Tariffs and Inflation

  

It seems clear, as opponents of President Trump’s tariff policy keep reminding us, that tariffs contribute to inflation. However, there are other factors that also have an impact on inflation. In particular, energy costs, which effect practically every aspect of the economy, have a major impact. Low energy costs help to keep inflation down, and high energy costs, lead to higher inflation.

Despite the tariffs imposed during President Trump’s first administration, there was practically no inflation from 2016 to 2020. Low energy costs must have contributed but the pandemic also was a factor in keeping inflation down. However, I have suspected that the tariffs imposed by President Trump during his first term might have contributed to the runaway inflation experienced during the Biden administration. Biden kept some of the Trump tariffs in place but drove up energy costs on behalf of the Green New Deal. Recall that almost the first thing President Biden did on taking office was to cancel the Keystone pipeline project.

Now in his second administration, President Trump has doubled down on tariffs, and at the same time he has acted to encouraged energy production. As a result, prices at the pump are well below those of the Biden years. So far, it seems that lower energy costs are offsetting the inflationary impact of the tariffs. 

So, why use tariffs in the first place? In a recent op-ed that appeared in the New York Times on August 7, Jamieson Greer, the current US trade administrator gave an extended explanation. He wrote:

The previous system rejected tariffs as a legitimate tool of public policy, meaning that the United States sacrificed tariff protection for critical manufacturing and other sectors. Over the past three decades, the United States slashed barriers to our markets to allow vast inflows of foreign goods, services, labor and capital.

At the same time, other countries kept their markets closed to our goods and deployed a suite of policies—such as subsidies, wage suppression, lax labor and environmental standards, regulatory distortions and currency manipulation to artificially boost exports to the United States. This approach made the United States and a handful of other economies the consumer of last resort for countries pursuing beggar-thy-neighbor economic policies. 

I think Jamieson makes a good point. I have often wondered why commentators who believe that tariffs are so bad for us never bother to explain why other countries think they are so good for them. It was amazing to see President Trump point to a chart showing how high the tariffs of our trading partners were compared to ours. 

Mr. Jamieson’s article helps to explain why my hometown in Connecticut is full of Korean, Japanese, and German cars, and why, when my wife and I travelled abroad, we never saw any American cars. Foreign countries use tariffs to protect their home industries from foreign competition. Even without tariffs, it would be hard for American auto manufacturers to compete against foreign rivals which have much lower production costs. Our salaries and benefits, from CEOs to janitors are the highest in the world. Our workplace and environmental regulations are also beyond compare. Our companies emit a fraction of the pollutants produced in China. Speaking of China, I doubt if there are any unions in the Peoples’ Republic.

Some may argue that in the past three decades the United States has achieved an incredibly high level of prosperity. The stock market is at an all-time high and business is booming. Consumers have gained by importing goods from abroad whose prices, even when you factor in transportation costs, are much less than those produced by American manufacturers. 

On the other hand, our national debt is $37 Trillion and rising. Interest on the debt alone comes close to our entire defense budget. Is this the cause or effect of our prosperity?

President Trump has repeatedly said that he is for “fair trade”, and so far, his trade deals have attempted to reduce the tariffs imposed by other countries in order to create trade balance. They are designed to stimulate American manufacturing.  Whether these tariffs work in the long run remains to be seen. 

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