EconomyCutting China tariffs will offer no respite from rising...

Cutting China tariffs will offer no respite from rising prices

The writer is executive director of American Compass

A campaign is under way, led by officials in the Biden administration, to convince Americans that slashing tariffs on Chinese imports might offer relief from rapidly rising prices. That is not remotely the case — indeed, the argument is hard to deliver without a wry grin and a chuckle. But watch which economists embrace it, happy to use any pretext for advancing their underlying free-trade agenda. And watch which politicians, until now eager to win votes by talking tough on China, leap casually off that train and on to an inflation express running in the opposite direction.

The economic problem with pitching a tariff rollback as inflation response is two-fold. First, a tariff of any given size might affect the price level but it does nothing to the rate of change. A tariff imposed in 2018 could perhaps have caused a price increase in 2018, but it cannot bear responsibility for prices rising in 2022.

Likewise, a tariff eliminated in the second quarter of 2022 might cause a onetime downward shift in prices — say, an 8.8 per cent inflation print in the third quarter instead of 9 per cent — but it will not affect whatever combination of forces is driving inflation to begin with. If inflation the following quarter would have been headed towards 9 per cent with tariffs in place, it will still be heading towards 9 per cent with the tariffs gone.

Thus, a tariff reduction is not so much an inflation-fighting tool as an arbitrary subsidy offered on a particular category of goods. Policymakers could just as easily take the tariff revenue and pay it to the sellers of pitted fruits and haircuts, reducing the price of those goods.

In fact, that would be a better policy than the proposed tariff cut, which has the rather unattractive quality of targeting its support specifically at the Chinese imports that policymakers have rightly sought to penalise. The “random subsidy” model (which, to be clear, is a ridiculous policy idea that no economist would defend) could be improved even further over the tariff cut by targeting it at those goods and services which have actually had the largest price increases, a category that tends not to include Chinese imports anyway.

And that leads to the second problem with the tariff-cutting idea, which is that tariff changes do not necessarily translate much into price changes. As analysts like RealityChek’s Alan Tonelson and the Coalition for a Prosperous America’s Michael Stumo have been observing for years, one is hard-pressed to find evidence in the consumer price data from 2018-19 to vindicate the warnings that American consumers would bear the burden of the Trump administration’s tariffs.

This should not surprise economists, who in other contexts are quick to observe that where a tax is imposed and where it is paid are two different questions. Suppose the US imposes a 25 per cent tariff on a widget that a Chinese company is selling for $100. If that company is the world’s sole widget supplier, the price might rise to nearly $125 and consumers would bear the tariff’s brunt. But if an American company (or, for that matter, a Vietnamese one) can meet demand for the widget at $102, then the price will settle near there. Consumers will see little difference, and it is the Chinese company that will have to swallow the tariff’s cost or exit the market.

Simply multiplying a volume of trade by a tariff level and declaring it the cost borne by consumers — as analysts at the Peterson Institute for International Economics do in a paper entitled “For Inflation Relief, the United States Should Look to Trade Liberalization” — is not economics at all, but mere globalisation propaganda.

For their part, policymakers face the challenge of assessing whether a tariff rollback’s minuscule, one-time effect on inflation is worth the cost of defanging the long-term China strategy initiated by Donald Trump and thus far carried forward by Joe Biden. This is not a hard challenge.

Anyone who takes seriously the need to confront China and rebalance global economic flows should not countenance abandoning the cause for the sake of a hollow inflation talking point.

America’s only hope of success is to convince the investors and corporations who place decades-long bets on where to build industrial capacity, and the Chinese with whom we are engaged in a repeat game of negotiations, that we have the steadfast resolve to see this project through and bear real costs along the way. If we reverse course at the first political opportunity, who would ever take us seriously again?

Politicians should be grateful this first test is such an easy one. But let’s see who passes it.

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