Tariffs have a long history in diplomatic and labor relations. On the local side, their application protects homegrown industries and is a form of a tax. The most common type of tariff is what is known as “ad valorem” – a fixed percentage of the total value of an import. There are then specific tariffs that either rise or fall depending on the volume of goods.
The US currently has several tariffs in place with China. Everything from school supplies to clothing is levied, but President Biden is exploring options to roll some of these back. On July 5th the Office of the US Trade Representative concluded its mandatory four-year review of the previous president’s (former President Trump) tariffs. Next comes feedback and comments from businesses that have been most affected – positively and negatively.
The share of Chinese imports to the US has been steadily decreasing since 2017. Yet, the Asian giant is still number one followed by Mexico, Canada, Japan, Germany, Vietnam, and South Korea. There is quite a bit of political jockeying at play in Biden’s cabinet. Some factions are pushing for stiffer tariffs while others would happily seek a reduction. Janet Yellen, President Biden’s Treasury Secretary has gone on record saying tariffs are simply a drag on the economy. In an environment with pressing inflation, the administration’s larger goal is to reconfigure existing tariffs to try and ease impending price increases.
The other side of the argument being championed by National Security Advisor Jake Sullivan and US Trade Representative Katherine Tai is tariffs (existing and future) are valuable tools in the diplomatic toolbox. Without them, concessions from China would be next to impossible on various issues. From a business perspective, the firms likely to benefit from the current talks are consumer goods. Yet, if tariffs are lowered for this sector, raising those on strategic items like transportation equipment and industrial machinery is rumored as likely.
Most economists agree that removing Chinese tariffs will not have an impactful effect on inflation. If anything, the Peterson Institute for International Economics estimates that the consumer price index inflation could decrease by a paltry 0.26 percentage points. Over time, US firms would likely cut their markups to compete with imports. Should this happen, that 0.26 could eventually grow to a 1% reduction in inflation.
Certain industries, like those engaged in producing summertime goods, have been identified as those that could benefit from tariff cuts. This essentially results in the elimination of taxes on products we all purchase. Meanwhile, labor unions (the AFL-CIO, Service Employees International Union, and the United Steelworkers) are actively lobbying against tariff cuts. The tariff game is full of winners and losers. Critical for all industries is to gauge where the wind is blowing.
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