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Hello from Washington, where President Joe Biden has just emerged from a virtual meeting with Chinese Premier Xi Jinping. Trade has been brought up, a senior administration official told reporters, before adding: “I wouldn’t say he somehow dominated the conversation.”
Meanwhile, inflation is the number one concern among economic types in Washington, and the subject of our memo today.
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Would the removal of tariffs curb inflation?
Inflation is now the number one topic of conversation in Washington. Senior Biden officials were duly mandated over the weekend to move the president’s agenda forward on Sunday broadcasts. One of the White House’s guidelines has been to say that increased U.S. government spending in the form of a yet un-adopted $ 1.75 billion social and climate spending plan would ease the burden on the government. inflation on low-income households, rather than increasing it. Their argument is that because the bill will help families with child care and housing, while offsetting its investments through tax increases on the rich, there will be no net impact. on tax expenditures.
Attention is also starting to turn to what trade policy could do to ease the burden of rising prices. The prices are in the spotlight. U.S. Trade Representative Katherine Tai was asked by reporters at a panel discussion last week whether the removal of Trump-era tariffs on Chinese imports was now being considered given the US consumer prices posted a gain of 6.2% in October from the previous year, its fastest increase since 1990. And on Sunday, Treasury Secretary and former Federal Reserve Chairman Janet Yellen said again asked about it and admitted that yes, removing tariffs on Chinese imports “would make a difference” to inflation. “Tariffs tend to increase domestic prices,” she said. She politely added that Tai was “reviewing” the phase one trade agreement with Beijing.
So how seriously is the administration considering this? The point is, Yellen was careful to say that the main drivers of inflation, in his view, are the changing supply and demand dynamics caused by Covid-19. Many workers remain cautious about returning to work or purchasing services such as restaurants and the theater. This means that the boom in demand for consumer durables is likely to continue, putting pressure on supply chains. White House officials have tried to ease pricing pressures by exploring ways to alleviate some of the bottlenecks, from semiconductor shortages to delays at ports, which increase costs.
That said, a few economics articles argue that yes, tariffs drive up prices, at least for US companies and importers. In 2018 and 2019, as Trump continued his trade wars, Mary Amiti, Stephen Redding and David Weinsten wrote two articles, concluding in the second that “surprisingly enough” and “in most industries”, US tariffs were passed on to US importers. As Chad Bown points out in his chart on page 14 here, most of the 25 percent higher tariffs are for intermediate inputs. (There’s an overview of how Bown works in the table below.)
Removing tariffs on intermediate products would likely end up spilling over to retail prices, he says, but it may take some time. Another study by Alberto Cavallo, Gita Gopinath, Brent Neiman and Jenny Tang uses data at the level of mass distribution products and finds that the impact on retail prices is mixed, with some sectors being more affected than others. .
In the summer, Matt Yglesias wrote a blog now worth reviewing, pointing out that while it is obviously not true that Trump’s Chinese tariffs are the cause of inflation, removing some (if possible, given political constraints) and inducing things like the price of a washing machine to experience a one-time drop would be good for consumers in today’s environment.
And now ? It seems unlikely to us, unless there is a lot more political pressure around it (which we don’t see, at least not from the people who matter, i.e. voters and union types in multiple swing states) that Biden’s team will remove all tariffs. What they could do, and what several types of business think tanks have been discussing for some time, 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 duty waiver. Under Trump, the USTR issued exclusions based on whether the product was available from non-Chinese sources, whether the company had made sufficient efforts to source it elsewhere, whether paying tariffs would unduly harm the importer, and if the product was important to China. “Made in China 2025” strategy. Tai had already said in October that the USTR would restart this process, which had stalled. For starters, the USTR said it would consider reinstating exclusions that had already been extended (this applies to about 550 previously granted exclusions, out of more than 2,200 granted by the previous USTR). Potentially, if extended, this process could sneakily suspend some tariffs at pressure points without attracting the attention of most of the general public. (Although we watch, as usual.)
Export restrictions on urea solution imposed by China last month threaten to cripple (Nikkei, $) industrial activity in South Korea, where it is used in diesel transport trucks and agricultural fertilizers.
Great technology sounding the alarm (Nikkei, $) over draft data protection rules that would require companies to seek government approval for overseas data transfers Vietnam.
Bad news for the metaverse. Fortnite dropped out (Bloomberg, $) on China after failing to convince Beijing to relax restrictions. The supply chain crisis is putting pressure (NYT, $) on American farmers. Aimé Williams and Francesca Regalado
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