Trade-related solutions to the U.S. inflation challenge
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Hello, from Washington, President Joe Biden has just concluded a virtual meeting with Chinese Premier Xi Jinping. A senior government official told reporters that trade was raised, and then added: “I wouldn’t say it dominated the conversation in any way.”
At the same time, inflation is the primary concern of Washington’s economic type and the subject of our report today.
Will the removal of tariffs curb inflation?
Inflation is now the top topic in Washington. Biden’s senior officials were formally fired over the weekend to advance the president’s agenda on Sunday’s show. One of the main views of the White House is that the U.S. government’s increase in spending in the form of an unapproved $175 million social expenditure and climate plan will reduce the inflation burden of low-income households, rather than increase it. Their argument is that because the bill will help families with childcare and housing, while at the same time increasing taxes on the wealthy to offset their investment, it will not have a net impact on fiscal expenditures.
Attention has also begun to turn to what trade policy can do to reduce the burden of price increases. Tariffs are the focus. U.S. Trade Representative Catherine Day was asked by reporters at the roundtable last week that, given that the U.S. consumer price index in October increased by 6.2% compared to the previous year, which was the fastest, is it now considering canceling Trump’s imports from China? Tariffs have increased since 1990. On Sunday, the Secretary of the Treasury and former Fed Chair Janet Yellen was asked about this again and admitted that it was. Abolish tariffs Goods imported from China “will have some impact on inflation.” “Tariffs will indeed increase domestic prices,” she said. She added politely that Thailand is “re-examining” the phase one trade agreement with Beijing.
So how serious is the government? The problem is, Yellen said cautiously that, in her view, the main driver of inflation is the dynamics of supply and demand caused by Covid-19. Many workers remain cautious about returning to the workplace or spending money on services such as restaurants and theaters. This means that the demand for durable consumer goods may continue to grow, putting pressure on the supply chain in the process. White House officials have been trying to ease price pressures by exploring ways to alleviate some bottlenecks (from semiconductor shortages to port delays), which are increasing costs.
In other words, some economic papers believe that, yes, tariffs do push up prices, at least for American companies and importers. In 2018 and 2019, when Trump was engaged in a trade war, Mary Amity, Stephen Redding, and David Weinstein wrote two papers that concluded In the second U.S. tariffs are “very surprising” and “in most areas” passed on to U.S. importers.As Chad Bowen pointed out In his chart on page 14Most of the higher tariffs of 25% are for intermediate inputs. (A snapshot of Bowen’s work is in the chart below.)
He said the removal of tariffs on intermediate products may eventually affect retail prices, but it may take some time. Another study by Alberto Cavallo, Gita Gopinath, Brent Neiman and Jenny Tang Use product-level data From large retailers, and found that the impact on retail prices is mixed, some industries are more affected than others.
Back in summer, Matt Iglesias Wrote a blog worth rereading, Pointed out that although Trump’s tariffs on China are obviously not the cause of inflation, the cancellation of some (when possible, taking into account political restrictions) and prompting things such as a one-time drop in washing machine prices will be in the current environment. It is a good thing for consumers.
So what should I do now? In our opinion, this seems unlikely, unless there is more political pressure around this (we don’t see it, at least not from important people, we are referring to the voters and union types in several swing states) Biden The team will cancel all tariffs. What they can do, and what some types of trade think tanks have been discussing for some time, is to use the exclusion procedure to readjust tariffs.
In a nutshell, the exclusion procedure basically allows U.S. importers to apply to the U.S. Trade Representative for exemption from paying tariffs. Under Trump’s leadership, the Office of the U.S. Trade Representative determined whether the product was available from non-Chinese sources, whether the company had made enough effort to source the product from elsewhere, whether paying tariffs would excessively harm importers, and whether the product would be harmful to China. “Made in China 2025” strategy. Tai stated as early as October that the Office of the United States Trade Representative would restart this suspended procedure. First, USTR stated that it would consider restoring exclusions that have been extended (this applies to previously granted contracts). 550 exclusions, among the more than 2,200 exclusions issued by the previous USTR). If expanded, this process may quietly suspend some tariffs at pressure points without attracting the attention of most of the public. (Although we will watch as usual .)
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