May 24, 2024

On Tuesday, the Biden administration announced that it’ll be raising tariffs on imports from China. Fees on electric vehicles will rise from 25 percent to 100 percent, and several other goods—solar cells, steel and aluminum products, semiconductors, even face masks—will now be much more expensive to import too. The change is expected to impact only about $18 billion worth of products—a relatively modest figure—because the United States is currently importing very few of those things from China. “American workers and businesses can outcompete anyone—as long as they have fair competition,” a White House press release explained. “But for too long, China’s government has used unfair, non-market practices.”

Biden’s decision, and American anxiety about Chinese goods in general, has to do with a theory of Chinese industrial “overcapacity.” The basic idea is that China is making too much cheap stuff that isn’t being bought there, so they “dump” it, as leaders in the U.S. and EU have argued, onto the rest of the world by exporting it. American and European governments claim an alleged oversupply of goods that they’re attempting to build themselves—like E.V.s and solar panels—presents a challenge. If China can sell those things freely, that discourages manufacturers here from learning how to produce them more efficiently at home as domestic buyers opt for the cheaper, Chinese-made versions already available to them. It also limits the growth potential for strategic domestic export sectors and threatens jobs and investments in important legacy industries like the automotive sector.

Tariffs, these leaders say, are essential to confront this threat. “It’s very important to protect our workers and our firms in these strategic sectors from the kind of dumping that results when China develops massive overcapacity in these areas,” Treasury Secretary Janet Yellen recently said.

There’s a debate among wonkish types around whether it is in fact bad to have lots of readily available, inexpensive tools for decarbonization available in this country that claims to want to fight the climate crisis. I’ll cover that debate in the next few days. (Spoiler: It’s complicated!) In the meantime, though, it’s worth exploring one area in which the U.S. could rightly be accused of dumping its own government-encouraged overcapacity onto the rest of the world: oil.

Throughout the course of the shale boom, the United States began to produce a lot of oil and its by-product, methane gas. That was thanks in no small part to a raft of early research support, subsidies, and regulatory relief for hydraulic fracturing (“fracking”), which the industry had long considered too costly and uncertain to be worth pursuing. Starting in 1976, for instance, the Energy Resource and Development Administration—now the Department of Energy—administered collaborations between companies, universities, and government labs on foundational research into fracking, including seismic mapping and the development of novel drilling techniques. From 1980 through 1992, the Non-Conventional Fuels Tax Credit more than doubled unconventional fossil gas production, spurring technological innovations and opening up new financing options for frackers. Following decades and billions of dollars’ worth of patient industrial policy, shale drilling finally started to take off in the late 2000s thanks to a goldilocks combination of high oil prices and low interest rates; domestic crude oil production doubled between 2009 and 2015, outpacing demand.

All that drilling drove down the price of crude oil. As I wrote recently, that can mean lower gas prices. But it’s also a problem for shale drillers themselves, who need higher crude oil prices in order to justify the still relatively high costs of fracking in tight shale rock formations. After the Organization of Petroleum Exporting States opted to maintain rather than cut production among its members so as to not lose too much market share to the U.S., in 2014, a further plunge in crude oil prices devastated smaller drillers, and the industry as a whole faced a problem. Since the 1970s, domestic producers had been almost entirely barred from exporting crude oil to the rest of the world via the Energy Policy and Conservation Act of 1975, or EPCA. The ban was put in place for the same reason that the government started to back fracking around the same time. Amid that decade’s “oil shocks,” strong-handed energy policies were enacted as a means of suppressing prices at the pump, as policymakers feared fuel shortages and overreliance on foreign producers.

By 2014, drillers faced the opposite problem: Americans could only buy so much oil. Much of America’s refinery capacity, moreover, specialized in processing medium-to-heavy oil, and companies had made little effort to build out facilities to refine the lighter oil now abundant as a result of the shale boom. “We have artificially limited the markets where Oklahoma oil producers and American oil producers can sell their product,” Cody Bannister, a spokesman for the Oklahoma Independent Petroleum Association, complained in 2015. “That has an impact in the form of lower crude oil prices in Oklahoma.”

Stabilizing prices at higher levels meant being able to sell crude oil abroad. That was illegal, though. So the industry went about trying to change the law, facing opposition from both environmentalists and domestic refiners. The oil industry won. Quietly, as part of a must-pass budget measure, the U.S. repealed its 40-year-old crude oil export ban in 2015. That year, the U.S. exported less than half a million barrels per day via the small list of exceptions to the ban provisioned by the EPCA, mostly to Canada. By 2019 exports were up to nearly three million barrels per day. The U.S. has now become a net exporter of crude oil and continues to break production records, incentivized, as the Government Accountability Office has found, by its relatively new, state-sanctioned access to markets abroad and drillers’ ability to charge higher prices relative to foreign oil.

To recap: Over the course of several decades, the U.S. used a series of nonmarket mechanisms—export and price controls, research and development support, subsidies—to encourage the production of a certain product it deemed vital to national interests. It worked, but eventually supply outstripped available demand, causing trouble for producers. So the U.S. government then explicitly empowered oil producers to go out and find more customers abroad. Did U.S. policy help lead to an “overcapacity” of crude oil? Yes. Did U.S. policy also encourage drillers to go and “dump” that oil abroad, suppressing prices for key goods in foreign markets and alarming foreign competitors? Also yes.

The point here is only to say that “overcapacity” is in the eye of the beholder. Foreign buyers readily snapped up U.S. oil because they wanted it. Companies sell their products abroad, and very often governments help them do it, as the U.S. is now via both continued fossil fuel subsidies and the Inflation Reduction Act’s incentives for wind, solar, and electric vehicles. Tariffs are a fairly ordinary part of that toolbox too, often implemented as a means of protecting domestic industries rather than punishing competitors. There’s compelling evidence that China faces real, albeit not especially nefarious, overcapacity issues in certain sectors and that Chinese entities have engaged in genuinely unfair practices. There’s a perfectly defensible case to be made, as well, for wanting to give U.S. car and chip manufacturers time to catch up to Chinese competitors. Yet the hawkish, borderline Trumpian rhetoric U.S. officials across the political spectrum are increasingly using to describe China’s industrial strategies tends to lump the bad in with the perfectly ordinary.