Whether For the ‘Right’ or ‘Wrong’ Reasons, Just Lift the Tariffs



Christine McDaniel | The Hill

The tariffs put in place by the Trump administration on all foreign steel and aluminum continue to do damage. Eliminating them, at least on key trading partners, will put more money in our pockets, help get America’s economic fundamentals in the right place and strengthen cooperation as we embark on reforming global trade rules.

Those are some of the “right” reasons to do away with the tariffs. Let’s start by looking at one of the “wrong” reasons to do so. I use the term loosely. 

Measures of inflation are on the rise. One, the consumer price index (CPI), was up 4.2 percent from April 2020 to April 2021 (admittedly measured from the bottom of the pandemic downturn). The upcoming May CPI data release is this week, and we will find out if those price increases are continuing.

Eliminating tariffs would treat these symptoms by easing price pressures for American manufacturers and especially consumers. National Bureau of Economic Research economists find that U.S. consumers have borne the brunt of the recent trade war. 

Simple data calculations show duties paid on imports in terms of the average American household of four increased from $422 in 2015 to $948 today. Evidently, this hidden tax amounts to over $500 per year. 

But don’t confuse lifting tariffs for an inflation cure. Our economy is large, and imports represent about 15 percent of U.S. GDP, less than in most other advanced economies. And while tariffs are high on certain goods, overall U.S. tariffs are still low.

Plus, tariffs are not the driving force of inflation. As the economy recovers from the pandemic, demand appears to be recovering ahead of supply, driving prices upward. Federal Reserve Board of Governors member Christopher Waller said recently that “the economy is ready to rip,” while there is a temporary labor shortage and other supply bottlenecks.

This so-called misalignment appears to be fueling today’s price increases. This mismatch and likely the resulting inflation are expected to be temporary.

There are two “right” reasons to lift the tariffs. The first is to set the market fundamentals in the right direction. Price fluctuations aside, most policymakers are focused on workers, employers and the economy.

In a study on the China tariffs, Columbia University economist David Weinstein and his colleagues found that the tariff announcements between 2018 and 2019 resulted in lower prices — but only by hurting the economy. The tariffs led to lower stock prices of firms exposed to China, which in turn leads to lower returns to capital and less investment. The authors estimate that the actions resulted in a 1.9 percentage-point drop in the investment growth rate of listed U.S. companies by the end of 2020.

The second reason to lift the tariffs, at least on our key trading partners like the European Union, is to strengthen our ability to cooperate on upcoming trade reform issues such as global subsidies and overcapacity.

Some industry observers cite overcapacity to justify continuing U.S. steel and aluminum tariffs. But not every country is engaging in unfair subsidies. Large EU members like Italy, Germany, Spain and France represent less than 5 percent of all 609 antidumping and countervailing duty orders.

It is one thing to have antidumping and countervailing duties on imports that fit the legal definition of unfair foreign pricing and government subsidies. But it is quite another to impose section 232 national security tariffs on a longtime ally such as the European Union. Europe is not driving overcapacity, and the steel and aluminum tariffs ignited a transatlantic trade war that is entangling more sectors with unintended consequences (e.g., wine and spirits and agriculture).

Instead, we should lift the steel and aluminum tariffs from EU imports, and have the EU call off all retaliatory tariffs. The two sides can focus on goals laid out in a recent joint statement, which includes finding solutions on how to “hold countries like China that support trade-distorting policies to account.” 

Lift the tariffs. Do it for the right reasons or do it for the wrong reasons. Just do it. 

Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University.

To read the original commentary from The Hill, please click here.

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