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Biden and Trump share confidence in import tariffs, despite inflation risks

Promising to make things more expensive when consumers are already unhappy with high prices may seem like an unusual political strategy. But it’s the one both President Biden and former President Donald Trump are choosing.

Both men, as they vie for a second term in the White House, say tariffs on imported Chinese goods are necessary to promote domestic manufacturing and to punish China’s zero-sum trade practices. While economists say tariffs lead to higher prices, Biden and Trump insist consumers will be unscathed.

Biden’s tariffs on $18 billion worth of Chinese electric vehicles, batteries and computer chips, announced last month, are likely too small to raise the economy’s overall price level, economists said . But Trump’s plan to impose 60% tariffs on the $427 billion in goods that China ships to the United States each year would almost certainly reshape trade in a way that consumers would notice.

“It’s certainly a much bigger shock. Yes, it would certainly be felt,” said Mary Lovely, an economist at the Peterson Institute for International Economics who co-wrote a recent analysis of Trump’s plan.

When Trump imposed tariffs on a wide range of Chinese imports in 2018, he promised China would pay, while critics warned it would lead to higher prices for Americans.

The actual outcome provided talking points for both sides.

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Contrary to expectations, the U.S. inflation rate fell after the tariffs were imposed and remained low for nearly three years, until the pandemic upended global supply chains. Consumer prices were rising at an annual rate of 2.9% in July 2018, when China’s first tariffs took effect. A year later, inflation was below 2 percent.

But that doesn’t mean the Chinese are footing the bill. Many studies have concluded that the costs fall on Americans and even consumers. Trump’s tariffs “had little or no impact on prices received by foreign exporters,” according to a 2018 study by economists Mary Amiti of the Federal Reserve Bank of New York, Stephen Redding of the Princeton University and David Weinstein of Columbia University.

The Americans who paid the tariffs were people like Lance Ruttenberg, chief executive of the American Textile Company, headquartered in Duquesne, Pennsylvania, where Andrew Carnegie once ruled a steel empire.

Ruttenberg’s 99-year-old company is one of about 225,000 U.S. importers who buy items from foreign suppliers and then use them to make finished products or sell them to consumers.

As production of basic textiles and fabrics has moved offshore in recent decades, American Textile began importing about 3,500 shipping containers full of pillowcases and specialty fabrics each year. The company has seen its costs rise by millions of dollars each year for imported Chinese materials it uses in pillows and bedding sold by brands such as Sealy and Tempur-Pedic.

Trump’s tariffs came at the end of a decade of extremely low inflation, which made it difficult for businesses to raise retail prices. Under pressure from retailers like Walmart to stay the course, importers have absorbed the cost of the tariffs by reducing their profit margins.

“Retailers, our customers, had no desire to accept this price increase. And so what happens is the American manufacturer ends up absorbing it,” Ruttenberg said.

A 2021 study by four economists concluded that U.S. companies absorbed “much of the higher costs associated with tariffs by earning lower margins on their sales.”

Analysis of price data for 90,000 products found that large retailers escaped the shock of tariffs by placing unusually large import orders between the tariff announcement and their entry date. force, and turning to suppliers outside China.

The study was led by Alberto Cavallo of Harvard Business School, Gita Gopinath of the International Monetary Fund, Brent Neiman of the University of Chicago and Jenny Tang of the Federal Reserve Bank of Boston.

There were other reasons for the muted consumer price response. The dollar rose about 10% against the yuan in 2018, offsetting some of the impact of tariffs by making Chinese goods cheaper.

Other Asian currencies fell alongside the yuan. Thus, the prices of products from suppliers in South Korea, Vietnam and Indonesia have also fallen. This allowed some U.S. buyers to switch from tariffed Chinese products to less expensive alternatives.

Additionally, the anti-China tariffs were implemented in multiple waves, meaning their full effects were not felt until more than a year after the trade war began. The first two waves of 25 percent tariffs affected a relatively small volume of goods, just $50 billion. To minimize the political consequences, Trump’s trade team refrained from going after everyday products used in American homes, focusing instead on industrial products.

The third and largest tariff schedule, covering $200 billion of Chinese imports, imposed 10% tariffs in September 2018. A final tariff of 15% on $112 billion of imports was announced in September 2019, bringing the total value of affected products to approximately $360 billion.

A few months later, the pandemic plunged the economy into a deep freeze, crushing the effects of the tariffs. Inflation all but disappeared in May 2020. But then, as global supply chains struggled to keep pace with consumer demand for products making the work-from-home era more palatable, prices soared, triggering an inflationary episode which is not yet over.

In a recent interview with Time magazine, Trump reiterated his false claim that other countries pay U.S. tariffs and rejected the idea that Americans would suffer as a result.

“I don’t believe it will be inflation,” Trump said, adding that his tariffs are aimed at convincing foreign companies to build new factories in the United States.

But the resumption of the trade war with China, promised by Trump, will probably not be as painless for consumers as the 2018-2019 campaign, economists say. His new rates would cost the typical middle-class household $1,700 more per year, according to the Peterson Institute study co-authored by Lovely and economist Kim Clausing.

First, the sheer scale of import taxes will be greater. Trump proposed a 60% tariff on Chinese goods, about four times the average levy of his original policy, and a 10% tax on the $3 trillion in goods the United States imports each year From all countries.

Some companies are already developing contingency plans. Stanley Black & Decker Chief Executive Donald Allan told analysts last month that he was still suffering from “post-traumatic stress disorder” from the $300 million in annual tariffs incurred by the maker of tools during Trump’s initial trade war. The company has reduced its dependence on Chinese imports from 40 percent to as much as 25 percent and would diversify further if tariffs rise, he said.

Stanley Black & Decker “should probably take some surgical action on pricing as well,” Allan said.

Finally, circumstances have changed since 2018. Importers cannot count on the dollar rising as much as back then. And after three years of high inflation, companies may be able to pass on their higher costs to consumers more quickly.

“My instinct is that the impacts will be much more visible,” said economist Brad Setser of the Council on Foreign Relations.

American Textile responded to the 2018 tariffs by moving about 30% of its supply chain from China to other countries, such as Vietnam, India and Pakistan. And he finally won government permission to continue duty-free imports of certain items that could not be obtained from American suppliers.

Yet existing tariffs, which Biden left in place after criticizing them during the 2020 campaign, are still being felt. As the Federal Reserve struggles to rein in rising prices, China’s tariffs are keeping the annual inflation rate about 0.3 percentage points higher than it would otherwise be, according to a Peterson study in 2022 by economist Katheryn Russ.

Some new U.S. textile products containing tariffed inputs are more expensive than they otherwise would have been, Ruttenberg said.

“As you develop products using these new input costs, the price of the next generation of a product is inevitably higher than it would have been in the absence of tariffs,” he said. he declared. “So inevitably the prices of everything go up over time. »

washingtonpost

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