With inflation running at 40-year high rates, President Joseph R. Biden Jr. is wringing his hands and the Federal Reserve is signaling more interest rate hikes in 2022 and 2023. But policymakers are overlooking one set of actions that could make a meaningful contribution to taming inflation: trade liberalization. The data cited in this Policy Brief indicate that a feasible package of liberalization could deliver a one-time reduction in consumer price index (CPI) inflation of around 1.3 percentage points.
That reduction would amount to $797 per US household, about half the size of pandemic relief in 2021. As a bonus, the embrace of trade liberalization would curb inflationary expectations taking hold in American firms now protected by trade barriers from foreign competition.
Goal: Liberalization Equivalent to a 2 Percentage Point Reduction in Tariffs
In a PIIE blog, Katheryn Russ explores the direct impact on US inflation of US tariffs imposed specifically on imports from China. Her research shows that these particular tariffs only marginally raised costs for US consumers and firms. But inflation can be meaningfully reduced if one looks at a broader array of tariffs.
To make a show of combating inflation, the Biden administration has rolled out an anti-monopoly strategy, arguing that lack of competition and high profits in the energy sector, among others, are contributing to high prices. But some press reports indicate that Treasury officials have argued privately that relaxing tariff duties would also ease price increases hitting American consumers.
If the White House takes these views seriously, it should set itself a liberalization target equivalent to a 2 percentage point tariff reduction. To put that goal in context, President Donald Trump inflicted Americans with $81 billion1 higher costs by imposing an additional 16 percent average tariff on $506 billion of imports from China. All told, over $610 billion of US imports in 2021 were subject to high tariffs, penalty duties, or severe quotas (table 1), and $949 billion of US imports were subject to some form of import duty. Two percentage points of tariff-equivalent relief on the $2,800 billion of US merchandise imports in 2021 would be equivalent to $56 billion2 in lower costs for Americans. If President Trump can raise costs for average households by $81 billion, President Biden can at least lower those costs by $56 billion.
To read the full report from the Peterson Institute for International Economics, please click here.