The author is Chazen Professor of Global Business at Columbia Business School
Fighting inflation has been on President Joe Biden’s mind lately. But any mention of the high tariffs on Chinese imports he inherited from the Trump administration has been absent from those discussions.
Between 2018 and 2019, the United States and China engaged in a trade war that increased tariffs on thousands of internationally traded products. The tariffs imposed by the United States and the Chinese retaliation against American exporters jointly targeted 3.6% of GDP.
Their potential deletion is currently the subject of fierce debate. Unlike most issues, US trade policy crosses party lines. Proponents of protectionism say the tariffs are key to building industrial capacity to counter China’s manufacturing prowess, and that they have not contributed to higher prices. But these proponents can’t have it both ways: tariffs can only help manufacturing jobs if they raise prices. If producers benefit from higher tariffs, it is precisely because consumers suffer.
Suppose an auto mechanic chooses to import tires from China for $100 each rather than the slightly more expensive US version. Would the US producer benefit from a 25% tariff increase on Chinese tires by the US government?
The answer depends on what happens to the after-tariff price of imports. At one extreme, if the Chinese exporter cannot find another buyer, he can reduce his price and leave the after-tariff price at $100. In this case, the government collects the fare revenue and the auto mechanic suffers no direct impact. That’s what Trump meant when he said the Chinese are paying the tariffs. But because the after-tariff price has not changed, the US tire producer, which has lost business to the Chinese supplier, does not directly benefit.
Instead, consider the extreme where the after-tariff price is $125. Now the car mechanic is wronged. Since import prices have increased, tariffs protect the US tire producer from import competition. The tire manufacturer’s gains have come at the expense of the mechanic.
This illustrates how tariffs favor producers at the expense of consumers. But to what extent this happens depends on the price after tariff. Only data can tell us the impact in the real world. In a rare case where economists agree, peer-reviewed studies by multiple teams conclude that the second extreme has materialized: prices after tariffs have risen by the full magnitude of tariffs. American consumers have borne the brunt of the trade war.
These price increases should benefit US producers. Unfortunately, the answer is more complex. Today, most global trade is in intermediate parts rather than finished products. On tires, the US also increased tariffs on carbon black – a key input – by 25%. This increases manufacturing costs and negates some of the protection benefits.
Moreover, China has not been content to remain silent. It triggered retaliatory tariffs on $100 billion of US exports, including tires. One study found that these higher inputs and tariff retaliation outweigh the benefits of protection for producers. Federal Reserve economists found that manufacturing employment had fallen. Another study found that exports increased among “spectator” countries like Malaysia and Mexico, not the United States.
The evidence confirms what economists argued at the start of the trade war: tariffs are not an effective policy to support US manufacturing. Instead, they eventually raised prices for everyone, with the retaliation hitting the Midwest particularly hard. Overall, the US economy is worse off.
Reversing tariffs will reduce prices for consumers. The impact on the price level would be modest since imports represent only about 15% of US GDP. But ending the trade war is the most immediate and effective policy in Biden’s mission to relieve the American consumer.