Tariffs and Unintended Consequences: The Case of China’s War on Smuggling

This week, our featured book is China’s War on Smuggling: Law, Economic Life, and the Making of the Modern State, 1842–1965. Today we are happy to present a guest post from author Philip Thai on tariffs and unintended consequences.

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Earlier this month, President Donald Trump fired the first salvos of an incipient global trade war. Accusing close allies and ostensible rivals alike of engaging in unfair trade practices, he levied billions in retaliatory tariffs on imports to the United States. According to Trump, higher tariffs are essential to protecting American jobs and reviving American industries. But according to economists, policymakers, and many others, higher tariffs often defeat the very aims they are intended to achieve by raising prices at home and depressing exports abroad. Moreover, higher tariffs generate many other unintended consequences, particularly more smuggling. As duties on imports become heavier, the incentives to avoid paying those duties correspondingly become greater, thereby encouraging many traffickers, businessmen, and travelers to resort to smuggling foreign goods. Higher tariffs, in other words, will certainly keep out some imports, but they will also divert other imports to illicit channels.

Moreover, higher tariffs generate many other unintended consequences, particularly more smuggling.

Throughout history, this fallout from the introduction of higher tariffs confronted many countries, including the primary target of Trump’s ire. During the early twentieth century, China recovered the right to set its own tariffs, which it surrendered to foreign powers after losing the Opium Wars in the nineteenth century. The Chinese government then proceeded to leverage the country’s newfound tariff autonomy by slapping higher duties and tightening restrictions on foreign trade. In 1928, the year before the introduction of new policies, overall tariffs stood at almost four percent. About a decade later, they rose sevenfold to almost twenty eight percent. Meanwhile, tariffs on commodities like sugar, kerosene, and rayon—all used widely by consumers and producers—rose even higher to fifty percent and even to one hundred forty percent. In the face of higher tariffs and a global economic depression during the same period, the total value of Chinese foreign trade fell by half.  

For the government, restrictive trade policies ostensibly made China modern and strong by raising more revenues, protecting nascent industries, and disciplining domestic consumption. Like Trump, many Chinese leaders and public intellectuals justified commercial protectionism on the basis of economic nationalism as they railed against unfair foreign competition. To proponents of protectionism, the tariff was an indispensable weapon for a weak China waging a “war of commerce” against more industrialized countries. Sun Yat-sen, the revolutionary leader and “father of the Chinese nation” whose ideas still animate Chinese policies today, once declared: “Just as forts are built at the entrances of harbors for protection against foreign military invasion, so a tariff against foreign goods protects a nation’s revenue and gives native industries a chance to develop.” In the vision of Sun and other leaders, higher taxes and stricter regulations on foreign trade would form the pillars of a modern Chinese state and help underwrite Chinese industrialization. More importantly, they represented the first steps toward realizing greater state control over the economy, then hailed as the epitome of modernity.

But what benefited the Chinese state did not necessarily benefit the Chinese people. Indeed, for everyone else, protectionist policies dramatically raised prices for everything from luxury goods to daily necessities and restricted the freedom to truck, barter, and exchange.

But what benefited the Chinese state did not necessarily benefit the Chinese people. Indeed, for everyone else, protectionist policies dramatically raised prices for everything from luxury goods to daily necessities and restricted the freedom to truck, barter, and exchange. While many consumers and businesses grudgingly paid the requisite duties, complied with new regulations, or turned to domestic substitutes, many others did not. And very soon, smuggling along the China coast grew to alarming proportions as an entire underground economy reoriented itself to meet the widespread, voracious demand for cheaper foreign goods. Organized gangs chartered fleets of junks and trucks to clandestinely land their cargoes at remote locales. Impoverished runners and itinerant peddlers on steamships made a precarious living illicitly shuttling their wares between different ports. Merchants submitted fraudulent invoices misrepresenting imports to fool discerning inspectors. Armed traffickers violently resisted customs agents who were often outmanned and outgunned. Indeed, higher tariffs effectively made trafficking ordinary consumer products more profitable despite the vast distances and complex coordination involved. As one Chinese customs official reported, the gains from trafficking traditional contraband such as narcotics and weapons were still attractive, but “the incentive to smugglers to discard other forms of smuggling and engage in evading Customs duty is [now] very strong.”

Although China enjoys lower tariffs and a more advanced economy today, smuggling remains an ongoing problem for many goods still heavily taxed or expressly prohibited.

Widespread smuggling thus threatened state revenues and authority, and to combat this scourge that its very own policies created, the Chinese government responded with a massive crackdown. It militarized interdiction by expanding its anti-smuggling forces and renewing its efforts to police trade. It also passed more draconian laws that criminalized smuggling and meted out harsher punishments for offenders. Now equipped with formidable weaponry and empowered by new legal authority, state agents carried out their expanded mission with great vigor. Up and down the coast, they raided homes and businesses, intercepted vessels on land and seas, battled armed gangs, and subjected travelers to invasive searches—all in the name of fighting illicit trade. This intractable conflict proved remarkably durable through the rest of the twentieth century even after the Communists took power in 1949. From the construction of a command economy during the 1950s through the transition towards a market economy during the 1980s, the Communist government maintained its predecessor’s restrictive trade policies and waged its own anti-smuggling campaigns that were as intrusive as they were expansive. Although China enjoys lower tariffs and a more advanced economy today, smuggling remains an ongoing problem for many goods still heavily taxed or expressly prohibited.

China’s war on smuggling was violent and transformative by strengthening state authority and remaking everyday life. But it was far from unique. Other countries—including Britain and France in the eighteenth century and the United States itself in the nineteenth century—have waged campaigns of their own to suppress the upsurge in trafficking created by their protectionist policies. Such historical examples, of course, do not necessarily suggest that Trump’s tariffs will lead to a similar spike in smuggling in the United States today, which enjoys a far more industrialized economy. But they clearly demonstrate that higher tariffs do not produce unambiguous benefits for the country levying them. Moreover, they serve as reminders that more restrictive trade policies do not create clear-cut “winners” at home and “losers” abroad.

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