our economy and is concerning,” she said. Tai and a few committee members said that supply chain problems also led to higher prices, along with the war in Ukraine. Here, Tai looked at it from a different angle. “With respect to supply chains, these bottlenecks have been a significant disruptor in our economies and significantly eroded confidence in the global economic system. Working towards a globalization that is about sustainability and resiliency is a guiding principle right now,” Tai said.
She mentioned an “eye-opening” conversation about global supply chains that she had with a bank CEO (unnamed). She said that this CEO told her that he never would have designed supply chains to look like this.
“What struck me was this perspective that our supply chains have not taken risk into account,” she said. “They’ve been only about efficiency. Building supply chains that are more resilient, beyond tariff liberalization, is how you incentivize firms to calculate supply chain risk when making business decisions,” she said.
Here are some noteworthy exchanges with the Senators:
Senator Bill Hagerty (R-TN): When those tariffs were imposed on China, it was felt around the world. It demonstrated to Japan that we were serious about leveling the playing field. And it allowed us to establish a high-standard digital trade agreement (with Japan). Wouldn’t removing these tariffs encourage more bad behavior? What kind of message would removing tariffs send to China?
Tai: I appreciate that question very much. We are responsible for the formulation of U.S. trade policy and guiding the U.S. economy through the challenges of today, but we are also tasked with setting up the U.S. economy for success in the future. The China tariffs, in my view, are a significant piece of leverage and a trade negotiator never walks away from leverage. The question for us…with respect to a number of different Section 301 tariffs is how to convert this leverage into a program that will strengthen the U.S. economy. We need to use our tools more effectively. We need an entirely new approach. And I think that doing that should be done on the backs of the tools we are using right now.
Hagerty: I think sustaining leverage on China is critical. I hear the argument that (removing tariffs) will have an impact on inflation. Well, look, inflation never took off when tariffs were imposed, and it stayed at or below 2% when tariffs were originally imposed. I appreciate the fact that you appreciate the leverage that you have, and I urge you to use it.
Senator Christopher Coons (D-DE): What is our path forward on China trade, and tariff exclusions?
Tai: The public debate is very fixated on the issue of tariffs. And what does it mean to remove the tariffs and what does it mean for our leverage? There are a set of challenges that we face globally in our economy, so there is a set of tools that we can use to address that. Tariff exclusion, however, is a temporary and targeted tariff, and it does not remove existing 301 tariffs. We will one day find ourselves on the other side of these challenges and it is very important that we do not undermine the need to defend our economic interests from a global system that has eroded our leadership in many different areas of our economy.
Senator Mike Braun (R-IN): China intends to win economically, day by day, month by month, year by year, and one day they will be a larger economy than ours and we will wonder – did we make the right moves along the way? I am concerned that they have the ability to do (beat us). They are a saving economy. They overproduce. Look at our steel industry where they dumped their glut onto the market. In an ideal world, you can have free trade. Where it is not free, you better be careful. Trump’s 301s were successful and put real pressure on China. I think they help us reduce reliance on the Chinese market and, by the way, they are a trading economy. We are not. But we accommodate them because of our propensity to import and consume and spend. In my view, they are getting the winning end of the bargain. The USTR must have the flexibility to design an exclusion process that also maintains economic pressure to go along with it. Do you agree with that?
Tai: Yes, I absolutely agree with that.
Tai said the Section 301 investigation from the Trump administration addressed a very legitimate and deep problem that the U.S. has with Chinese economic practices with respect to IP and forced tech transfers in joint venture. But she took it further, giving the Senate subcommittee on Commerce, Justice, Science and Related Agencies a crash course in free markets.
There is a fundamental economic incompatibility between a market-based economy with its division between the state and private sector, and China, where the state is the control and the direction of most of the economy.
Tai gave an analogy of how free trade was supposed to work in theory. One economy is great at growing bananas, the other is great at making boats to deliver bananas to the world. But that is not the precise world that we live in.
“Especially when you consider that there is not just two products an economy makes, but there are 25 products …and advantages are not always natural (like soil and climate) and if one is state driven then that one is going to be able to target and take over strategic industries and create advantages that the market-based economy does not have,” she said. “That’s the challenge. Unless you identify that as the problem, and address it from there, you condemn yourself to repeating the problems of the past,” she said. “Now you have China looking very closely at semiconductors and a number of other strategic industrial areas that will be critical for our future and future competitiveness.”
Senator Joe Manchin (D-WV) talked about anti-dumping laws and China using Southeast Asia as a transshipment to avoid tariffs. He said he has a constituent dealing with this now but bringing up a case took too long. He mentioned how more work had to be done on investigation and audits to protect trade rules, especially anti-dumping rules.
Senator Joe Manchin (D-WV): All we ask for is a level playing field. When you have a U.S. company that knows it’s being dumped on and it is being funneled through China because the country doesn’t have the facilities to make it, then they should be punished for anti-dumping.
Tai: I agree.
Manchin: I know Covid came up and China then failed on its trade agreements, but they have made no efforts yet on the terms that they have agreed to. What avenues are being explored right now to assure fairness in future trade agreements with China.
Tai: This is one of the most difficult questions we are grappling with right now and relates to the future of a globalized economy.