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Wednesday, December 13, 2017

China Is Moving in the Right Direction on Tariffs

Chinese consumers are now benefitting from more competition and lower prices.

While U.S. trade policy under the Trump administration has become a confusing mix of bluster, posturing, threats, and uncertainty, China has gone in the other direction, at least incrementally by lowering some of its tariffs unilaterally.

On November 24, China’s Ministry of Finance announced that it would cut tariffs on 187 consumer products. The lower duty rate took effect on December 1, so Chinese consumers are now benefitting from more competition and lower prices. As noted in the announcement, the average tariff on the covered products will be brought down from 17.3% to 7.3%.

There is plenty of protectionism remaining.

To give some specific examples, the tariff on cosmetics will be reduced from 10% to 5%; 30% to 10% for electronic toothbrushes; 32% to 10% for coffee makers; and 20% to 10% for mineral water. Baby formula and diapers will no longer face tariffs at all, dropping from 20% and 7.5%, respectively.

Of course, China is far from perfect on trade policy. There is plenty of Chinese industrial policy and protectionism remaining. The World Trade Organization can probably handle more of these trade practices than people think, but new rules may be necessary to deal with certain issues.

Nevertheless, the tariff reduction is a positive development. Commentary on this policy change suggests that the Chinese government’s goal here was, in part, to satisfy the demand of Chinese consumers and to improve the efficiency of Chinese production by introducing foreign competitors. These days, it is nice to see any government basing decisions on this kind of thinking. (And it may contribute to China soon becoming the world’s largest importer, as one report suggests.)

These tariff cuts could be incorporated in a trade agreement.

One can imagine that the Trump administration would try to take credit for this tariff reduction. All that badgering of China paid off, right? In reality, this is the fourth tariff cut since 2015. The previous three tariff cuts reduced tariffs on 152 consumer products totaling $11 billion per year in imports. This time the tariff cut has an even broader impact: Imports under this tariff cut are valued at up to $14 billion per year.

While a unilateral tariff cut is always welcome, it is worth noting that taking action unilaterally also means the tariff cut is not bound by an international agreement, and therefore the decision can be reversed at any time. For greater stability and predictability, these tariff cuts could be incorporated in a trade agreement, as some other countries have already negotiated with China, and which the United States should consider as well. This would provide the predictable and stable framework both businesses and consumers need.

Reprinted from Cato Institute.

  • Simon Lester is a trade policy analyst with Cato’s Herbert A. Stiefel Center for Trade Policy Studies.