Removal of tariffs would carry substantive political and strategic costs, without any tangible economic benefits
US President Joe Biden is planning to roll back tariffs on a range of Chinese imports that were imposed by his predecessor. A final decision may only be taken after next week’s G7 meeting, with many reports indicating that Biden’s team is deeply conflicted on the issue.
The very fact, however, that the move is being considered – and even favoured – indicates the confusing priorities and self-contradictory impulses of an administration that has at times seemed to lack ideas, and ended up looking like a headless chicken in its attempts to teach Russia a lesson and adopt a viable policy to tackle China, its biggest strategic rival.
The Section 301 tariffs on more than $350 billion worth of consumer goods from China, spanning textiles, meat, laptops, clothing, etc., were imposed by Donald Trump administration in several tranches starting 2018 to address the trade deficit, force China into changing its predatory trade practices and impose costs on Beijing’s theft of US intellectual properties.
The deficit has widened, but Biden has so far not tampered with the tariffs. He indicated in January this year that these levies won’t be rescinded since China has failed to abide by the commitments of the Trump-era Phase One trade deal signed two years ago. So why is Biden mulling over scrapping these tariffs now? Has China started acting on its promises? Has it given any major concessions?
Quite the contrary. Recent data indicates that far from purchasing additional American goods and services to the tune of $200 billion by the end of 2021 – that would have meant a total of $502.4 billion worth of American soybean, sorghum and other agricultural products, airplanes, energy and services over the designated two-year period – China has ended up buying only $288.8 billion, or 57 per cent of the total it had promised — a volume that is lower than even the baseline 2017 levels under the agreement, reports New York Times, citing Chad Bown from the Peterson Institute for International Economics.
If that is the case, why is Biden talking about reviewing these tariffs at all? The answer lies in the runaway inflation in the US that has already accelerated to a 40-year high in May and threatens to further scorch the Democrats in the coming midterm elections.
As consumer confidence ebbs and bourses enter a bear grip, consumer prices are up 8.6 per cent from a year earlier and has recorded an estimate-breaking 1 per cent jump since April. The spectre of a recession is looming large with rising costs of gasoline, food and shelter costs hurting the American way of life.
With prices reaching the sky and the dollar travelling less than it used to, Americans are getting angrier, and Biden is feeling hot under the collar. Latest polls show far less than third Americans approve of Biden’s handling of the economy and less than a fourth feel that he is doing a good job at containing inflation; almost three-fourths don’t support his tactics. The possibility of a red wave in November looms large.
A PEW Research survey conducted between 25 April and 1 May found that 7 in 10 Americans view inflation as a “very big problem for the country” and “no other concern comes close.”
Faced with such a predicament, and the possibility of becoming a lame-duck president after the midterms, Biden and his team are desperate to tame the inflation monster. The interesting thing to note here is that the inflation that is causing such a big political headache for Biden has been fed to a large degree by US-led Western energy sanctions on Russia. It is mostly a self-inflicted wound.
To punish Putin, Biden and his allies imposed some of the toughest economic sanctions on Moscow. That in turn triggered an unprecedented rise in global oil and natural gas prices, driving up housing, food, and electricity prices and fuelling four-decade high inflation in the US and the UK.
The collateral damage of Western sanctions has been so severe that Biden administration is now “quietly encouraging some US businesses in the agricultural and shipping spheres to buy and carry more Russian fertilizers”, reports Bloomberg.
On the inflation front, Biden’s problem is that he has very few tools at his disposal to fight the raging fire. But he must be seen to be doing something, so he may end up reversing the Trump-era tariffs as a desperate, stopgap measure. That doesn’t address the core problem, won’t alleviate the pain, makes no economic sense, even less political sense, and is a strategically short-sighted and counterproductive move that may handsomely reward China for its duplicitous trade policies.
Biden, of course, didn’t want to be pushed to such a dilemma. He was happy to let the status quo prevail on the sanctions, fully aware of the onerous choices at hand. But the coincidence of politically noxious high energy prices and the looming, statutory four-year review of the Section 310 tariffs that must be completed this summer has forced him to act. Latest reports say he is going to request Congress for a three-month suspension of federal gas tax, a frantic manoeuvre that Barack Obama had once called a “gimmick”.
This conundrum reflects the policy indecisiveness and ad-hocism in an administration that seems confused both in its rhetoric (consider the White House rolling back Biden’s comments on Taiwan three times) and actions. It is muddling through on China — that Washington considers to be its “most serious competitor” — in a mix of uncertain lunges and walkbacks, and on Russia, Biden is all fire and brimstone, taking actions without thinking through the consequences.
The US president had boasted in March that his sanctions had turned the Russian ruble into “rubble”. He had predicted that Russian economy will soon be halved. Yet months after the US and its allies moved to impoverish Russia, the ruble is now the strongest against the dollar in seven years, it is the strongest currency in the world this year, Russia is selling more oil than ever, earning even more than it did before the war and even European nations are quietly upping their share of Russian crude while the US battles crippling inflation at home.
