The Biden administration is debating whether to ease some of the Chinese import tariffs on billions of dollars of Chinese goods. If so, it would mark the first step towards reconciling trade differences between the world’s two largest economies – and could even lower the rate of inflation.
The trade war is now over four years old and substantial tariffs remain. “To what end”, some may ask, as certain deadlines approach. The first installment of import duties on $34 billion worth of goods is due to expire this week. Another $16 billion in tariffs will expire on August 23, followed by $100 billion in tariffs on September 4.
You may recall that in 2018, former President Donald Trump imposed a series of tariffs on a host of Chinese products totaling over $450 billion. In response, China imposed its own tariffs on American products. From there, as the rhetoric reached new heights, each side raised tariffs, encompassing more and more goods at higher and higher penalties.
Since China was the largest agricultural export market for the United States, China concentrated its retaliatory tariffs in this area. The US Department of Agriculture found that tariffs reduced US exports of agricultural products by $27 billion between 2018 and 2019.
The damage was ultimately so severe that the federal government was forced to give farmers nearly $30 billion in taxpayer money just to make up for lost sales in China. Overall, the tariff war slumped U.S. exports by 9.9%, while trimming GDP by 0.04%, according to the National Bureau of Economic Research.
The tit-for-tat escalation eventually led to a “phase one” trade deal between the two countries, signed to much fanfare by Trump in January 2020. The deal required China to sharply increase its purchases of American products like prerequisite to the president. to remove the new tariffs. The deal was a total flop. China, in the first two years of the agreement (2020-2021), bought only 57% of its commitments. China bought $289 billion worth of American goods, instead of the promised $502 billion.
A partial explanation for such a big miss was the COVID-19 pandemic, which has affected trade between nearly every nation. Additionally, supply chain disruptions have had a significant impact on other US products such as auto and aircraft exports. Weakening aggregate import demand as China’s economy declined was also a contributing factor.
Bottom line: Looking at trade between the two nations as a whole, China’s purchases are lower than they were before the trade wars started.
The United Nations Conference on Trade and Development concluded that the trade war was simply a lose-lose for both countries. The tariffs were supposed to protect American industries, but instead they hurt the American economy. Had it not been for the trade war, US exports between 2018 and April 2022 would have been $129 billion higher, according to Washington-based research group Americans for Free Trade.
Unfortunately, the phase one agreement did not end the tariffs, but only prevented them from increasing. Average tariffs on affected goods are still around 20% on each side. Tariffs on Chinese parts, components and materials have not only not made our manufacturing sectors stronger and more competitive, but they have also done the opposite.
Our companies needed these Chinese intermediate products (now on tariff schedules) to make finished products here. Companies found that without them, competition with companies in Japan and Europe, which continued to have access to these cheaper Chinese inputs, made our products more expensive on the open market. As a result, our businesses continued to lose market share globally. These losses continue today.
Some may wonder why President Biden continued Trump’s misguided policies, despite the damage they caused to the US economy, while doing little to hurt China’s economy. The simple answer is politics.
Being “tough on China” is a popular stance among Americans, even if it means a weaker economy. If you add China’s growing authoritarianism, suppression of human rights, oppression of minorities and military ambitions in Asia, the Biden administration would need strong counterarguments to justify easing tariffs.
Given the rising rate of inflation and the slowing economy in the United States, President Biden may now have the political cover to roll back some of these tariffs. Biden hopes the tariff reduction would lower the costs of everyday goods for consumers. Unfortunately, economists expect tariff cuts to have only a modest impact on inflation, but in my opinion, every little bit counts when inflation exceeds 8%.
This week, US Treasury Secretary Janet Yellen and Chinese Vice Premier Liu He held talks focused on economic policy and the relief of global supply chains. Words such as “pragmatic”, “constructive” and “substantial” seemed to indicate that some movement on tariffs is in sight. Let’s see what develops throughout the week.