Trade and inflation

The US has been a member of the World Trade Organization (WTO) since 1995. As such, we’ve signed onto an organization that’s committed to ensuring that international trade proceeds as freely as possible, with the WTO positioned to settle trade disputes between its members. This membership, however, may be an exercise of hypocrisy. When it comes to international trade, actions may speak louder than words.

The US has a history of unilaterally imposing tariffs, often under the guise of national security but more likely to serve a protectionist interest. During the last administration, for instance, Trump imposed tariffs of 25 percent and 10 percent on steel and aluminum imports, respectively, as well as 25 percent tariffs on some goods from China. Trump made a few adjustments to those tariff provisions during his term, but nothing terribly consequential. The same could be said of the Biden administration. For the most part, the tariffs initiated by Trump remain in effect.

Beyond the power of moral suasion, I admit to being unsure as to how to respond to bad actors in the international trade arena, aside from referring the dispute to the WTO. In my view, however, US imposed tariffs are largely counterproductive, as they have the potential of imposing a larger cost on us than they may have for the producers of the imported goods. It’s reasonable to expect those producers to seek out alternative markets, where they might be able to maintain or even expand production levels; but as long as those tariffs remain in effect, Americans will pay a higher price than they would otherwise.

As it happens, the imposition of tariffs is generally limited. According to the Office of the US Trade Representative, industrial goods represent 94 percent of imports, and about half of those imports are subject to tariffs, with an average tariff rate of 2 percent. This relatively low average tariff rate notwithstanding, as the previously mentioned tariffs on steel and aluminum show, much higher tariff rates apply on a variety of import categories.

Using tariffs as a protectionist policy is a “beggar thy neighbor” strategy. While I recognize the hardship for those who lose their jobs and livelihoods because of foreign competition, I believe that people of all nations should be able to hawk their wares in free markets without being limited to the geographic confines of their countries’ borders. Workers and businesses in other countries are seeking to make a living, just like their American counterparts. Is it fair to prioritize US workers over foreign workers, particularly in circumstances where the foreign workers have far fewer employment opportunities than those available to their US competitors?

Similarly, special consideration to protect workers from foreign competition seems unfair to me, given that we offer no comparable protection to those who would lose their jobs as a result of domestic competition. If unemployment compensation suffices for one of these categories of workers, it should suffice for both. I’m all in favor or providing more expansive unemployment benefits, but they should be provided in a more evenhanded way, allowing for greater support and assistance to any worker forced into a transition, irrespective of whether that situation derived from foreign or domestic competition.

The idea of using tariffs to protect jobs in the US as a matter of national security is somewhat trickier. The mere act of defining areas that would be covered, however, is problematic. The pandemic revealed how dependent our economy is on myriad products that are almost exclusively produced abroad, but it’s unrealistic to pursue a policy of self-sufficiency in all such markets. I admit to being at a loss as to how to address such structural challenges, but I don’t see the use of tariffs as being particularly constructive. Again, they just make things more expensive for us, and they invite retaliatory reactions that will detract from our own capacity to export. Sounds like a lose/lose to me.

Eliminating or reducing current tariffs would allow for a greater variety of goods to be available for purchase and lower costs; and these lower costs would clearly help in our fight against inflation. While contractionary monetary and fiscal policies take time to have their effects realized, lowering tariffs could happen with the stroke of Biden’s pen; and the impact on inflation would start immediately. Lowering tariffs won’t be enough to solve the inflationary problem in its entirety, but it would certainly move us in the right direction. On the other hand. leaving the current tariffs in place allows some measure of inflation to go unchecked, needlessly.