Will Tariffs Work? I: What is the Problem to be Solved?

Before we can even begin to answer the title’s first existential question, we must ask what problem tariffs are supposed to solve. The answer is dismal and spectacularly obvious.

In little more than a single generation, China has become the world’s factory floor. It made that “great leap forward” by sucking manufacturing jobs—and related engineering and scientific expertise—out of the US and Europe. In this respect China has been a gigantic siphon, of factories, know-how, and wealth. It has occasioned a hollowing out of “Western” manufacturing and the conversion of the United States, and increasingly Europe, into so-called “service” economies.

That conversion has had a number of consequences for the “West.” Nearly all of them are bad. It displaced millions of “Western” manufacturing workers and dried up US manufacturing towns. It left US workers high and dry after nearly 60,000 US factories closed from 2001 to 2015, most (but not all) to move to China. In so doing, it helped fuel the opioid crisis and produce a pandemic of deaths of despair.

The surging competition from China also allowed home-grown managers and pols to batter US workers further. The means were “right-to-work” laws, the Southward drift of remaining American factories, and the decline of labor unions. All were justified, if not caused, by the increasing need to “compete” with low wages and weak environmental protection abroad, especially in China.

Remember Ross Perot? He was the late twentieth-century’s most successful third-party candidate for president. Perot attracted votes away from Republican George Herbert Walker Bush with his common-sense approach to protecting American manufacturing jobs. In so doing, he helped put Bill Clinton, a Democrat, into the White House.

Paradoxically, Clinton enthusiastically supported NAFTA and later China’s entry into the World Trade Organization. Thus Clinton, the Democrat, and not a Republican, sealed American manufacturing’s fate. He also began the Democratic Party’s long but little-known betrayal of manufacturing workers—a betrayal that has now helped motivate Trump’s re-election.

Perot was known for warning against NAFTA, the original North American Free Trade Agreement. He predicted it would cause a “great sucking sound” in drawing manufacturing jobs, with lower wages, south into Mexico from the US and Canada. Of course he was right. A lot of manufacturing jobs got sucked south into Mexican maquiladoras, or assembly factories, near the U.S.-Mexico border. There parts from the US could be trucked in, assembled into finished products with low-paid labor, and easily trucked back into the US.

But Perot missed the whole Chinese-growth phenomenon, perhaps because his presidential campaigns were premature. Mexican authorities and people were ambivalent about the maquiladoras and the intrusion of the American economics, habits and values they represented. But China’s leaders were wholeheartedly enthusiastic and, in China’s top-down authoritarian society, workers necessarily went along for the ride.

And what a ride it was! China’s general plan was absurdly simple and spectacularly effective. It leveraged the greed of American capitalists—our oligarchs—in several ways. By promising them much lower labor costs and fewer costly environmental restrictions if they produced their goods in China, it promised them, in effect, absolute price dominance in global competition. By setting up their factories in China, our oligarchs could rule the world, economically speaking. They took to that offer like flies to honey.

Over the years, our oligarchs and politicians have made a lot of noise about Chinese “cheating,” for example, with intellectual-property (“IP”) violations and industrial espionage. But the vast bulk of American technology transfer to China was entirely legal and voluntary, pursuant to private agreements willingly made.

American oligarchs voluntarily licensed their patents and copyrights so that the Chinese factories could produce internationally competitive goods. And our oligarchs were making so much money, and so enjoying their Chinese factories’ global dominance, that they barely noticed a tiny fly in the ointment. Under Chinese law or pressure, most Chinese factories were run by joint ventures, in which the Chinese partner owned 51% or more. So our oligarchs got global industrial dominance through price supremacy, vast profits, and immense dividends as shareholders, while the Chinese got the technology and control.

There’s one other twist to this story that few people but IP experts like me fully appreciate. It’s trade secrets.

Patents can be risky, the more so in international trade. Every patent requires a complete, public description of how to make and use the patented invention. So manufacturing enterprises often keep their most important technology as trade secrets, so as to avoid disclosing them in patent applications and published patents, especially in nations whose IP systems are nascent or enforcement weak.

I once met a retired General Electric engineer, who explained GE’s (and probably Rolls-Royce’s) industrial dominance in the field of jet aircraft engines. That dominance likely arose from highly secret techniques used to balance jet-turbine blades perfectly on their spindles, allowing them to rotate reliably at impossibly high rates under impossibly high heat and pressure.

Once a secret like this is disclosed in an international joint venture, the cat is out of the bag. No IP law prevents the joint venture from using the secret in business, or—being the sole entity actually doing the work—from developing new or better trade secrets that then can remain onshore.

So, as baseball fans often say about stolen bases, China stole our factories and their technology mostly fair and square.

There were, and still are, instances of industrial espionage and now (increasingly) military espionage. But the vast transfer of tens of thousands of US factories to China came about without massive theft or violation of IP laws. It came about because it was mutually beneficial for the Chinese people (and their farsighted leaders) and for the owners and managers of American businesses. For US manufacturing workers, the future of US manufacturing generally, the future of technology and science in the US, and the general strength of our economy, not so much.

The next essay in this series will explore exactly how disastrous this vast transfer of factories, know-how and wealth has been not just for American manufacturing workers, but for American science and technology and for the American economy as a whole. The impact on our society, our culture, our sense of responsibility to each other, and ultimately on our human morality, may yet be the most dismal and heretofore unexplored aspect of this extraordinary tale.

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