Tariffs have played a large part in the growth and expansion of the Chinese economy. The Open Door Policy of 1978 encouraged the global community to invest in China – though that “door” opened slowly, and with many creaks.
In the beginning, the inflow of foreign investment into China in the late 1980s and early 1990s was a trickle of a few foreign firms. That soon grew to hundreds and then a flood of tens of thousands of foreign companies investing in the country.
These investments came accompanied by foreigners, the people tasked to deliver and manage the investment package. These foreign expats wanted foreign goods and foreign foods to make them feel at home, and by definition these were unavailable in China. What to do?
Through state-owned companies with the rare and therefore coveted right to import goods from overseas, shelves at state-owned stores near expat-heavy areas in Beijing and Shanghai began carrying imported breakfast cereals, peanut butter, European chocolates, canned goods, coffee, and all things Western. These goods were expensive, usually at least three to four times their retail price in the United States, Europe, or Australia.
Clearly, the stores themselves knew they could get away with price gouging to desperate expats longing for a taste of home. But not all of the inflated pricing was an outsized profit. On the contrary, much of the retail price went to pay for a customs tariff of anywhere between 50 to over 100 percent of the imported value.
Tariffs are usually used to protect domestic competitors, but China levied heavy duties on imported Western foods that had no Chinese counterparts to protect. These were goods and foods unwanted by those citizens – then and mostly now.
They were also outside the price range of almost all Chinese citizens – even without the heavy tariffs. On New Year’s Eve of 1992, The Los Angeles Times reported that China’s “average annual per-capita income in 1992 was US$314 for urban residents, up 7 percent after inflation, and $134 for peasants, up 5 percent.”
It goes without saying, then, that the purchase of even domestic products was severely limited for the vast majority of Chinese citizens, including urban dwellers with “good” jobs. Back in the China of the 1980s and early ‘90s, everyone but a tiny few worked in one way or another for the government, with essentially no private enterprise in the nation at large. People lived from month to month on extremely low wages. A government gift of cooking oil from a state-owned work unit to its workers was considered a fine bonus; such “perks” were given not just to workers and technicians at a Beijing hospital, for example, but to doctors and senior medical staff, as well.
Amid the poverty of its planned economy, China used tariffs in its early gambit to bring foreign technologies to its shores. The goal was not to protect domestic industries, but to simply make money, and where possible, hard currency, for which China thirsted.
In essence, China benefited twice from foreign direct investment – not only from the direct investment itself, but also through came from the successful imposition of tariffs on the products that supported this investment. An extraordinary rise in wages accompanied the overall investment, bolstered by tariffs that foreign investors could not afford not to pay.
Overall, it worked. In 2018, the Beijing Investment Promotion Bureau reported that the average wage of staff and workers in Beijing was the equivalent of $21,187 – 67 times of the average salary in 1992.
China’s Tariff “Hacks”
During the early economic development stage that the Open Door Policy ushered in, Chinese customs houses were unprepared for the onslaught of foreign products, machinery, and technologies that came as a result of China’s ever-increasing investment in national infrastructure.
A case in point was the import of telecommunications equipment used to test, measure, and monitor network systems during their installation in customer facilities. The contracts for these systems had been negotiated with the foreign sellers, usually major multinationals from Europe. Hardware, software, and training were defined down to the smallest detail. The buyers for these state-of-the-art networks were Chinese government state-owned and run Chinese telecoms providers. Customs offices worked with the buyer to ensure the smooth and speedy transition of equipment from port to place of installation.
But they forgot about the test equipment. This advanced equipment – for example, oscillators and spectrum analyzers – did not exist in China. Customs had no paperwork to facilitate their entry. Not only were they not included in the contracts, they also weren’t listed in the customs schedules. Without that equipment, installation could not proceed. On the Chinese side, careers were on the line.
What to do?
An answer soon presented itself. Western companies put a deposit down on each piece of critical equipment, which was officially labeled a tariff. They would bring the equipment in, use it until the networks were successfully installed and running – and then remove it from China, at which time firms could show the original deposit slip, and get the money back.
It was hacks such as this that formed the backbone of the early development of China’s modern economy, and still do so to this day.
Enter Trump
China built its rapid economy growth through the strategic use of tariffs – in some cases to protect key industries, but at other times simply to earn a quick buck. Today, however, the focus now is on the other direction, as U.S. President Donald Trump has hit China with tariffs of an astounding 145 percent amid an escalating trade war.
Dr. Alejandro Riaño, a senior lecturer in Economics at City St George’s, University of London, told The Diplomat that tariffs should have been imposed in a “more precise and surgical manner.”
“A blunt instrument can disrupt in unexpected ways,” Riaño cautioned. Rather than go it alone to settle trade disputes, Riaño said that Trump should have been “more active” in the World Trade Organization.
“Tariffs,” he concluded, “are a 19th century instrument.”
Tariffs are far older: ancient Greece and Rome used tariffs to effect, and for the same reasons that they are used today. Protection of domestic production. Leverage in political negotiations. Revenue for the government of the day to use as it pleased, and needed. Ancient Rome charged a 25 percent tariff, called a tetarte, on imports.
Tariffs are also well established as a tool for modern economies, as China proves.
While Trump’s tariffs started as a “blunt instrument,” essentially a blanket tariff to cover all U.S. imports, the administration is now using precision mechanisms to reduce those tariffs on key sectors, including auto manufacturing and certain technology imports. Whether this results in the sort of creative accounting that has typified China’s use of tariffs for the past 40 years will be interesting to watch.