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

Promising to make things more expensive when consumers are already angry about high prices may seem like an unusual political strategy. But it is one that both President Biden and former President Donald Trump favor.

As they battle for a second term in the White House, both men say tariffs on imported Chinese goods are needed to boost domestic manufacturing and to push back against China’s zero-sum trade practices. While economists say tariffs will lead to higher prices, both 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 for 60 percent tariffs on all $427 billion of goods China ships to the United States annually would almost certainly reshape trade in ways that consumers would notice.

“It’s definitely a much bigger shock. Yes, it would definitely 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 the result would be higher prices for Americans.

The actual outcome provided topics for discussion for both parties.

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Contrary to expectations, U.S. inflation fell after the tariffs were imposed and remained lower for nearly three years until the pandemic upended global supply chains. Consumer prices rose 2.9 percent year-on-year in July 2018, when the first Chinese tariffs came into effect. A year later, inflation was below 2 percent.

But that didn’t mean the Chinese paid the bill. Numerous studies concluded that the costs fell on Americans, if not consumers. Trump’s tariffs “had little to no impact on the prices foreign exporters received,” according to a 2018 study by economists Mary Amiti of the Federal Reserve Bank of New York, Stephen Redding of Princeton University and David Weinstein of Columbia University.

The Americans who paid the tariffs were people like Lance Ruttenberg, CEO of American Textile Company, whose headquarters are in Duquesne, Pennsylvania, where Andrew Carnegie once ruled a steelmaking empire.

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

As basic textile and fabric production moved abroad in recent decades, American Textile began importing about 3,500 shipping containers full of cushion covers and specialty fabrics each year. The company has seen its costs rise by millions of dollars every year for the 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 ultra-low inflation, making it difficult for companies to raise retail prices. Under pressure from retailers like Walmart to toe the line, importers absorbed the costs of the tariffs by shrinking their profit margins.

“The retailers, our customers, did not want to accept that 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 the tariffs by earning lower margins on their sales.”

The analysis of price data on 90,000 products found that major retailers avoided the impact of the tariffs by placing unusually large import orders between the tariffs’ announcement and their effective date, and by switching to suppliers outside China.

The research was conducted 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 response in consumer prices. The dollar rose about 10 percent against the yuan in 2018, offsetting some of the impact of the tariffs by making Chinese products cheaper.

Other Asian currencies fell along with the yuan. So prices for goods from suppliers in South Korea, Vietnam and Indonesia also fell. This allowed some U.S. buyers to switch from tariff-laden Chinese products to cheaper alternatives.

Moreover, the anti-China tariffs were imposed in several waves, meaning that the full effects were not felt until more than a year after the start of the trade war. The first two waves of 25 percent tariffs affected a relatively small volume of goods, just $50 billion. To minimize political fallout, Trump’s trade team steered clear of everyday products used in American homes, focusing instead on industrial goods.

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

A few months later, the pandemic plunged the economy into a deep freeze, wiping out the effects of the tariffs. By May 2020, inflation had virtually disappeared. But as global supply chains struggled to keep up with consumer demand for products to make the work-from-home era more enjoyable, prices soared, setting off an inflationary episode that has yet to end.

In a recent interview with Time magazine, Trump repeated his false claim that other countries are paying U.S. tariffs and rejected the idea that Americans would suffer.

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

But the new China trade war Trump is promising will likely not be as painless for consumers as the 2018-2019 campaign, economists say. His new rates would cost the average middle-class household an additional $1,700 annually, according to the Peterson Institute study co-authored by Lovely and economist Kim Clausing.

First, the size of import taxes will be larger. Trump has proposed a 60 percent tariff on Chinese goods, about four times the average tariff of his original policy, and a 10 percent tax on the $3 trillion in goods the United States imports from all countries each year.

Some companies are already making contingency plans. Donald Allan, CEO of Stanley Black & Decker, told analysts last month that he still suffers from “PTSD” over the $300 million in annual tariff costs the toolmaker incurred during Trump’s original trade war. The company has reduced its import dependence on Chinese suppliers from 40 percent to no more than 25 percent and would diversify further if tariffs rise, he said.

Stanley Black & Decker would also likely have to take “some surgical price action,” Allan said.

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

“My sense is that the consequences 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 percent of its supply chain from China to other countries such as Vietnam, India and Pakistan. And ultimately, the government was allowed to continue importing certain items on a tariff-free basis that could not be obtained from U.S. suppliers.

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

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

“If you develop products in the future using these new input costs, the price of the next generation of a product will inevitably be higher than if the tariffs had not existed,” he said. “So it’s inevitable that the prices of everything will rise over time.”

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