No matter who wins the White House and control of Congress this autumn, one aspect of trade policy is likely to endure: Washington’s tough-on-China protectionist stance. But several trade experts predict that the America-first model of slapping tariffs on adversaries — as President Biden did this week — will backfire.
Critics of tariffs and export restrictions say they not only will potentially exacerbate inflation and drag down economic growth, but are also likely to fail for a simpler reason: Chinese companies may see their businesses slowed down by the restrictions, but have found ways to beat them.
As Alex Durante, an economist at the Tax Foundation, a nonpartisan think tank that works with policymakers in the United States and Europe, bluntly put it: “They don’t work.”
Huawei has shown that companies can find workarounds. Last year, the Chinese telecom giant unveiled the Mate 60, a smartphone powered by a high-end semiconductor. The new product raised eyebrows in Washington because the advanced chip was precisely the kind of technology that the Biden administration was trying to keep out of China’s hands through the passage of the CHIPS Act a year earlier.
Huawei’s breakthrough was less a breach of international trade rules than a result of a company’s using a web of gray channels to get the banned materials it needed to make the chips, concluded Douglas Fuller, an associate professor at Copenhagen Business School. “America’s flimsy controls” of those suppliers helped Huawei, he wrote in a recent research report.
A similar approach could work for electric vehicles. Among the $18 billion worth of increased tariffs on Chinese-made goods that Biden announced this week, E.V.s were a major focus. The levies jumped to 100 percent from 25 percent.
Analysts expect to see Chinese E.V. companies ramping up production in Mexico to circumvent Biden’s import taxes. Trade chiefs are already eyeing that loophole, suggesting this phase of the trade war will feel like a game of Whac-a-Mole. (Relatively few Chinese E.V.s are sold in the United States, but the domestic industry fears they will soon flood the market as they’ve done in Europe.)
Free-market boosters say trade barriers pack other problems. Protectionist trade policies tend to stifle competition, limit consumer choice and drive up prices, Joachim Klement, the head of investment strategy at Liberum, an investment bank, told DealBook. (Even some within the Biden administration acknowledge there’s a link between tariffs and prices.)
Another critique: Tariffs under Biden and President Donald Trump are expected to be a drag on economic growth and the labor market, the Tax Foundation calculates.
Both political parties embrace anti-China policies. Like Trump before him, Biden has justified increased tariffs by accusing China of “flooding global markets with artificially low-priced exports” and has framed them as a way to bolster national security, defend American economic interests and “protect American workers and companies.” As the TikTok divest-or-ban law shows, restricting Chinese tech in the United States is one of the few areas that unite a fractious Congress.
The number of protectionist policies by governments around the world has exploded since the U.S.-Chinese trade war kicked off under Trump, but not all are exclusively focused on tariffs. Sweeping industrial policies such as the Inflation Reduction and CHIPS Acts use a mix of tax breaks, subsidies and export restrictions to build up strategic sectors such as semiconductors and green technologies locally at the expense of foreign rivals.
Companies often have a say in how industrial policies are shaped. “The system can be gamed by industry lobbyists,” Klement noted. The upshot: The legislation is watered down, potentially introducing loopholes that even trade foes can exploit.
So what works? Economists who favor free markets tend to see greater potential in industrial policies that are more carrot and less stick. Rather than policies that restrict trade, for example, they prefer measures that offer businesses low-interest loans and grants designed to stimulate investment in research and development. Such incentives, over time, tend to fuel innovation and economic growth, Klement said. “They tend not to be inflationary,” he added. It should be noted that the Bipartisan Infrastructure Law, and the IRA and CHIPS acts include such provisions for companies and research institutions.
Joseph Stiglitz, the Nobel Prize-winning economist, told DealBook something similar this week, pointing to the Cold War space race as an example. Back then, Washington threw its support behind universities and research centers to achieve its moonshot ambitions and fend off rival nations. — Bernhard Warner
IN CASE YOU MISSED IT
Mercedes-Benz workers in Alabama rejected a union. Workers at two Mercedes factories near Tuscaloosa voted against being represented by the United Automobile Workers. The election was seen as a test of whether the U.A.W. could build on a string of recent victories to unionize factories in the South, where political leaders have fiercely opposed organized labor.
