Washington (CNN)Lifting Trump-era tariffs is one of the few things President Joe Biden could do to slow inflation — but that doesn’t mean Americans would immediately notice a drop in prices if he took that action.
So far, Biden has resisted pressure from many in the American business community to lift the tariffs that his predecessor imposed on $350 billion of Chinese goods — including bicycles, baseball caps and sneakers — during a tit-for-tat trade war.
But as inflation continues to be a thorn in the President’s side — or “the bane of our existence” as Biden recently put it — he has said his administration is considering lifting the tariffs. A White House official earlier this month said that a decision would be announced in the “coming weeks.”
It’s not a simple decision and advisers within the administration are divided on whether to lift the tariffs. On the one hand, China has not lived up to purchase commitments it made during the Trump administration, and some US industries struggle to compete with China’s unfair trade practices. On the other hand, Biden is eager to take any step that shows he is combating high prices. He could decide to lift some tariffs and leave others in place.
“Some reductions may be warranted,” Treasury Secretary Janet Yellen told lawmakers during congressional testimony earlier this month. But she also noted that the impact on prices wouldn’t solve America’s inflation problem.
“I want to make clear I honestly don’t think tariff policy is a panacea with respect to inflation,” she added.
One of the few tools for Biden to address inflation
Biden doesn’t have a lot of tools he can use to address inflation. But he does have the authority to lift the tariffs that were imposed on Chinese-made goods during the Trump administration.
“It’s something the President can actually do by himself to lower prices. No one ever said it was a panacea — but compared to other things the President can do, this is pretty substantive,” said Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics.
“What certainly isn’t a panacea is wailing against refiners for price gouging. It may make a great headline but that is truly inconsequential,” Hufbauer said.
Last week, Biden rebuked oil companies for reaping big profit margins at a time when families are grappling with record-high prices. He also attacked shipping companies for raising prices and signed a bipartisan-backed law aimed at improving oversight for ocean shipping and makes changes that proponents say will ease inflation and lessen export backlogs.
Earlier this year, Biden approved the release of an unprecedented amount of oil from US reserves to address the rising energy and gas prices — but a gallon of regular gas recently hit $5 on average nationwide for the first time ever.
Maintaining price stability is largely the job of the Federal Reserve, which it can do by raising interest rates. Last week, the central bank aggressively imposed its biggest rate hike since 1994.
How lifting tariffs could bring down consumer prices
There are two ways that lifting tariffs could slow inflation.
First is the direct, immediate impact on US importers. Companies that import goods from China would no longer have to pay the tariffs when the items reach America’s border. The Trump-era tariffs imposed a 25% rate on most of the goods affected, including baseball caps and bicycles. They put a 7.5% rate on some other goods like shoes.
Importers generally pass along the cost of the tariffs to consumers. But the Chinese imports affected by the Trump-era tariffs aren’t a huge part of the US economy. Those tariffs have only marginally contributed to US inflation.
The second way that lifting tariffs could slow inflation is more indirect. If importers lower their prices because they no longer have to pay the tariffs, domestic competitors may need to lower their prices as well in order to compete. This indirect effect is much larger than the direct effect, but could take about a year before it really lowers prices for consumers, Hufbauer said.
But the price consumers are paying for those imported goods may not immediately fall — especially if the item is a component piece in a domestically manufactured good. Some companies may choose to drop their prices once tariffs are lifted but others may opt to keep prices the same.
Phil Page, chairman of Cap America, said the company raised prices soon after the tariffs went into place, and the tariffs are “now baked into the pricing.”
Cap America embroiders baseball caps, which it mostly imports from China. Page is unsure if he would lower prices if Biden lifted the tariffs.
“A lot depends on the competitor. Once you’re able to get a higher price, it’s hard to lower them unless competition forces you to,” Page said.
Matt Priest, president of the Footwear Distributors and Retailers of America, expects that retailers would have two options if Biden lifted the tariffs: reduce prices or hold them where they are.
“Each retailer is different, each relationship between vendors and brands is different. But at a minimum, I think we would see prices level out,” Priest added.
For Rick Muskat, president of shoe importer Deer Stags, the tariffs did nothing to help curb his reliance on China. Even with the tariffs, Chinese-made shoes are still cheaper than shoes he’s attempted to import from elsewhere. He raised prices when the tariffs went into effect.
“These tariffs only hurt American consumers,” Muskat said.
Would consumers notice a difference in prices?
Inflation rose by 8.6% in the year ending in May, the biggest jump in prices experienced by consumers since 1981. The typical US household is spending about $460 more every month than it did last year to purchase the same basket of goods and services, according to Mark Zandi, chief economist with Moody’s Analytics.
The increase is largely driven by record gas prices, which were up nearly 50% compared with a year ago, and food prices, which were up nearly 12% — products not typically imported from China.
If Biden lifted the Trump-era tariffs on Chinese goods and reduced some other trade barriers the US has in place, including duties on foreign steel and Canadian lumber, those actions would eventually lead to a 1.3 percentage point reduction in inflation, according to a policy brief that Hufbauer contributed to for the Peterson Institute for International Economics.
That kind of reduction could save the average household $797 a year, the brief said.
Biden must also consider the political risk of lifting the tariffs, which are supported by some importing industries.
“Canceling these tariffs would create further unhealthy dependence on Chinese supply chains and embolden future systematic trade abuses as bad actors know that the US will not hold them accountable,” wrote three textile manufacturing trade groups recently in a formal comment submitted to the US Trade Representative’s office in support of keeping the tariffs in place.
