COLUMBUS — Tariffs will not solve the United States trade deficit problem, and they probably won’t solve the problem of China stealing intellectual property, according to Ian Sheldon, Ohio State professor and Andersons Chair of Agricultural Marketing, Trade, and Policy.
“Trade is a positive sum game. Import tariffs will not solve the trade deficit,” said Sheldon. According to Sheldon, the United States currently imports more than it exports.
Sheldon spoke at the 2018 Agriculture and Policy Outlook Conference, Nov. 2, at the Nationwide and Ohio Farm Bureau 4-H Center.
Since March, when the United States imposed a tariff on foreign aluminum and steel, the phrase “trade war” has flooded media and discussions. China responded with its own tariffs on soybeans sold to China, the largest consumer of soybeans. Thereafter, multiple countries countered with tariffs on U.S. products, including corn, pork and other agricultural products.
“[The United States] spends too much and saves too little,” said Sheldon. He added that in contrast China saves too much and spends too little. “This is a well-understood problem,” said Sheldon. He added that the loss of soybean markets is an unintended, but significant, consequence of the trade war.
In addition to the trade issues with China (and other countries), the topic of China stealing United States intellectual property has generated attention.
Sheldon said that there is evidence that China stole intellectual property from the United States.
“My argument, which is not unique to me, there is bi-partisan, if not multi-nation agreement, that something has to be done on how we transfer intellectual property to the Chinese,” said Sheldon.
But tariffs are not the answer.
Sheldon argues for a consumption tax, which he said will not be popular. A value-added tax (VAT), a consumption tax, is a tax on the amount by which the value of an article has been increased at each stage of its production or distribution.
Europe implemented a value-added tax in the 1970s. Sheldon said that the VAT is completely legal in accordance with the World Trade Organization (WTO). VAT is not a tariff, but an adjustment at the border for domestic taxes, said Sheldon.
WTO is an intergovernmental organization that regulates international trade, signed by 124 nations in 1994. China joined the WTO in 2001.
“If we got rid of tariffs tomorrow, no harm no foul, maybe. If we continue this for years, we are going to lose market share, and it will take us a long time to get back,” said Sheldon. And this wouldn’t be the first time the United States has lost out on market share in the past year, according to Sheldon.
When President Trump withdrew the Unites States from the Trans-Pacific Partnership in January 2017, the United States “threw away a real opportunity to set the rules for trade in Asian markets and gave up a lot of disciplines,” said Sheldon.
“The only real solution is to reduce the fiscal deficit, which means raise taxes, but also means reduce spending, means reducing social safety net. It’s politically difficult to do,” said Sheldon.
Trade is good
Sheldon explained that trade is good and it’s correlated with economic growth.
“Exports and imports are good. Trade is beneficial and raises GDP (gross domestic product), more trade leads to more growth, more innovation,” Sheldon said. “Poorer consumers get more from free trade than wealthy consumers. Rich people benefit less from trade than poor people.”
He added that the United States didn’t lose with the North American Free Trade Agreement (NAFTA). The agreement was mutually beneficial for all countries (Canada, Mexico and the United States). However, there was a redistribution of wages as manufacturing jobs were sent to other countries, he said. But with that came an increase in innovation.
At the end of September, the United States, Mexico and Canada approved a revised North American trade deal, which will update NAFTA. Most of its key provisions will take effect in 2020.
“New boss same as the old boss, you win here you lose there,” Sheldon said, referring to the United States-Mexico-Canada Agreement (USMCA), which is replacing NAFTA. “It’s small potatoes.”