John Phipps: Are Tariffs Part Of The Problem With Inflation?

From Gary McIntyre in Hawkeye, Iowa:

“Can you please explain how tariffs placed on goods coming from one country into another really work?   I understand the U.S. has over 500 tariffs on various products coming from China currently. It is being considered to drop it down to the 300 range. Was some objective met that some tariffs might be cancelled? Also, wouldn't tariffs contribute to inflation?”

Gary, I was just thinking about revisiting my tariff Agsplainer from 2018 when the tariffs on Chinese products were enacted by President Trump. The spoiler is this: tariffs are taxes paid by buyers – American consumers – not sellers in China.

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There were no checks from the Chinese treasury to ours, only higher prices especially for consumer goods. The effects were almost exactly what economists of all flavors warned, and none of them beneficial. The trade imbalance did not improve, for example.

I’ll try to update our tariff scorecard and report soon, but today address just the tariff contribution to inflation. Economists and econometricians have struggled to come up with estimates of all kinds of economic effects due to the unprecedented and lingering COVID influence on world business.

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COVID disrupted the oil industry from top to bottom and prompted governments to provide massive amounts of assistance to prevent an outright recession or even a global depression. Those two factors most likely caused the bulk of retail price increases, but recent research indicates tariffs added from .3% to 2% to those headline inflation numbers.

Removing the tariffs could lower prices on a wide range of consumer goods like electronics, appliances, clothing and tons of products with Chinese subassemblies. Much will depend on unkinking the supply chain, which seems to be occurring as ocean freight rates are returning to pre-pandemic ranges, as one indicator.

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That said, one development may lessen this desired price action. All along supply chains of every kind, profit inflation is now one of the big drivers. Consumers are conditioned to expect inflation and still wary of supply problems, so an opportunity to increase margins is hard for retailers to pass up.

There is another bonus to removing tariffs – reciprocal removal of Chinese tariffs on goods we export to them – like ag products.