American consumers are feeling the pinch, with prices of everything from gas to eggs to cars on the rise. There are myriad reasons for the inflation—which hit a 40-year high in June—and President Joe Biden is reportedly considering lifting tariffs on some Chinese goods to rein it in.
Biden, who has called inflation “the bane of our existence,” said in May that his administration is evaluating how to best move forward on existing tariffs on China. The tariffs of up to 25%, which former President Donald Trump slapped on China as part of a trade war, cover hundreds of billions of dollars worth of Chinese imports.
Higher prices will be on the minds of American voters in midterm elections in November, and virtual talks between China’s Vice Premier Liu He and U.S. Treasury Secretary Janet Yellen on July 5 fueled speculation that tariffs could be lifted soon.
“With high inflation becoming a politically toxic issue, the Biden administration is clearly eager to take whatever policy actions are under its purview to corral rising prices,” says Eswar Prasad, a professor of economics and trade policy at Cornell University and the former head of the IMF’s China Division. “The imperative of doing whatever is possible to rein in inflation is probably overriding concerns about any political blowback from the perception of a softening of U.S. policies towards China,” he adds.
But will Biden actually lift the tariffs, and would that help the American consumer? Here’s what to know.
Will Biden actually lift tariffs?
The White House said on Tuesday that it is still considering its options, and it appears to be split on the issue. Yellen said this month that some cuts might be warranted and that some of the tariffs “ended up being paid by Americans, not by the Chinese, hurt American consumers and businesses.”
But U.S. trade representative Katherine Tai told a Senate subcommittee in late June that it was important to protect U.S. trade interests. “The China tariffs are…a significant piece of leverage, and a trade negotiator never walks away from leverage,” she said.
The U.S. Trade Representative’s office had received more than 400 requests to keep tariffs on Chinese goods in place, including from a committee of 24 labor unions, as of late Tuesday, according to Reuters.
“Strong pressure is coming from U.S. labor unions to continue the tariffs, fearing job losses due to increased outsourcing of manufacturing to China,” says Doug Barry, an official at the non-profit U.S.-China Business Council, which represents about 200 companies that trade and do business with China.
But he adds that there is evidence that the tariffs have actually caused domestic job losses in some industries. “Weakened demand for China imports means less economic activity generated by those imports: fewer truck drivers, salespeople, accountants, and less tax revenue for local governments where the U.S. companies do business,” he says.
Even if the government does lift tariffs, the changes might not be substantial.
Clete Willems, a former top White House trade negotiator, told CNBC’s Squawk Box Asia on Wednesday that moves to lift some China tariffs would likely be “modest”—perhaps $10 billion out of over $360 billion that are currently being imposed on China—in the short-term.
Many U.S. industry groups not a fan of the tariffs
Removing all of the tariffs would have a modest effect, reducing prices of many products, says David Dollar, a senior fellow at the Brookings Institution. “Some of that would work via supply chains as U.S. firms import a lot of components from China and eliminating the tariffs would make the chains operate more smoothly.”
But any tariff reductions are likely to be focused on consumer goods such as electronics “where any price reductions might be most visible to consumers,” says Prasad, of Cornell. But, he says, “it is not obvious that the tariff reductions will pass through into lower prices at a time of strong consumer demand.”
A Peterson Institute for International Economics study published in June said that a broad trade liberalization would save American households an average of $797. But trade representative Tai criticized the study, calling it “something between fiction or an interesting academic exercise” and Yellen has warned that cuts would not be a “panacea” for easing high inflation.
That means that a potential tariff reduction might not give the Biden administration the political boost it wants.
There is a risk that “reductions in tariffs might at best have a limited and delayed impact on inflation, and would highlight the government’s impotence in managing inflation with the very limited policy tools at its disposal,” says Prasad. “Clearly, a tariff reduction would benefit both countries, but reducing tariffs without any concessions or commitments from China could result in unpalatably high political costs for the Biden administration relative to the economic benefits.”
Still, Barry says that members of the U.S.-China Business Council oppose the tariffs, “because they do more harm than good.” He says lifting tariffs would be meaningful for U.S. companies as some firms have “paid hundreds of millions of dollars in extra tariff fees to the U.S. Treasury.” He cites one of the last loudspeaker makers in the U.S., which complains that his products are no longer competitive because of the 25% tariffs on some components he imports from China.
Says Barry: “We want them all lifted, reciprocated by China, and negotiations restarted immediately on resolving the growing list of trade and other disagreements between the two largest economies in the world.”
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