How Companies Dodge Tariffs

No matter who wins the White House and control of Congress this autumn, one aspect of trade policy is likely to endure: Washington’s tough-on-China protectionist stance. But several trade experts predict that the America-first model of slapping tariffs on adversaries — as President Biden did this week — will backfire.

Critics of tariffs and export restrictions say they not only will potentially exacerbate inflation and drag down economic growth, but are also likely to fail for a simpler reason: Chinese companies may see their businesses slowed down by the restrictions, but have found ways to beat them.

As Alex Durante, an economist at the Tax Foundation, a nonpartisan think tank that works with policymakers in the United States and Europe, bluntly put it: “They don’t work.”

Huawei has shown that companies can find workarounds. Last year, the Chinese telecom giant unveiled the Mate 60, a smartphone powered by a high-end semiconductor. The new product raised eyebrows in Washington because the advanced chip was precisely the kind of technology that the Biden administration was trying to keep out of China’s hands through the passage of the CHIPS Act a year earlier.

Huawei’s breakthrough was less a breach of international trade rules than a result of a company’s using a web of gray channels to get the banned materials it needed to make the chips, concluded Douglas Fuller, an associate professor at Copenhagen Business School. “America’s flimsy controls” of those suppliers helped Huawei, he wrote in a recent research report.

A similar approach could work for electric vehicles. Among the $18 billion worth of increased tariffs on Chinese-made goods that Biden announced this week, E.V.s were a major focus. The levies jumped to 100 percent from 25 percent.