Leibowitz: Can tariffs fix China's trade ascendancy?

Last week, the government of China reported a trade balance of $1.12 trillion in 2025, the largest merchandise trade surplus in history.

And this surplus was despite massive tariffs imposed by the United States and other countries, partly in an effort to rein in China’s trade juggernaut. Experts, politicians, and policy wonks are looking for a way to address China’s export power. So far, nothing has been suggested that would work in the near future.

A look back reveals that China’s export prowess started under the regime of Deng Xiaoping in the late 1970s. Deng put forward a plan to develop China’s industrial economy by focusing on export markets rather than domestic consumption.

Chinese consumers, who were traditionally not reliant on government support, were compelled to work hard for low wages. They saved as much as they possibly could, rather than spend on items not considered necessities. The social safety net, ironically for a society based on Marxism (“from each according to his ability, to each according to his need”), was extremely weak.

It remains so. As the decades rolled on, China’s focus on export dominance was incompatible with taking care of the elderly. Export markets were the key to increasing Chinese industrial might.

The rest of the world hoped, rationally, that as the Chinese economy grew, consumers would boost spending and create domestic demand to absorb all this industrial production. The bet seemed to work. But when China joined the World Trade Organization in 2001, the export engine really started to take off. While consumer spending in China has grown a lot, industrial production has grown much faster.

I am not one to blame western governments, economists, or politicians for this. China has seized the moment, much as the United States did in the years running up to the First World War. Antidumping laws were originally created more than a century ago to deal with export powerhouses like the United States and Germany, who were out-competing Britain and France. With relative peace after 1945, and the end of the Cold War in 1991, most of the world believed that China would be a constructive part of the global order.

But China just kept on growing. The outcome is China’s $1 trillion-plus global trade surplus.

The response so far has been limited to hand wringing. The surplus is the result of Chinese policies, as noted above. Thus, any reduction of China’s export boom must be based on China importing more and/or exporting less.

The former means policies that China must impose to create more demand for imports. The main areas of action are: (1) encouraging more consumer spending and less saving; (2) trending the Chinese currency (the yuan or renminbi) upward in relation to other global currencies – which would make imports relatively cheaper to Chinese consumers; and (3) discouraging Chinese exports by taxing them (tariffs).

The effort least likely to have any favorable effect is the last. The United States imposed major tariffs on Chinese goods in 2018 and boosted them further in 2025. The rest of the world didn’t follow. The United States’ share of world commerce is the largest of any single country. But it is a declining percentage of the total. Depending on how it’s measured, the US accounts for between 15% and 25% of global output. The tariffs the Trump administration imposed (and the Biden administration continued) simply diverted China’s exports to other markets, barely making a ripple in the overall trends.

Economists, those practitioners of the “dismal science,” argue that Chinese exports enrich the rest of the world by selling products at low prices, allowing other economies to invest more resources in products and services that will produce more wealth for them. There will, no doubt, be short-term losers, but the overall benefits will overwhelm them. This argument remains valid despite the efforts of protectionists to undermine them. Helping the losers is more productive than propping them up.

If certain products must be produced at home to secure the nation, tariffs on those goods are not the best way to do it. That’s because the incentive to invest in new production requires more. Subsidies are much more effective. They should be carefully used and limited to products that are clearly essential to produce at home.

The US once stockpiled numerous products (mostly minerals) for defense. But that program didn’t work and was dropped years ago. Government money for new production would work much better and would not burden American consumers.

The best argument for US tariffs is that it pressures China to reduce exports. But to succeed, that approach requires international cooperation. US policy hasn’t done that, and therefore tariffs are not working to pressure China.

Witness the visit of Canadian Prime Minister Mark Carney last week to China, where Canada agreed to reduce tariffs on China. While Canada is not a major part of the global economy, its actions are indicative: tariffs on China are not uniform.

And the Chinese government shows no signs of changing its policies to encourage imports through increased domestic consumption. The social safety net is not increasing the spending power of the Chinese people. Nor is the yuan increasing in value. Persuasion is necessary to do that.

If coercive pressure is to work, quantitative restrictions would likely be much more effective than tariffs to encourage China to change its policies. But even that would take years, and President Trump would be long gone before any change is likely.

China has clearly made a choice to boost exports, betting that the rest of the world will continue to be lured by low prices. They have cornered the market on many important items, such as steel, aluminum, and rare earths.

The steel industry is under China’s control. China produces more than half the world’s steel. The United States is now the fifth largest producer in the world, and tariffs will not change that.

As a matter of policy, the US and other nations must recognize the trap that has been laid. Tariff advocates have created an unattainable goal (reduction of excess global capacity) and insist on more tariffs that enrich a few for a while but do little to reduce China’s production capacity. Tariffs won’t take time to work—they just won’t work and everyone will lose.