Revoking tariffs would not tame inflation: But it would leave our supply chains even more vulnerable to disruption
- Section 232 and 301 tariffs have nothing to do with the current inflationary spike. The tariffs—implemented in 2018—had little effect on U.S. prices, and inflation only spiked after the pandemic recession began in February 2020.
- Eliminating tariffs would not significantly reduce inflation. At best, removing these tariffs would result in a one-time price decrease of 0.2%—a drop in the bucket when consumer prices have risen by more than three times as much, on average, every month since January 2021, driven largely by pandemic-related global supply chain disruptions and the war in Ukraine.
- Removing these tariffs would undermine U.S. steel and aluminum industries and increase domestic dependence on unstable supply chains. Tariff removal would result in job losses, plant closures, cancellations of planned investments, and further destabilize the U.S. manufacturing base at a time of intensifying strategic importance for good jobs, national security, and the race to green industry.
With dwindling options on inflation and a mounting chorus of special interest business lobbies, the Biden-Harris administration is reportedly considering removing some Trump-era tariffs in an effort to moderate rising prices in the U.S. economy.
Tempting as such an action may seem, it is certain to have unnoticeable effects on overall prices—at best. And the action will ensure, moving forward, that our supply chains will be even more vulnerable to the kinds of disruption risks we are seeing play out right now. These tariffs offer a tangible policy response to a real-world economy rife with market failures that invalidate the predictions of canonical economic trade models used to argue against keeping the tariffs.
In the absence of a more comprehensive approach to U.S. industrial strategy, the tariffs are working to resuscitate America’s industrial base and have done so with no meaningful adverse impacts on prices. Pulling the rug from under this rebuild now, without first putting in place other policy solutions to address costly market failures, risks undoing this progress and jeopardizing the financial conditions in industries that are critical to building the infrastructure and renewable energy investments needed to power future economic growth.
Two broad sets of tariffs implemented under U.S. trade law in 2018 are under review by the Biden-Harris administration. The first and biggest group retaliated against findings of intellectual property theft and forced technology transfer in U.S. companies doing business in China, following a United States Trade Representative (USTR) investigation under Sec. 301 authority. This led the Trump administration to negotiate a “Phase One” economic agreement with China.
The second set of tariffs invoked national security concerns under Sec. 232 of the trade act to bolster U.S. steel and aluminum industries, perennially at risk of financial insolvency amid long-running, state policy-driven global supply gluts. Since joining the World Trade Organization in 2001, China’s mushrooming steel investment accounted for nearly 70% of the growth in the world’s steel production capacity—a 423% increase—though the tariffs apply more broadly to cover imports from a range of countries where industrial policies are driving investment on a non-commercial basis, worsening chronic overcapacity in global steel and aluminum markets, among other energy- and carbon-intensive basic industries.
Ever since these tariffs were enacted, business lobbies and orthodox economists have warned that tariffs would devastate the economy. One can debate what alternative policy outcomes were possible or preferable, but it is clear that tariffs didn’t make the sky fall. The data show no material adverse impact on consumers or the broader U.S. economy. Previous EPI analysis has shown that the Section 232 measures on steel and aluminum imports have had no meaningful real-world impact on the prices of the leading metal-consuming products (such as motor vehicles, machinery, construction materials, and more).
The unspectacular effects of these tariffs on prices are plain to see by breaking up the recent experience into three periods. Figure A compares the average inflation rate performance across consumer price and various key industrial goods price measures in the period preceding these tariffs, the nearly two-year period with tariffs in effect prior to the pandemic, and from the pre-pandemic business cycle peak through the latest May 2022 data. Inflation, broadly, decelerated substantially after implementation of the tariffs in the pre-pandemic period. This is true for manufactured goods writ large, as well as for consumer prices overall, measured in the Consumer Price Index (CPI). Tellingly, price increases for steel and aluminum slowed sharply to 0.7-0.8% annually from roughly 10% and 4% annually, respectively—largely attributable to U.S. producers redeploying and reinvesting in domestic production capacity amid improved financial conditions resulting from the tariffs.
Price increases for transportation equipment—the biggest metals-consuming industry, including for cars and trucks and their parts—slowed by more than one-third. In some other leading metal-using industries, prices accelerated modestly, but nothing to affect the overall downward trend in prices, and nothing on the order of doomsday predictions prophesied by tariff opponents. In other words, for two years markets and policymakers adjusted to these measures before the pandemic without a hiccup. Inflation, broadly, only spiked after February 2020; it is simply not plausible to infer that these tariffs had a causal role in pandemic-era inflation.
Tariffs have nothing to do with the current inflationary spike
|Pre-tariffs||With tariffs, before pandemic||Pandemic + Ukraine war|
|Iron & steel||9.9%||0.7%||64.2%|
|Machinery & equipment||0.8%||2.0%||50.3%|
|Energy (final demand)||12.7%||-0.5%||71.7%|
Note: Pre-tariffs = April 2016–February 2018; With tariffs, before pandemic = March 2018–January 2020; Pandemic = February 2020–May 2022.
Source: EPI analysis of BLS 2022 data.
It should not be surprising that these tariffs, though affecting a wide swath of U.S. imports, had little effect on U.S. prices. First, Chinese policymakers responded to the tariffs by depreciating their exchange rate by 15% from February 2018 to late 2019, offsetting much of the price impact by making all Chinese exports to the United States that much cheaper in dollar terms.
