Do You Think the United States Government Should Use Trade Tariffs to Combat Cyber Theft?
The U.S.-China economic relationship has reached a critical juncture. Over the past year, the U.S. has imposed tariffs on $250 billion worth of Chinese imports and China has retaliated, raising tariffs on U.S. exports. At the G-20 leaders’ summit in November 2018, Presidents Trump and Xi agreed to resolve the trade dispute within 90 days—by March 1, 2019, though this deadline has been recently extended. The U.S. concerns that underpin these bilateral trade tensions stem from specific practices endemic to China’s economic model that systematically tilt the playing field in favor of Chinese companies domestically and globally. Progress on specific trade issues will require China to comply with its World Trade Organization (WTO) commitments and to make certain reforms that will likely touch on areas of state control over the economy. In addition, new trade rules are needed to address China’s economic practices not covered by its WTO commitments, including in areas such as state-owned enterprises (SOEs), certain subsidies, and digital trade. These issues also come at a time of increasing U.S. concern over the national security risks China presents, particularly with respect to technology access. Despite the challenges the U.S. has had at the WTO, the WTO should be central to resolving U.S.-China trade tensions. From this perspective, we outline a multipronged strategy, including bilateral, multilateral, and unilateral actions, as well as working with allies, that together would constitute positive next steps for this critical economic relationship. In taking this multifaceted approach, the U.S. also needs to stay true to its values and not accept short-term gains or “fig leaf” deals. In particular, creating a managed trade relationship with China would not be a constructive outcome. The resulting deal should address the real issues at hand in a free Joshua P. Meltzer and Neena Shenai POLICY BRIEF February 2019 The US-China economic relationship A comprehensive approach 2 The US-China economic relationship: A comprehensive approach market manner and strengthen the multilateral global trading system and rule of law that the U.S. has championed in the post-World War II era. All of these matters underscore the complexity of U.S.-China bilateral negotiations as well as the stakes at play. Resolving U.S.-China differences in a meaningful way will take time.
The most serious of the USTR’s charges, arguably, is that China uses cyber intrusions to steal US technology. In its March 2018 main report, the USTR concluded that those cyber intrusions give Chinese actors “access to commercially valuable business information, including trade secrets, technical data, negotiating positions, sensitive and proprietary internal communications.”3 This is not a new charge by the US government. In 2016, the USTR under President Obama concluded that “actors affiliated with the Chinese government have infiltrated computer systems in US and stolen terabytes of data, including firms’ intellectual property for the purpose of providing commercial advantage to Chinese firms.”
Tariffs in particular can have this effect through a few channels. One possibility is that a tariff may be passed on to producers and consumers in the form of higher prices. Tariffs can raise the cost of intermediate goods such as parts and materials, which then raises the price of goods that use those inputs and reduces private sector output.,  This would result in lower incomes for both workers and the owners of capital. Similarly, higher consumer prices due to tariffs would reduce the after-tax value of both labor and capital income. Because these higher prices would reduce the return to labor and capital, they would incentivize Americans to work and invest less, leading to lower output.
To sum up, since the end of World War II, public policy has shifted to embrace free and open trade, and reduced many trade barriers. This increase in international trading activity has led to increases in productivity, employment, output, and incomes for the countries involved. Though historically the United States has led the movement toward free and open trade, the U.S. maintains high tariffs on select categories of goods. These sectors of the economy are not open to free trade or the competitive pressures free trade entails, and the related prices are artificially raised because of tariffs and other restrictions. Rather than focus trade policy on reducing these barriers, recent actions by the Trump administration have been to levy new tariffs and threaten further trade restrictions. History has shown that tariffs fail to achieve their intended objectives, and result in higher prices, lower employment, and slower economic growth in the long run. Rather than erect barriers to trade that will have negative economic consequences, policymakers should promote free trade and the economic benefits it brings.
 Dean Russell, “Tariffs Kills Jobs,” Foundation for Economic Education, Feb. 1, 1962, https://fee.org/articles/tariffs-kills-jobs/.
 Chad P. Brown, “The Element of Surprise Is a Bad Strategy for a Trade War,” Peterson Institute for International Economics, April 16, 2018, https://piie.com/commentary/op-eds/element-surprise-bad-strategy-trade-war.
 Kyle Pomerleau and Erica York, “Modeling the Impact of President Trump’s Proposed Tariffs,” Tax Foundation, April 12, 2018, https://taxfoundation.org/modeling-impact-president-trumps-proposed-tariffs/.