WASHINGTON – With the stroke of a White House pen, President Joe Biden could lower the cost of thousands of consumer and industrial products and strike a blow in the anti-inflation fight that he calls “his top domestic priority.”
All he has to do is lift the tariffs on imported Chinese products that President Donald Trump imposed starting in 2018.
But with his advisers split, the potential economic gains limited and the danger of Republican attacks for being “soft on China” looming, Biden is unconvinced.
The imperative to do something about inflation is clear. Consumer prices in April were 8.3% higher than one year ago, near a 40-year high, and voters routinely cite rising prices as among their top election-year irritations.
With inflation threatening the Democrats’ prospects in November’s congressional elections, Biden said this month that he is eyeing changes to the 25% tariffs that apply to about two-thirds of U.S. imports from China, or roughly $335 billion annually.
While Trump’s first China tariffs minimized the consumer impact by targeting industrial products, the levies eventually expanded to household items including AirPods, refrigerators, televisions, clothing and toys. Now, U.S. corporations that have opposed the tariffs from the start hope to capitalize on the inflation scare to win their removal.
“It’s a no-brainer to reduce tariff burdens on Americans at a time of high inflation,” said Myron Brilliant, executive vice president of the U.S. Chamber of Commerce. “Hopefully they will do something, but will they go far enough? That’s the billion-dollar question.”
Yet even eliminating all of the tariffs on Chinese goods – which no one anticipates – would have only a modest impact on prices before the midterm elections. A study by economists Gary Hufbauer, Megan Hogan and Yilin Wang of the Peterson Institute for International Economics concluded that lower import prices resulting from the end of tariffs would reduce the consumer price index (CPI) inflation measure by 0.3 percentage points.
If such tariff cuts had been in effect in April, the 8.3% inflation rate would instead have been 8%.
A separate Peterson study by economist Kadee Russ of the University of California at Davis, who served in the Obama White House, found a similar effect, which she described as “a small, short-lived dent in overall inflation.”
Hufbauer said there would be an additional benefit as the prices of domestic goods that compete with Chinese imports also fell, bringing the total reduction in inflation to about 1 percentage point. But he said that could take nine to 15 months to materialize.
“In other words, the full benefit would not be felt before the November election,” Hufbauer wrote via email.
Even those estimates are optimistic, because they assume the elimination of all tariffs on more than 10,000 Chinese goods and Biden is likely to keep most of the existing trade taxes in place.
At least two options are under consideration, according to business executives who spoke on the condition of anonymity to discuss confidential deliberations. The president could make it easier for importers to win waivers from the import levies. Or he could drop tariffs on some Chinese products while launching a new investigation of Chinese trade practices that could result in fresh tariffs on high-tech products or those improperly subsidized by Beijing.
For Biden, there are few easy fixes for inflation. Many economists say his free-spending response to the pandemic in 2021 is partly to blame for today’s soaring prices. But it’s too late to do anything about that. Chronic supply chain problems, and product shortages, are a major inflation driver that have defied Federal Reserve forecasts of imminent improvement for the past year.
So debate within the administration has turned to tariff-cutting, which many economists support on principle, even if its immediate benefits are likely to disappoint.
Chinese products, for one thing, have not been among the main contributors to inflation.
Gasoline prices are up 44% from a year ago, according to the Bureau of Labor Statistics. Used cars cost almost 23% more. And food cooked at home is up nearly 11%.
The cost of Chinese imports, however, has increased by 4.6% over the past 12 months, well below the overall jump in the cost of living.
That doesn’t mean getting rid of the tariffs – which are supported by labor unions and some domestic manufacturers – will be easy.
“Tariffs are sticky,” said Craig Allen, president of the U.S.-China Business Council. “They’re easy to put up and really hard to bring down.”
Whatever inflation benefit the president might realize from tariff cuts would not be costless. Before he can act, Biden must referee a split among his advisers that is tied to broader questions about the administration’s strategy for addressing the competitive threat from China.
At a meeting Wednesday of Group of Seven nations’ finance ministers, Treasury Secretary Janet Yellen endorsed modifying the China tariffs.
“It seems as though they impose more harm on consumers and businesses and aren’t very strategic in the sense of addressing real issues we have with China, whether it concerns supply chain vulnerabilities, national security issues or other unfair trade practices,” she told reporters in Bonn, Germany. “… Some relief could come from cutting some of them.”
Indeed, American importers pay roughly $142 million each day in the China tariffs, according to Steve Lamar, president of the American Apparel and Footwear Association.
Yellen acknowledged “a variety of opinions” within the administration about the tariffs and suggested a decision was not imminent.
Katherine Tai, the president’s trade representative, is less enamored of potential tariff reductions. During a recent appearance at the Milken Institute, she derided Hufbauer’s study as “something between fiction and an interesting academic exercise.”
Like any negotiator, Tai does not want to surrender a bargaining chip without getting something in return. But she also doesn’t want to abandon tariffs to address an immediate inflation problem at the expense of the country’s long-run economic climate. Tai sees the tariffs as encouraging investment in U.S. industries that would be less attractive if they were unprotected against unfair Chinese competition.
“We need to make sure that whatever we do right now . . . doesn’t undermine the medium-term design and strategy that we know we need to pursue,” she told the Milken audience.
The debate over whether to maintain the tariffs comes as most analysts describe them as having failed. Trump imposed the trade fees in 2018 to shrink the mammoth U.S. trade deficit with China and to compel the Chinese to abandon several unfair trade practices, including coercing American companies into sharing their technology secrets.
Instead, the deficit with China is on track to set a record. Through the first quarter, U.S. imports of Chinese goods exceeded U.S. exports to China by $101 billion, up from $79 billion during the same period in 2017, before the tariffs were introduced.
“They didn’t achieve their objectives,” said William Reinsch, a trade specialist at the Center for Strategic and International Studies. “China’s behavior isn’t any different than it was then, and they caused a lot of collateral damage.”
But the political cost of cutting tariffs could be steep. The AFL-CIO and other Biden-backing labor unions want them to continue. And Republicans would be certain to pounce on tariff cuts as a sign of Democratic weakness toward Beijing.
Republican hostility toward China has been evident on the campaign trail in states such as Missouri, Pennsylvania and Ohio. In a March Gallup poll, 49% of Americans identified China as the country’s “greatest enemy,” up from 45% last year.
“Republicans would blast President Biden if he cut tariffs substantially,” said Derek Scissors, a China expert at the American Enterprise Institute. “The U.S. deficit in goods trade with China set a record for the first quarter, despite tariffs, and could set a record for the year. If President Biden cuts tariffs and we do see a record deficit, it’s handing Republicans a chance to draw away union voters.”