Second, the tariff measures themselves are rather porous, allowing significant shares of imports to pass around these duties. The Department of Commerce has granted hundreds of thousands of exclusions to both the Section 301 and Section 232 tariffs where businesses could demonstrate adverse economic impacts from limited alternative domestic sources, and where deemed essential under the COVID-19 public health emergency. More importers bypassed the tariffs by transshipping products through countries with preferable access to U.S. markets, perhaps after performing some trivially minimal transformation to qualify as a different product under U.S. trade rules.
Finally, the tariffs are levied on a much smaller base than is implied by the volume of imports covered: the primary steel and aluminum and intermediate inputs of more processed parts and materials. These make up just a fraction of the overall cost of a final good supplied to consumers. For example, looking at pre-pandemic prices, the steel inputs required to make a new U.S. car amount to just 2% of the sales price, compared with 40% for semiconductors and other electronic components.
This suggests that removing the tariffs now—even ignoring impacts on already strained supply chains—would have a similarly negligible impact on the surging inflation we are now experiencing. Figure B illustrates why: overall tariff and customs duties paid on U.S. imports amount to a trivial share of overall personal consumption expenditures. In the nearly two years following the Sec. 232 and Sec. 301 tariffs, customs duties as a share of consumer expenditures increased from 0.3% to 0.4%, on average, relative to the period preceding tariffs. Even if one were to assume (implausibly) this was due to Sec. 301 and 232 tariffs and no other factors, they amounted to at most a 0.1% increase in prices.
But, of course, there were other economic factors at work and the increased tariff collection did not translate into higher inflation. In fact, Figure B shows that consumer prices decelerated from 2.0% to 1.8%, on average, annualized, after implementation of the tariffs and through the business cycle peak in the first quarter of 2020. Customs duties continued to ratchet up during the pandemic, minimally and mechanically, as people shifted from consuming services—less available in the pandemic—to goods, and imports surged with a stronger U.S. dollar, adding another 0.1% as a share of consumer spending. At best, removing these tariffs would result in a one-time price decrease of 0.2%—a drop in the bucket when you consider consumer prices have risen by more than three times as much, on average, every month since January 2021.
Eliminating tariffs would yield at best inconsequential gains for consumers
|Pre-tariffs||With tariffs, before pandemic||Pandemic + Ukraine war|
|Tariff and customs revenues, share of personal consumption expenditures||0.3%||0.4%||0.5%|
|PCE price index, average annualized growth rate||2.0%||1.8%||4.4%|
Note: Pre-Trump tariffs = 2016, third quarter–2018, first quarter; With tariffs, before pandemic = 2018, second quarter–2019, fourth quarter; Pandemic = 2020, first quarter–present.
Source: EPI analysis of BEA 2022 data.
This is not to say that the tariffs had no impact—they did, particularly in helping U.S. steel and aluminum producers. The increase in the price of imported metal products makes it possible for U.S. producers to achieve economically viable financial margins and stabilize expectations of market conditions enough to entice reinvestment in new production capacity. Nonetheless, conditions of global chronic glut–especially given expected global growth slowdown from China’s partial economic lockdown, the war in Ukraine, and ongoing pandemic-related supply chain disruptions—continue to threaten U.S. metals industries. This affects the strategic goods they produce and the millions of jobs they support directly and indirectly—and a robust manufacturing base more generally. The tariffs may be a crude instrument, but absent other feasible policy options to address the glaring market failures in global trade, they remain a critical tool to support ongoing industrial rebuilding and to ensure that these essential industries have the necessary resources for technology investments to decarbonize moving forward.
Congress applied different criteria for considering these two sets of tariff measures. The Sec. 232 measures clearly prioritize national security concerns over economic efficiency and consumer welfare; under conditions of chronic global gluts, U.S. steel and aluminum producers have been perennially at the brink of economic viability to the extreme that only one producer in a NATO country is capable of producing military- and aerospace-grade aluminum. The Department of Commerce identifies an 80% capacity utilization rate in steel production as a minimum threshold for long-term financial viability of the industry. In the business cycle prior to the 232 tariffs, U.S. steelmakers reached this level of activity less than 5% of the time; though this has improved to 26% of the time since March 2018. The Sec. 232 measures afforded metals producers the financial breathing space to start rebuilding the industry with expanded investment and job creation.
As for the Sec. 301 tariffs, the Phase One agreement with China has gone largely unfulfilled in terms of the bulk commodity purchases pledged by Chinese policymakers and the promise to continue negotiations on further prying open Chinese markets to U.S. foreign direct investment and intellectual property monopolies. Ironically, however, if Chinese policymakers had lived up to their end of the bargain, the United States would arguably be in a worse position today in regard to inflation and supply-chain vulnerabilities. The kinds of intellectual property protections and free reign for their foreign investment in China that U.S. business interests sought would make it easier for big corporations to move—or merely threaten to relocate—operations to China, and to book profits in offshore tax havens.
People often focus on trade’s tendency to push down prices. But by exporting in bulk U.S. natural gas and agricultural products to China, Phase One would have made these commodities scarcer, and therefore prices paid by American businesses and households for electricity and food would be higher.
It is clear that the United States is in dire need of an economic strategy rethink. Until a more comprehensive policy approach to U.S. industrial development is heeded, policymakers should at least keep in place the parts of policy that are working to promote U.S. industry.
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