2022.08 The Taiwan Banker NO.152 / By Matthew Fulco
Will China get a tariff reprieve from Joe Biden?Banker's Digest
It depends largely on Biden’s domestic political considerations The tariffs that former U.S. President Donald Trump imposed on China have been a geoeconomic game changer. First, the punitive duties of up to 25% on Chinese goods valued at some $370 billion signified a new and more assertive U.S. approach to trade with the world’s second largest economy. The Trump administration did not just accuse Beijing of unfair trade practices – its predecessors had as well – it did something about the problem. Second, the hundreds of billions of dollars in tariffs catalyzed the relocation of some supply chains from China to other developing economies, reducing its attractiveness as a manufacturing destination. Third, the tariffs set U.S.-China decoupling into motion, closing the book on the engagement era of the bilateral relationship. Though Beijing hoped that the Biden administration would lift at least some of the tariffs after the 46th president took office, its hopes were quickly dashed. Because the U.S.-China relationship had become fundamentally more antagonistic, Biden’s team recognized that the tariffs represented valuable leverage Washington had over Beijing. To lift the tariffs without extracting any concessions from China would have been foolish. That was then – in the Biden administration’s fledgling days when the president still enjoyed the support of the majority of Americans and inflation had yet to wreak havoc on the U.S. economy. In the summer of 2022, the situation has changed for the worse. Inflation hit a 40-year high of 8.6% in June, while Biden’s approval rating is cratering. New polls consistently show Biden with an approval rating below 40%. Monmouth University’s poll, released in early July, showed that just 36% of Americans approve of how Biden is doing his job. 70% of Americans say the country is on the wrong track. Surging inflation is the primary reason Americans are unhappy with Biden. To be sure, he has not delivered on certain campaign promises, from ending the pandemic to cancelling student loan debt, but the U.S. economy has been surprisingly resilient, notwithstanding a contraction of 1.6% in the first quarter. Goldman Sachs estimates it will rebound in the second quarter with an annualized expansion of 0.7%. Inflation, however, hits people at the gas pump, when they buy food and other daily essentials, and makes them feel poorer because their money buys less. The inflation-tariff connection Eyeing the likelihood of Democrats losing badly in the upcoming mid-term elections, some members of the Biden administration are advocating a tariff reprieve for China. Lifting some of the tariffs will help tame inflation, they say. Former White House economic adviser Jason Furman has said it would be “the biggest step” Biden can take to bring prices down. Pro free-trade economists agree. The Washington, D.C.-based Peterson Institute of International Economics (PIEE) estimates that in the year to November 2021, U.S. tariffs on Chinese goods added 0.26 percentage points to the CPI. In the year after the U.S. imposed tariffs on Chinese goods, producer prices also rose by 1%, PIEE says. Treasury Secretary Janet Yellen has emerged as one of the key voices in the administration calling for targeted lifting of tariffs on China. "We all recognize that China engages in a range of unfair trade practices that is important to address but the tariffs we inherited, some serve no strategic purpose and raise cost to consumers,” she said in June, adding that President Biden is considering scrapping some of them as a way to bring down inflation. Beijing has taken note of Yellen’s stance on tariffs and sensing Biden’s electoral vulnerability, sees an opening to push for a rollback of some of the levies. During a July virtual call between Yellen and China’s Vice Premier Liu He, the close confidante of Chinese leader Xi Jinping told her that the lifting of tariffs and sanctions and the fair treatment of Chinese firms are areas of concern to China. Within the U.S. business community, some see an opening to eliminate levies that have eaten into their profits. “It’s a no-brainer to reduce tariff burdens on Americans at a time of high inflation,” said Myron Brilliant, executive vice president of the U.S. Chamber of Commerce told The Washington Post in June. “Hopefully they will do something, but will they go far enough? That’s the billion-dollar question.” However, U.S. Trade Representative Katherine Tai appears more circumspect about lifting the tariffs on China. In a June testimony before a U.S. Senate Appropriations subcommittee, Tai noted that the levies provide Washington with “significant piece of leverage” in the bilateral trade relationship, adding that “a trade negotiator never walks away from leverage.” Tai, like her Chinese counterparts, is playing the long game. She said in her testimony that while inflationary pressures will eventually subside, China’s state-led economic policies will continue to pose long-term strategic challenges to the United States. She argued that it is essential Washington not undermine its ability to boost its competitiveness and defend its economic interests. Biden’s likely course of action Even optimistic forecasts do not show that lifting tariffs on China will drastically reduce the U.S. inflation rate. Barclays estimates that given the limited number of Chinese imports in America’s consumption basket, a complete end to the duties would cut inflation by a maximum of 0.3%. PIEE reckons that eliminating a wide array of tariffs, including those on Chinese goods, could reduce inflation by 1.3%. However, “broad tariff elimination has never been on the table for the Biden team,” according to Bloomberg. At the same time, the goods and services worst hit by inflation like housing, gasoline and food have not been affected by the tariffs on China. From a political standpoint, cheaper China-made clothing, bicycles or Christmas toys are not likely to assuage Americans’ concerns about inflation when their housing, fuel and food prices remain sky-high. It is important to be clear about what tariff reduction can and cannot accomplish, Commerce Secretary Gina Raimondo told NBC in July. While it may make certain household goods cheaper for consumers, “lifting tariffs isn’t going to bring down top-line inflation in a very significant way,” she said, adding that paramount to Biden is that any easing of the levies does not hurt American workers. Meanwhile, some analysts believe other factors are more responsible than tariffs for high inflation in America. The Federal Reserve Bank of San Francisco reckons that supply constraints, worsened by Russia’s war in Ukraine, are responsible for about half of the surge in US inflation. Lockdowns in China have also exacerbated pandemic-induced supply-chain disruptions that raised prices. For its part, the Alliance for American Manufacturing argues that cutting the tariffs would harm efforts to rebuild critical supply chains at home if companies have fewer roadblocks to offshoring production. Biden has to be careful that he does not take action that will worsen the electoral chances of Democratic candidates in so-called “Rust Belt” states in the American Midwest. These states have seen once-numerous manufacturing jobs disappear over the past few decades, often because firms moved production to China. Tim Ryan, the Democratic nominee for Ohio’s open Senate seat, opposes any tariff relief for China. “I will fight like hell against any move – by either political party – that incentivizes predatory trade practices that put China ahead of our workers,” he said in a statement. As of mid-July, the Biden administration has yet to make a decision on tariff reduction. On July 10, Biden told reporters in Delaware, “No, we are having further discussions on that.” Given the limited ability of lifting tariffs to sharply reduce inflation, and the possibility that sweeping action could anger important politicians in his own party, President Biden must tread carefully. Any immediate tariff relief will thus likely target a limited number of consumer goods – Politico estimates around US$10 billion out of US$370 billion affected – as voters would be more likely to notice any ensuing price cuts on such products. The Biden administration may also reopen the exclusion process – which allows interested parties to petition for exemption from tariffs – and launch a new tariff investigation into China’s subsidized technology sectors. That would be a prudent course of action. Leaving the overwhelming majority of the tariffs in place is both better for the Democratic party’s political fortunes and the U.S.’s long-term competitiveness vis-à-vis China.