OpenAI and Google unveiled new A.I. technologies. Google began rolling out AI Overviews, which puts A.I.-generated summaries ahead of links in its search results, and OpenAI announced major updates to its ChatGPT chatbot. A day later, OpenAI announced the departure of Ilya Sutskever, its chief scientist and co-founder, who helped lead the rebellion that briefly ousted Sam Altman as the company’s C.E.O.
Stocks soared to record highs. After a better-than-expected Consumer Price Index report, which showed so-called core inflation rising by its lowest level in three years, the S&P 500 rose to a record. The Dow Jones industrial average also passed a milestone this week, climbing above 40,000 for the first time.
Whither meme stock mania 2.0?
The beginning of the week felt like 2021 all over again. Driven by a burst in activity on @TheRoaringKitty, the X account belonging to the trader Keith Gill, who became the face of “meme stock” mania, shares in companies including GameStop and the theater chain AMC Entertainment shot up for a few days.
Analysts and commentators have struggled to make sense of the brief resurgence in retail-fueled stock speculation. Was it a sign of overexuberance about the markets? That Wall Street is better prepared to handle sudden-onset trading manias? That Gill may not actually own the account anymore? Or maybe, given the stock boom’s ephemerality … nothing at all?
John Mackey’s next act
John Mackey, the Whole Foods co-founder who ran the company for 44 years, says building a business is like having a baby: “You’re creating something from nothing, and it’s very soul satisfying.” And that’s what he tried to convey in his upcoming book, “The Whole Story,” which recounts how a single store grew into the giant upscale grocery chain that Amazon acquired for $13.4 billion in 2017. DealBook talked with Mackey about the merger, “conscious capitalism” and the health start-up that he’s opening in July. The interview has been condensed and edited.
In the book, you describe a solo retreat where you processed anger over the ways in which you “felt disrespected and disempowered since the sale of Whole Foods to Amazon.” Do you regret selling Whole Foods?
I regret the circumstances that made selling the company and Amazon the best option. If I had to do it over again, I would make the same decision. But of course, I wish we hadn’t been in that circumstance in the first place, where we had shareholder activists who were trying to take over our company.
You also mention the fallout from writing an op-ed about Obamacare in 2009, which led to protests against Whole Foods and hundreds of letters to the board calling for your resignation. C.E.O.s have since come under more pressure to speak out about social and political issues. What do you think they should do?
Stay out of politics. People are going to wrongly assume that if a C.E.O. takes a position on an issue, the company is taking a position on the issue. You are running the risk that you’re going to be demonized, and your business is going to be attacked.
Is staying out of politics becoming harder to do, as employees and customers demand that business leaders take a stance?
I stayed out of all the controversies that happened after George Floyd, which got a lot of C.E.O.s speaking up and then created a lot of blowback. You should take a stand if it’s directly related to what your business is about. So Whole Foods took stands on, say, organic produce or regenerative agriculture. I think that’s quite appropriate.
It’s been more than 10 years since you published “Conscious Capitalism,” your book that argues businesses can create value for all stakeholders, including society. If you were writing it again today, is there anything that you would change?
I’m actually worried about conscious capitalism because I think it’s being attacked by both the left and the right for different reasons. The traditional capitalists are attacking it because they’re worried that conscious capitalism is going to take away control of corporations from the owners and redistribute power, so to speak, to stakeholder groups. That you’ll have a labor union on the board, a customer representative on the board.
And then on the other side, you’ve got people that are weaponizing conscious capitalism to change the power structure of businesses. I think businesses do have a purpose besides only maximizing profits, but making money is a very important purpose of business. It’s not like you throw that away. It’s just that it’s not the only reason business exists.
Conscious capitalism is not a political statement. It’s a business management philosophy. And I think that’s where people mostly misunderstand it. It’s not about redistributing power. It’s about how to manage the business to create more value in the world.
Your new start-up, Love.Life, describes itself as a “holistic health and wellness club.” Why start a new company at 70?
We’re going to have a healthy food restaurant, a fitness center, a spa, yoga, Pilates. We’re going to have pickleball courts, a medical center that focuses on functional, integrative and lifestyle medicine.
My heart calls me to do it. I want to do it. And finally, even at age 70, it’s fun.
Thanks for reading! We’ll see you Monday.
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