WASHINGTON – Mitch Spencer’s business costs soared after the U.S. imposed tariffs on billions of dollars in Chinese imports four years ago.
Spencer’s company, Polaris Rare Earth Materials, based in Carmel, Indiana, makes engine parts with its business partner at a factory in China and sells them primarily to the automotive industry in the United States.
The components are subject to a 25% tariff that then-President Donald Trump levied against some Chinese imports as part of a trade war with Beijing. Spencer estimates the duties have cost his company nearly $500,000 – money he otherwise could have used to hire more engineers and grow his business.
Running a business while paying penalizing tariffs is like “trying to run a race with weights on your ankles,” Spencer said. “It’s just really hard to do what you want to do when you’ve got this bleeding coming out the back end and you have no control over it.”
With inflation at a 40-year high, President Joe Biden is under pressure to roll back Trump’s tariffs to reduce costs for businessmen like Spencer and other American consumers. But lifting the tariffs carries major risks, politically before the November midterm elections and geopolitically with China, while economists debate how much it would lower consumer prices.
Trump placed tariffs on $360 billion worth of Chinese-made goods starting in 2018 amid allegations that China steals U.S. intellectual property and forces American companies to divulge their trade secrets as the cost of doing business in China.
The tariffs, which covered a broad range of industrial products and household items such as clothing, televisions and refrigerators, were part of a trade war that lasted nearly two years between the world’s two biggest economies.
Biden has been weighing the move for weeks and says he is close to a decision.
Easing the duties could undermine Biden’s efforts to boost U.S. manufacturing of microchips and other goods typically produced in China. The president has built close ties with organized labor, but unions oppose touching the tariffs. Removing them also would put Biden at odds with Democratic candidates in the Rust Belt, such as U.S. Rep. Tim Ryan, who’s running for the Senate in Ohio and argues that removing the tariffs would be a mistake.
“The president is still thinking about it. This is a big decision,” Commerce Secretary Gina Raimondo said Sunday on CBS’s Face the Nation, adding there could be potential labor implications the president is mindful of.
She added: “One thing about this president is he will never do anything that he thinks will hurt workers in America or hurt union workers in America.”
Lifting the levies also could open Biden up to attacks that he’s soft on China as the U.S. accuses President Xi Jinping of human rights violations and Chinese companies engage in intellectual property theft.
The Biden administration is in “a tough spot,” said Rob Handfield, a professor of supply chain management at North Carolina State University. “They want to maintain political leverage over China,” he said.
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Tariffs haven’t worked, economists say
Tariffs really don’t give the U.S. much political leverage because they never really did what Trump said they would do, said Derek Scissors, a China expert at the American Enterprise Institute, a Washington-based think tank.
The U.S. trade deficit with China hasn’t improved. China sent $353 billion more in goods and services to the United States last year than it imported in U.S.-made products. Nor has China ended its unfair trade practices. What’s more, China countered with its own tariffs on U.S. exports that have hurt farmers financially.
Scissors said he doesn’t think tariffs give the U.S. much leverage, “but if you drop them and you replace them with nothing, the signal to China is the Americans cannot do anything to punish us for our predatory economic policy.”
The White House hasn’t indicated when a decision on the tariffs will be announced. “I haven’t made that decision,” Biden told reporters July 8. “We’re going through them one at a time.”
Biden said he expected to speak with Xi as soon as this month.
A White House official, speaking on the condition of anonymity, laid out the administration’s rationale for a rollback, saying the Trump tariffs were “poorly designed and have increased costs” for families, small businesses and ranchers without addressing China’s harmful trade practices.
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The effect on inflation
How much would rolling back the tariffs ease inflation in the U.S.?
Not much, economists agree.
A report earlier this year by the Peterson Institute for International Economics concluded that the tariffs raised costs for U.S. consumers and firms only modestly and that removing them would lower inflation by just 0.26%.
“This one-time drop in the price level would put only a small, short-lived dent in overall inflation,” the report concluded.