If Biden’s Russia policy seems to be backfiring, it would be nothing in comparison to the long-term pain he may invite by lifting the Trump-era tariffs on Chinese goods. The US president is under increasing internal, competing pressure from within his own administration. While national security officials and the Office of the US Trade Representative (USTR) — the agency that implements the tariffs — are loathe to give away the negotiating leverage over China, the treasury and commerce departments that represent the business communities and lobby groups, are advocating rolling back the tariffs claiming that it would let some inflationary steam off the economy.
Biden has so far been coy, unwilling to commit one way or another, but Democrats are panicking at falling ratings even among core voters and senior administrative officials are willing to grasp at anything if only to manage the optics around a president seemingly doing nothing to curb inflation.
The move to tweak tariffs would carry significant political and strategic costs, however, without bringing any substantial economic benefits.
Politically, it would expose Biden to renewed attacks from the Republicans that he is soft on China, especially if the lifting does not involve any quid pro quo. Wall Street and business lobbyists apart, China’s adversarial position is among the rare issues that enjoy consensus in a bitterly polarised American polity, and if the president is seen to be easing the pain on China without any tangible gains, that would outweigh any political benefits Biden may derive by easing off the inflationary pressure.
Additionally, it would complicate Biden’s pitch for mid-term or even presidential polls going ahead if, after promising to create and bring back middle-class jobs, the US president takes a step that encourages American companies to maintain their supply chains in China and undermines whatever is left of America’s manufacturing base. That would hurt the chances of creating more jobs. Biden has been tom-tomming the fact that the US has recorded healthy job growth under his watch, but it is worth remembering that the growth comes off a low base point. In April 2020, battered by a rampant Covid crisis, US unemployment had hit its highest level since the Great Depression of the 1930s.
Biden’s economic record, therefore, at best has been patchy. After months of denial on inflation, calling it a temporary phenomenon, trying to deflect the blame, Biden finally admitted that there’s not much he can do to tame soaring prices. He is now fending off fears of recession.
On top of this, if Biden removes the tariffs, ahead of what is likely to be a difficult election, he will end up angering Democrats’ core constituency — the domestic trade groups and labour unions — who want the Trump-era tariffs on Chinese imports to stay and have officially filed an appeal with the USTR demanding an extension. Biden has so far been careful not to irk the backbone of his party, but with reports trickling in that he is considering a removal, the labour unions are feeling restive and has warned the White House against such a move.
Kim Glas, the chief of National Council of Textile Organizations, a major American textile group, released a statement last month pointing out that “tariffs are a reasonable and necessary mechanism to support US jobs, offset unacceptable practices, and strengthen the national economy. They help partially level the playing field for American manufacturers and workers trying to compete against unfair and illegal trade practices – ranging from intellectual property theft, forced labor, to state-sponsored subsidies – that have been perpetuated by the Chinese government… It’s critical we maintain key negotiating leverage to address these predatory trade behaviors.”
It would have been understandable if the political cost returned long-term, economic benefits. The tariffs did not cause the inflation, and they are expected to have a marginal and transitory effect on price rise, shaving off at best a few percentage points from overall inflation.
Washington Post cites a study by economists Gary Hufbauer, Megan Hogan and Yilin Wang of the Peterson Institute for International Economics that says tariff removal would reduce the inflation measure by 0.3 percentage points, and even then the full benefit “could take nine to 15 months to materialize.”
Other studies paint an even bleaker picture, contesting that benefits are illusory, and effects would be harmful to US economy. Robert E Scott and Adam S Hersh of the Economic Policy Institute write that “rolling tariffs back would return efforts to reshore key elements of global manufacturing supply chains to the United States back to square one. Given how damaging fragile global supply chains have proven to be—and how important it is to reshore production back to the US —claims that tariff rollbacks are an answer to inflation are dangerous”.
Besides, there’s no guarantee that retailers and importers would pass on the benefits to the consumers instead of profit taking, and there’s even the possibility that China may stop the deep discounts that were placed to counterbalance the tariffs and will now absorb the differential by hiking prices at their end.
The only constituency that is lobbying for tariff removal are the big retailers and businesses that have large operations in China. Washington Post quotes Derek Scissors of the American Enterprise Institute as saying that the “the financial community wants to get rid of the tariffs because they will get treated better by the Chinese government regarding access to the Chinese market”.
It is not surprising to see that China has been very vocal about removal of the tariffs, and is now helpfully suggesting that Biden should rescind these to curb inflation. Beijing senses that Biden is in a tight spot and has been making the case that the import duties are “harming Americans more than the Chinese”.
Therefore, whether or not Trump succeeded in forcing China to change its behavior, the tariffs do present the Biden administration with a negotiating leverage that should not be abandoned for nothing. Not only will that take away a key cushion for US manufacturing base, it would embolden China to carry on with its subversive and illegal trade practices and, as Bob Bilbruck of consulting firm Captjur tells New York Post, “the amount of negative impact this will have will last decades if not forever turn the tide of competition with China in favor of China.”
The Biden administration so far has appeared clueless when it comes to China strategy, failing to match rhetoric with action. It has talked a game bigger than it is capable of walking, and as the power balance shifts in Asia in favour of China, the US domestic debate over withdrawal of China tariff is yet another example of the Biden administration’s muddled thinking that ends up weakening its own hand and strengthening that of its chief adversary.