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Hello from Washington, where President Joe Biden is fresh from a virtual meeting with Chinese premier Xi Jinping. Trade was raised, a senior administration official told reporters, before adding: “I wouldn’t say that it in any way sort of dominated the conversation.”
Meanwhile, inflation is the number one preoccupation among economic types in Washington, and the subject of our note today.
Would removing tariffs damp inflation?
Inflation is now the number one topic of conversation in Washington. Biden’s top officials were duly wheeled out over the weekend to push the president’s agenda on the Sunday shows. One of the White House’s key lines has been to say that more US government spending in the form of the as-yet-unpassed $1.75tn social spending and climate package will ease the burden of inflation on lower income households, rather than increase it. Their argument runs that, because the bill will help families with the likes of childcare and housing, while offsetting its investments with tax increases on the wealthy, there will be no net impact on fiscal spending.
Attention, too, is beginning to turn to what trade policy could do to ease the burden of higher prices. Tariffs are in the spotlight. US Trade Representative Katherine Tai was asked by reporters in a roundtable last week if removing the Trump-era tariffs on Chinese imports was now under consideration given that the US consumer price index showed a 6.2 per cent gain in October from the previous year, its fastest increase since 1990. And on Sunday, Treasury Secretary and former Federal Reserve chair Janet Yellen was asked about it again and conceded that yes, removing tariffs from Chinese imports “would make some difference” to inflation. “Tariffs do tend to raise domestic prices,” she said. She politely added that Tai was “revisiting” the Phase One trade deal with Beijing.
So how seriously is the administration looking at this? The thing is, Yellen was careful to say that the main drivers of inflation, to her mind, are the shifting supply and demand dynamics caused by Covid-19. Many workers remain cautious about returning to the workplace, or spending money on services such as restaurants and the theatre. That means the boom in demand for consumer durables is likely to continue, placing pressure on supply chains in the process. White House officials have been trying to damp price pressures by exploring ways of easing some of the bottlenecks, from semiconductor shortages to delays at ports, that are raising costs.
That said, there are a few economic papers arguing that yes, tariffs do push up prices, at least for US companies and importers. In 2018 and 2019, when Trump was pursuing his trade wars, Mary Amiti, Stephen Redding and David Weinsten wrote two papers, concluding in the second that “quite surprisingly” and “in most sectors” the US tariffs were passed on to US importers. As Chad Bown points out in his chart on page 14 here, most of the higher tariffs of 25 per cent are on intermediate inputs. (There’s a snapshot of Bown’s workings in the chart below.)
Removing the tariffs on intermediate products would probably eventually feed through to retail prices, he says, but it may take a while. Another study by Alberto Cavallo, Gita Gopinath, Brent Neiman and Jenny Tang uses product-level data from large retailers and finds the impact on retail prices is mixed, with some sectors affected more than others.
Back in the summer, Matt Yglesias wrote a blog now worth rereading, pointing out that while it’s obviously not the case that Trump’s China tariffs are the cause of inflation, removing some (where possible, given political constraints) and prompting things such as the price of a washing machine to experience a one-off drop would be a good thing for consumers in the current context.
So what now? It seems unlikely to us, unless there’s significantly more political pressure surrounding this (which we don’t see, at least not from the people who matter, by which we mean voters and union types in several swing states) that Biden’s team is going to remove all of the tariffs. What they could do, and what several trade think-tank types have been discussing for a while, is reformat the tariffs using the exclusion process.
To recap, the exclusion process essentially allows US importers to apply to the US Trade Representative for a waiver on paying the tariffs. Under Trump, USTR issued exclusions based on whether the product was available from non-Chinese sources, whether the company had tried hard enough to source it from elsewhere, whether paying the tariffs would overly harm the importer and whether the product was important to China’s “Made in China 2025” strategy. Tai already said back in October that USTR would restart this process, which had stopped. To begin with, USTR said it would consider reinstating exclusions that had already been granted an extension (this applies to about 550 previously granted exclusions, out of more than 2,200 handed out by the previous USTR). Potentially, if expanded, this process could sneakily suspend some tariffs at pressure points without attracting the attention of most of the general public. (Although we’ll be watching, as usual.)
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