How Would a Cap-and-Trade Scheme Work ?

A cap-and-trade system for Chinese imports is similar to one that exists for glasshouse gas emissions in other parts of the world. This system is immune to political favoritism, bureaucracy, and corruption. The market would decide who purchases licenses and what gets exported. It is possible to adjust the level of the cap relative to a target, such as GDP or the size and extent of the trade deficit.

How will it work?

To prevent market disruption, and to allow the United States to solve its current worker shortages as well as logistics bottlenecks, all existing import arrangements would be accepted initially. The cap-and-trade scheme would then be implemented gradually over the next one to two years. Companies that import Chinese items at a higher cost or with greater quality than U.S.-made items would be allowed to pay higher license prices, while those who import Chinese goods at a lower cost or with less performance would not be able to recover the cost. This would allow American suppliers to remain competitive in cost and performance.

The auction would allow licenses to be sold for administrative simplicity. They would transfer rights to the importer. He would then decide which products to import or to sell.

The entire cap and trade system must have a sunset provision. It would condition its renewal after five years if U.S. supplier's prices are lower than pre-license imports' levels. The cap-and-trade system is too expensive and could be scrapped if the United States fails to solve its skill shortage and improve its overall competitiveness. This system cannot be used to restore the U.S. supplier base for many industries.

According to the US import export data, it is important to have a long time horizon, at least five years. This is because it will take years to rebuild many of the U.S. industries' industrial commons. In the last 30 years, many of the critical intermediate materials and skilled labor needed to make many things have been lost in America. U.S. firms were willing to build N95 masks in the face of severe shortages. But, domestic suppliers of non woven filtering fabric and the machinery necessary to make the masks proved difficult to come by. U.S. firms did purchase the equipment required to make masks but large hospital buyers went back to cheaper Chinese masks after supply had caught up with demand. Companies in the United States will be reluctant to invest in machinery, equipment, or workers without a guarantee of future markets.

The economic impact of cap-and-trade would be minimal. The United States would spend less than 0.3% of its GDP to replace all of China's imports, and it wouldn't have any significant inflation-impacting effects. It would be a low price to pay considering the many benefits such as stronger domestic "industrial commons", more jobs, and healthier communities.

Cap-and-trade systems offer the following benefits:

Encourage, but do not force reshoring. The cap allows U.S. multinationals who source materials from China to supply American markets to make decisions about whether to continue these practices, switch to U.S. suppliers, or diversify by adding other suppliers (China Plus One). This was happening even before the pandemic.

Some specialty chemical companies have switched their raw material purchases from Chinese to U.S. suppliers, as the Chinese materials are cheaper and there is less lead time for customers to order. American robotics companies are moving their supply of key components from China to Taiwan, Israel, or the United States, as they fear disruptions in Chinese supply.

As we have done study of US Import Data, American port operators will continue purchasing large cranes made in China for loading and unloading ships. This is due to the large cost advantages, standardization (i.e. only using one type of crane), and longer lead times. Big clothing brands are likely to continue purchasing high-quality, tailored clothing for women from China thanks to the superior knowledge and local supply chain. Apple is diversifying its iPhone assembly sites, but it is not leaving China. So don't expect a reshoring stampede.

For Chinese companies to expand their U.S. footprint, push them. The United States would benefit from the cap-and-trade system, which would encourage Chinese suppliers to move to the United States. Many of these companies have already taken this step.

Slow China has been slowly taking over supply chains for high-tech products. China has leveraged the combination of rapid growth in its domestic market and exports for a fast build-up of a dominant production-scale advantage (and thus cost advantage) in existing high-tech goods such as solar panels and drones and surveillance cameras as well as important new products like electric cars and advanced battery technology. The U.S. would have to import these products to be competitive with Chinese exports. It would increase their cost and allow U.S. rivals to manufacture them at a lower price. While many high-tech items were developed first in America, production has shifted quickly to China. The imports cap could slow this outsourcing.