One way Biden could cut inflation


President Trump left President Biden with an interesting card: Trump’s tariffs on imports from China and several other places.

Biden has kept most of the tariffs. But with inflation now soaring to a four-year high of 8.5% — and threatening to derail Biden’s presidency — the tariffs could act as a release valve, easing the pain of rising prices.

The Peterson Institute for International Economics estimates that lowering various import tariffs could reduce inflation by 1 to 2 percentage points. That might sound small, but at the midpoint, it could save the average household about $800 a year. It could also give Biden something he desperately needs: tangible evidence that he is doing something about inflation, not just talking about it.

Biden has so far blamed Russian President Vladimir Putin’s brutal invasion of Ukraine for rising gas prices and many other things. But only about one-third to one-quarter of gas price increases over the past 12 months have occurred since the start of the Russian invasion on February 24. Other Democrats have accused greedy oil companies of unduly inflating oil and gas prices. However, economists say inflation is a complex phenomenon for a number of reasons, including supply chains still kinked by the COVID-19 pandemic and a sudden shift in consumer spending patterns.

The Fed is finally starting to tackle inflation with a series of rate hikes that may or may not get the job done. As Richard Nixon, Gerald Ford, and Jimmy Carter learned in the last battle against inflation in the 1970s, American presidents are often powerless to control rising prices.

[Follow Rick Newman on Twitter, sign up for his newsletter or send in your thoughts.]

But Peterson’s research argues that tariff policy could give Biden something to work with. The United States imports about $2.8 trillion worth of goods each year. About half of the goods arrive without tariffs, and under Trump, the average tariff on Chinese imports has risen to around 19%. The average tariff on all imported goods is about 6%.

Peterson economists recommend reducing the average tariff by 2 percentage points to around 4 percent. This, in turn, would ultimately reduce inflation by 1.3 percentage points. There are multiple ways to do this. Biden could remove all of Trump’s tariffs on Chinese imports, which would be a major move that could move most or all toward a 2 percentage point reduction. Or Biden could partially reduce Trump’s tariffs on China while lowering other tariffs or loosening quotas that have the effect of pushing up prices. Biden could also relax the “Buy America” ​​provisions that apply to federal contracts, for example, allowing the government to buy foreign products if they are significantly cheaper than domestically made products.

Lowering tariffs will lower U.S. inflation in two ways. By reducing the prices consumers and businesses pay for affected products, they can have a fairly quick immediate impact. Cheaper imports also reduce the cost of domestic products that compete with these foreign products, because buyers can substitute one for another if it is cheaper. If Biden wants to get very aggressive, he could cut average tariffs by more than 2 percentage points, which would push inflation down further.

But don’t expect Biden to pull that lever. Biden has eased some of Trump’s trade restrictions, especially on Europe. But he has retained measures against China, while being vague about his overall approach to China. Biden’s foreign policy goals are broader than Trump’s, including global warming, human rights and now China’s relationship with a militant Russia. When the time comes, Biden may see Trump’s tariffs on China as leverage he can use on these issues.

Biden also wants to boost U.S. manufacturing, a goal that would be undermined by lowering the cost of imports. He sees the union as an important component, which has long called for higher import tariffs rather than lower tariffs. Biden has some complicated logic on this. He argues that more U.S. production will lower the cost of buying those products for Americans because shipping costs will be lower and there will be no tariffs on homemade goods. However, over the past 30 years, the main reason for the relocation of many manufacturing industries overseas has been the dramatic reduction in production costs. For items critical to the U.S. economy, it might make sense to increase U.S. production, but economists tend to think that would push prices up, not lower.

Biden may finally trust the Fed and hope that other inflation drivers break his path in the coming months. Inflation may now be peaking and slowing as the COVID disruptions subside, which is certainly plausible. The problem is that voters who associate Biden with high inflation may still feel alienated as it slowly declines and they will never see Biden taking bold steps designed to help.

Rick Newman is the author of four books, including “Rebounders: How winners turn from setbacks to success.” Follow him on Twitter: @rickjnewman. you can also Send confidential reminder.

Follow Yahoo Finance Twitter, Instagram, YouTube, Facebook, flipand LinkedIn

source: Read the full article


Please enter your comment!
Please enter your name here