Mark Zandi, chief economist of Moody’s Analytics, said repealing the tariffs could have a small effect on reducing inflation but “wouldn’t be a game-changer by any means.” Even reducing all the tariffs would probably lower inflation by just about four- or five-tenths of a percentage point, he said.
“It will lower inflation, modestly and temporarily, but opens up these other problems that are significant,” said Zandi, who supports lowering the tariffs but cautions it would not result in a “slam-dunk policy change,” pointing to issues with China and the possible effect on U.S. manufacturing.
Historically, the U.S. doesn’t set trade policy because of short-term considerations such as inflation, said Jeffrey Bergstrand, professor of finance in the Mendoza College of Business at the University of Notre Dame. But repealing the tariffs could significantly lower costs on some goods because the duties were so large, he said.
“That would lead to less inflation at the consumer level, so I think there is a gain from it,” he said, adding the move also would boost international trade. “It is probably appropriate at this time.”
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Biden’s dilemma on tariffs
Biden has political considerations besides the inflation math.
The president has staked much of his economic vision on rebuilding America’s depleted manufacturing sector in the Midwest with semiconductor, electric vehicle and other plants aimed at clean energy. Repealing the tariffs, though, would boost Chinese imports, not domestic production.
Ryan, who is running against Republican nominee J.D. Vance in a tough race in Ohio, sent a letter to the president last month urging him to keep the tariffs in place. He said tariff reductions would “strip the U.S. of leverage” with China and “inundate American companies with a slew of imports they may not be able to withstand.”
“We cannot continue to enable China’s practices that cripple our workforce by allowing Chinese-made products to flood our markets.”
Biden, who has billed himself as the most union-friendly president in modern U.S. history, also would upset his union allies.
“We believe that now is the wrong time to relax tariffs on China,” said Liz Shuler, president of the AFL-CIO, the largest federation of unions, arguing it would have just a “marginal impact on inflation.” She said tariffs are a tool for the U.S. to “get tough on China” and give U.S. manufacturers a “leg up.”
Others, however, predict there would be benefits from removing the tariffs.
Larry Summers, treasury secretary under President Bill Clinton and an economic adviser in the Obama administration, has criticized Biden’s economic policies, including last year’s COVID-19 rescue plan, and said they accelerated inflation. But when it comes to lifting tariffs on China, Summers backs the move.
“I think cutting the tariffs is clearly a good idea,” Summers said on NBC’s “Meet the Press” in June. “It will hold down prices. It will enable us to take a more strategic approach to dealing with China.”
Lifting the tariffs could reduce the consumer price index by a percentage point or more over time, Summers said, adding: “I hope the administration will find a way to do it. “
Handfield, who forecasts high inflation will persist for six to nine more months, said eliminating the tariffs could reduce costs for automobile parts, electronics, computers and a range of other goods by 5% or 10%.
“I think it’d be a good time to take out the tariffs,” he said. “We need all the help we can get because inflation is likely to continue for some time to come.”
But Hoyt Bleakley, professor of economics at the University of Michigan, said rolling back the tariffs as an “inflation-fighting policy” would not make much of a dent because the tariffed goods don’t make up a large enough share of the economy.
“To some extent, tariffs get passed on to consumers. And so prices for some goods could drop,” Bleakley said. “That’s going to be a measurable effect. It’s just not going to be a large effect.”
Spencer, the Indiana-based manufacturer, sees another advantage of lifting the tariffs. His foreign competitors have an unfair competitive advantage because they are not subject to the same duty, he said. Removing the tariffs would level playing field for U.S. companies.
“We don’t just compete with U.S. customers – it’s an international market,” he said. “We have stiff competition on every continent.”
But “they’re not saddled with the same thing that we are.”
Joey Garrison and Michael Collins cover the White House. Follow Garrison on Twitter @joeygarrison and Collins @mcollinsNEWS.
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This article originally appeared on USA TODAY: Will inflation ease if Biden ends Trump China tariffs?