Opinion: If Biden were really serious about fighting inflation, he’d repeal Trump’s failed tariffs that raise consumer prices

Opinion: If Biden were really serious about fighting inflation, he'd repeal Trump's failed tariffs that raise consumer prices
Spread the love

WASHINGTON (Project Syndicate)—In response to surging prices, President Joe Biden declared this month that “fighting inflation” is his “top economic priority.” He promises that his administration “will continue to do everything we can to lower prices for the American people.” Yet notwithstanding such statements of commitment, Biden has refused to lift the Trump administration’s tariffs on goods imported from China.

Consumer prices are growing at their fastest rate in four decades. In May alone, the consumer price index increased by 1%, putting it 8.6% above its level one year before. And the problem is not just rising food and energy prices. Although core inflation, which excludes those factors, is not accelerating, it is at a high level and not declining, indicating that inflation is entrenched throughout the economy.

News: Fed interest-rate hike is biggest in three decades as central bank anticipates its policy rate rising to 3.8% by end of next year

To be sure, concerns about China are legitimate. But the current tariff regime has to go. Protectionism that hurts U.S. companies and raises prices for consumers is ineffective and harmful.

By stimulating consumer demand well above the economy’s productive capacity, the Biden administration’s $1.9 trillion stimulus package, passed in March 2021, contributed to the sharp rise in consumer prices. Now, the task of shepherding the economy back to an environment of low, stable inflation falls largely to the Federal Reserve.

Rhetoric isn’t action

Biden has made a laudable effort to ensure that the Fed’s decisions are independent of political influence. And after being too slow to recognize the magnitude of the inflation challenge in 2021, he has at least adopted the appropriate rhetoric for the moment. But since the president’s tools for combating inflation are very limited, no option should be left off the table.

In a March 2022 policy brief for the Peterson Institute for International Economics, economists Gary Clyde Hufbauer, Megan Hogan, and Yilin Wang estimated that eliminating Trump’s trade war tariffs would directly reduce CPI inflation by 0.3 percentage points. And as corporations attempt to compete in a context of lower domestic and import prices, the reduction could grow to as much as 1.3 percentage points over the longer term.

Moreover, Hufbauer, Hogan, and Wang find that a broader package of trade-liberalization policies would produce an even larger effect. They outline a plan that would include rolling back Trump’s China tariffs; waiving duties on Canadian lumber; relaxing rules that exclude foreign competitors from U.S. government procurement; capping tariffs on a range of goods; and expanding the scope of duty-free imports from developing countries.

This plan would reduce tariffs, duties, and quotas on $610.5 billion of imported goods, reducing CPI inflation by 0.5 percentage points directly. Over the longer term, the reduction could be as great as two percentage points.

In the face of 8.6% inflation—which may not represent a peak—reductions in this range might not seem like much. But with the typical household spending $460 per month more than it did last year to buy the same goods and services, every little bit helps.

Benefiting the economy

And even if rolling back the trade-war tariffs had no effect at all on inflation, it would still benefit the economy. Trump’s protectionism was a failure on its own terms: it reduced, rather than increased, manufacturing employment.

In a December 2021 working paper studying the U.S. tariff increases in 2018-19, Aaron Flaaen and Justin Pierce estimate that shifting a domestic industry from relatively light exposure to tariffs (at the 25th percentile) to relatively heavy exposure (at the 75th percentile) was associated with a 2.7% reduction in manufacturing employment. Any benefits from import protection were dwarfed by the boost to input costs for domestic producers and the employment costs stemming from other countries’ retaliation.

The White House has been considering lifting the Trump tariffs for months, but it has refused to act. U.S.-China relations are increasingly adversarial, and the administration is likely reluctant to de-escalate unilaterally. Biden also may be worried about weakening his support among labor unions (which tend to favor protectionist measures).

But if Biden is still being swayed by these considerations, then he has not in fact made fighting inflation his “top economic priority.” The White House needs to signal that it understands the gravity of the problem. That means going beyond rhetoric and demagogic attacks on the supposed profiteering of domestic oil refiners. It means that other important priorities will need to come second.

Legitimate concerns

To be sure, concerns about China are legitimate. But the current tariff regime has to go. Protectionism that hurts U.S. companies and raises prices for consumers is ineffective and harmful.

Instead, the administration should focus its efforts on stopping the forced transfer of technology from U.S. companies, leading a serious multilateral effort to compel China to comply with international law and norms, and taking additional steps to establish American economic leadership in the Pacific region. And it should increase support for basic research, so that the U.S. can continue to out-innovate China.

Biden has yet to follow through on his promise to “do everything” that he can do to lower prices. Reducing tariffs is low-hanging fruit. Pick it, Mr. President.

Michael R. Strain is director of Economic Policy Studies at the American Enterprise Institute.

This commentary was published with permission of Project Syndicate — Biden’s Empty Inflation Rhetoric

More on inflation

Steve Goldstein: Here’s why Larry Summers wants 10 million people to lose their jobs

Rex Nutting: The Federal Reserve can’t even get the direction of the economy right

Robert Powell: ‘This is a daunting time to retire’: In the age of inflation, there are steps you can take to deal with higher prices

Source by [author_name]

Leave a Reply

Your email address will not be published. Required fields are marked *