Will rolling back tariffs help tame inflation?

President Joe Biden’s administration has been discussing changes to US tariffs on China for weeks. Officials are concerned that high import prices are adding to inflation, and they’re looking for remedies. People familiar with the discussions say a decision will come soon — and that the result will be tweaks to the measures put in place by the Donald Trump’s administration, not a comprehensive effort to roll back US import restrictions on China and other countries.
That would be disappointing. A timid move on trade is better than nothing, but falls short of what the country needs. Completely dismantling Trump’s Chinese tariffs would be a good start. It would help curb inflation and, no less important, acknowledge that the policy has failed by its own lights: The goal was to boost US exports, and that didn’t happen. Yet trade liberalisation could and should go further. A range of other plausible steps could reduce inflation, and — by injecting fresh competition into US markets — raise longer-term productivity and living standards.
Robert Lighthizer, Trump’s US trade representative and the principal designer of the China tariffs, says such talk is nonsense: Rescinding the China measures, he says, would do little or nothing to curb inflation while worsening the country’s trade deficit and surrendering US negotiating leverage on theft of intellectual property and other matters.
Recall the history. About two years ago, Trump paused his trade war, leaving in place most of his tariffs and those China had raised in retaliation. He avoided further escalation, it was claimed, in return for Chinese promises to increase imports from the US. Those additional imports failed to materialise — partly because of the pandemic, but also because US producers adapted in ways that undermined the policy (for instance, by moving some production abroad to escape the retaliatory tariffs). The evidence suggests that US exports to China would have been higher, and the US better off on balance, if the Trump administration had never started its trade war.
It’s true that the direct effect of those tariffs on inflation was modest — a 0.3 percentage point increase. But second-round effects, mainly due to diminished competitive pressure, push that cost to more than a full percentage point of extra inflation. Add in a few other trade-liberalising measures — notably, relaxing the “Buy American” rules that cost the US some $100 billion a year by excluding foreign competitors from government contracts — and the Biden administration could shave between 1.5 and 2 percentage points from the current rate.
With prices rising at 9.1% a year, that wouldn’t solve the problem. But it would help. It would mean that the Federal Reserve wouldn’t have to raise interest rates as high as it otherwise would, lessening the risk of a more abrupt economic slowdown. Abandoning this benighted policy, moreover, would be a free lunch: The tariffs and other restrictions simply aren’t doing what they were meant to.

—Bloomberg