The China Tariff Puzzle

Eakinomics: The China Tariff Puzzle It’s not usually too difficult to sort out how the administration sets its policy priorities. Just draw a line from progressive true north beliefs straight through union labor desires and you will land on the White House proposal. Do not detour based on data, expert appraisal, public opinion, or any other such distraction. From this perspective, the (non) decision-making on China tariffs is (to quote Churchill) a riddle, wrapped in a mystery, inside an enigma. Recall that the Trump Administration first imposed tariffs on China in July 2018. New research by Tori Smith and Tom Lee shows that “these tariffs have resulted in a quadrupling of the trade-weighted average tariff rate Americans pay for Chinese imports, and a doubling of the trade-weighted average tariff rate Americans pay for imports generally.” The whole point of these tariffs was to change China’s actions in the trade arena, but a Biden Administration review of the so-called Phase One agreement between the United States and China indicated that it had failed to meet those objectives. So, we have what appears to be a simple situation. The sharp rise in costs due to tariffs is not accompanied by any apparent benefits. This would typically be reason to make a U-turn and drop the tariffs. Yet the administration has kept them in place for over a year after the review was completed. That’s a riddle. Moreover, the president’s number on economic and political liability is the inflation engendered by his other policies. His administration has flailed about in trying to explain where the inflation came from – other than the unconvincing “we didn’t do it” – and evidently has no proactive strategy to bring inflation down. That’s a mystery. But here is the kicker. [ALGEBRA ALERT: If you have not recently studied for the GREs, skip to the end of this alert.] Let’s let P be the U.S. consumer price and C the China seller price (in dollars). Then P=C(1+t), where t is the effective tariff rate. Smith and Lee conclude that t rose to 4t in the presence of the Trump tariffs. That means the percentage rise in the price for U.S. consumers can be written as: 3t/(1+t). [END OF ALGEBRA ALERT.] Smith and Lee estimate that the effective rate on imports from China was 2.68 percent in 2017, which implies that the tariff increase raised prices for U.S. buyers by 7.83 percent! Using effective rates for imports as a whole (not just from China) yields the result that overall prices rose by 1.5 percent. Reversing the China tariffs would provide a one-time relief of as much as 7.8 percent on China purchases and 1.5 percent on imports overall. The administration has at its disposal a policy that would have no costs and significant benefits for inflation, which would be politically helpful, as well. Yet it refuses to use it. It is an enigma.