Panel Debates Tariff Policy's Influence on Inflation

An economist and a former assistant U.S. trade representative for trade policy and economics agreed that rolling back the Section 301 tariffs on Chinese imports would be modestly helpful to fight inflation, but that it wouldn't be noticeable to many consumers. Ed Gresser, the former assistant USTR now at the Progressive Policy Institute, a Washington think tank, said that he thinks the administration's talk that the best way to refine the Trump-era tariffs is to roll back those on consumer goods is misguided. "The effect there has been to shift a lot of purchasing to Vietnam, a little bit to Mexico and a little bit to India," he said, so he doesn't think inflation would change much if those tariffs are dialed back. He said the more inflationary part of the tariffs is the 25% tariffs on industrial inputs.

"I find it hard to see how you can increase the size of American manufacturing by taxing it more heavily," he said during a Washington International Trade Association webinar Sept. 1 on whether trade policy should be harnessed to protect or grow jobs domestically, or to fight inflation.

Michael Stumo, CEO of Coalition for a Prosperous America, disputed the very premise that the tariffs contribute to inflation. He said that inflation didn't jump in 2018, when they went on, and that inflation in the wake of COVID has been a worldwide phenomenon.

He said U.S. inflation is driven by increased costs for fuel, energy, housing, chips in new autos, and used cars, and said none of those are hit by Trump tariffs.

Stumo also argued that not all of the tariffs have been passed on to consumers, that some have been eaten by Chinese producers, and some by companies that have had to cut margins to hold prices down as their input costs increase.

Although the Coalition group has supported the tariff actions taken under Trump, Stumo said they are far too small to move the needle on manufacturing employment, as the Coalition argues needs to happen.

He said that the amount of Chinese imports hit by Section 301 tariffs is only 15% of all imports, and 2% of the economy. He said the U.S. exchange rate needs to change in order to balance trade, and if that doesn't happen, the U.S. will continue moving toward a commodity-producing and service economy.

University of Michigan Professor Emeritus Alan Deardorff said that while tariffs can protect domestic producers in the industries competing with the imported products with tariffs, "they hurt the rest of the economy," either because downstream buyers of the goods are paying more or because consumers are.

"Our economic analysis consistently shows that the harm is greater than the benefits," he said. "Getting rid of them, I think, is a desirable thing. But is that going to matter for inflation? Yes, but not much. I can’t in all honesty argue for getting rid of them on that basis."

Gresser said various estimates have said that if the tariffs were removed, inflation would drop somewhere between 0.3 percentage points and 1.3 percentage points. That amount "is not huge, but is not nothing," he said. "Whatever we can do to take some of the weight off of the Federal Reserve to raise interest rates, that will take down some of the pain," he said, because recessions often follow hikes from the Fed.

Moderator Nasim Fussell, former chief international trade counsel for the Senate Finance Committee, now a partner at Holland & Knight, asked the panel if tariffs support jobs in the U.S.

Stumo said of course they do, and pointed to South Korean firms that opened washing machine factories in the U.S. to maintain market share after safeguard tariffs were placed on imported washing machines.

Gresser said, "Tariffs can, in some cases, support employment in particular industries; they don’t always do that." He pointed to the fact that there are "very, very high tariffs on clothes and shoes," and that those tariffs are regressive -- inexpensive sneakers have higher tariffs than more expensive sneakers, which have higher tariffs than leather dress shoes. He said these rates go back to the 1930s or 1950s, "but jobs have drained away anyway."

Stumo had argued that Section 232 tariffs on imported steel helped the domestic industry make major investments; Gresser responded that data says that there are about 2,800 fewer steel jobs in the U.S. since 2018, when the tariffs were imposed.

Deardorff said of course, tariffs help jobs in the sector that is protected. "They stimulate production of the protected product. That could be in an industry that was already declining, so it might only slow the decline," he said. He said that conceivably, tariffs could increase employment economywide -- if other countries didn't retaliate. But they do.

"And that’s a thing that seems to be being missed in the discussion," he said.

Stumo said that policymakers need to continue to use tariffs to encourage companies to get out of China -- and Taiwan, which he says is too risky -- and also offer subsidies so that strategic industries that don't exist in the U.S. can get established.

"Right now the public opinion is shifting very much toward tariffs," he said. He praised the electric vehicle tax credit, which aims to create a critical mineral supply chain in the U.S. and allied countries, and which incentivizes a homegrown EV battery supply chain. He also said the CHIPS industrial policy and solar panel industrial policy are the right moves.

"We should be doing tariffs to change the terms of trade across industries; that’s what India is doing with the solar supply chains," he said.