Faced with rising prices for food and various consumer goods, the Biden administration announced it’s considering dropping its current tariffs on Chinese imports to ease inflationary pressures. This policy change is long overdue, as these tariffs have imposed steep costs on consumers and businesses while failing to revive American manufacturing, and it will encourage China to play by the rules.
Former President Donald Trump imposed tariffs as high as 25% on over $230 billion worth of Chinese goods beginning in summer 2018. This was followed by another round of tariffs on more than $100 billion of Chinese imports in September 2019, with rates initially set as high as 15%. The tariff rates on this last batch of goods were cut in half following China’s signing of the Phase One trade deal, in exchange for China agreeing to purchase more agricultural exports from the US. Although additional tariff exemptions were granted for imports of certain medical goods from China during the onset of the pandemic in 2020, no other major policy changes have been made since, and the tariffs are set to expire this summer.
The results of the tariffs have been underwhelming. Despite culminating in a trade deal with China, its purchases have fallen well below its commitments, only 57% of its agreed upon US exports in 2020 and 2021, according to one analysis by the Peterson Institute for International Economics. And while the tariffs themselves were presented as a benign solution to punish China, they have been anything but: American consumers and businesses have been forced to pay higher prices with no tangible benefits generated for the US economy.
The evidence compiled by both academic and government economists overwhelming bears this out. The initial round of tariffs targeted primarily intermediate and capital goods, raising the costs of production for US businesses. Economists at the Federal Reserve Board found that the tariffs actually reduced manufacturing employment overall. Employment gains in the protected industries were offset by employment losses elsewhere in the economy due to the rising costs of manufacturing inputs.
Other research has found similar negative effects for the US economy. Pablo Fajgelbaum and other academic economists estimated the Trump administration’s tariff actions through 2019 led to a net loss to the US economy of $16 billion annually, including more than $114 billion in losses to firms and consumers, offset by small gains to protected producers and revenue gains to the government. Another paper, by Mary Amiti and other economists, noted that “US tariffs continue to be almost entirely borne by US firms and consumers,” not Chinese firms as was intended. Consumers took a big hit, with Alberto Cavallo and other economists finding that one year of a 10-percentage-point increase in tariffs resulted in retail prices being about 0.44% higher.
And these are all just the direct effects of the tariffs. The tariff announcements alone reduced stock prices, lowering aggregate equity prices by about $1.7 trillion, according to one estimate, and reducing investment growth by 1.9 percentage points over the following two years. Federal Reserve Board economists further found that the trade policy uncertainty generated by the tariff announcements likely lowered aggregate investment in the economy between 1% and 2%.
The imposition of tariffs on Chinese imports also invited retaliation. China imposed tariffs as high as 25% on about 8.7% ($134 billion) of US exports, including $30 billion of agricultural products. A US Department of Agriculture study found the retaliatory tariffs reduced US exports of agricultural products by $27 billion from mid-2018 when the tariffs were imposed to the end of 2019. China’s tariffs on US automobiles reduced auto sales through 2018. Although those tariffs were imposed for only a short period, auto exports had still not recovered through 2020, despite China’s purchase commitments in the Phase One deal. What’s worse, unlike the US tariffs, research has found that the retaliatory tariffs were not passed onto Chinese consumers, but borne by US firms, costing them about $2.4 billion per month in lost exports.
Our own analyses at the Tax Foundation have not been kind to this trade war, despite Trump’s assertion that “trade wars are good and easy to win.” We found that the trade war has reduced US GDP by about 0.3%, costing over 200,000 jobs.
While controlling inflation is ultimately the responsibility of the monetary authority—the Federal Reserve—we should not overlook the negative impact this trade war has had on prices consumers pay. A new analysis by the Peterson Institute of International Economics found that lifting the tariffs could reduce inflation by about 1.3 percentage points, or about $797 per household. Such a change of course would not happen overnight, likely taking months to materialize. Nonetheless, with inflation set to remain high throughout the rest of the year due to a surge in inflation expectations, consumers could use any bit of relief no matter how small.
President Joe Biden has recently announced the Indo-Pacific Economic framework, part of a US strategy of countering China’s influence in the Indo-Pacific region. The framework is not a formal trade agreement and lacks many key details, but engaging our economic partners in that region is a far more effective strategy for addressing US grievances against China than launching a trade war. While the current administration has shown little interest in joining a Trans-Pacific Partnership-like agreement, a new free trade agreement with countries in that region would support US industry while simultaneously delivering lower prices for US consumers.
But trade agreements can take a long time to negotiate. By contrast, Biden has the unilateral authority to provide direct relief to American consumers by lifting the tariffs. The president should make good on his promise to fight inflation and bring this trade war to an end once and for all.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Alex Durante is a federal tax economist at the Tax Foundation, a think tank in Washington, D.C.
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