Do you want to lower inflation? Lift the tariffs on China first

The tariffs are causing far more damage than good.

Inflation rose to 8.5 percent in March, the highest level since 1981. Policymakers are increasingly seeking for ways to put downward pressure on pricing, from the Federal Reserve to the Biden administration to Congress. Treasury Secretary Janet Yellen stated last week in an interview with Bloomberg TV about measures to combat inflation that cutting tariffs on Chinese goods is "worth considering." It's not worth considering, it's worth doing, as my Cato colleague Scott Lincicome put it on Twitter.

Inflation is caused by a complex supply-demand imbalance, with loose fiscal and monetary policy being the key drivers of demand. Meanwhile, tariffs are a significant barrier to boosting supply. Smarter trade policy isn't a panacea for lowering inflation, but it might assist on the margins. There are several grounds for the Biden administration to lift tariffs on Chinese goods — as well as other Trump-era tariffs.

First, as previously stated, with inflation at 40-year highs, recent research from the Peterson Institute for International Economics (PIIE) finds that eliminating the Trump administration's trade tariffs on Chinese imports, as well as steel and aluminum imports, could reduce inflation by 1.3 percentage points. Similarly, according to PIIE's research, loosening Buy American restrictions for federal procurement would reduce inflation by 0.6 percent. These solutions, taken together, might reduce inflation by about 2%. Such actions are already within the Biden administration's authority and may be implemented promptly. They are also far more likely to contain price increases than the administration's growing emphasis on using antitrust enforcement to reduce prices, which is a problematic tactic.

The tariffs were reportedly imposed to force Beijing to reform its economic policies, including intellectual property protections and compulsory technology transfer. From the outset of the trade hostilities in 2018, many of us expected that tariffs would have little effect on China's conduct. Now, politicians are beginning to accept this reality; in recent testimony before Congress, U.S. Trade Representative Katherine Tai admitted that the tariffs did not incentivize Beijing to make the reforms that the US requested, saying, "[the penalties have] not incentivized China to change."

Tariffs were imposing considerable expenses on American individuals and businesses even before inflation. According to the New York Federal Reserve, tariffs increased average American consumer expenses by roughly $830 per year after accounting for direct costs and efficiency losses, and resulting in around $1.7 trillion in lost market value for companies due to investment slowdowns. According to Moody's Analytics, the trade conflicts have lost 300,000 jobs.

The rules-based trading system faces enormous difficulties from China's 21st century mercantilism, which necessitates a more intelligent response than antiquated tariffs and purchase pledges. Outcompeting China should be a key objective for policymakers, and it defies logic to believe that weakening ourselves through tariffs is the best long-term strategy. Rather than tariffs, authorities should pursue measures that increase dynamism and global competitiveness, such as immigration and educational reforms, tax adjustments, and unilateral trade liberalization for intermediate inputs and capital goods. Similarly, by rejoining the Comprehensive and Progressive Trans Pacific Partnership and crafting new anti-subsidy rules through the World Trade Organization (WTO), the United States should be leveraging allies to expand trade and set high quality commercial standards throughout the Pacific Rim region.

The tariffs are causing far more damage than good. Eliminating them will not totally control inflation, nor will it solve all of the problems that afflict US-China trade ties. However, it's a good place to start.


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