Repealing The Trump Tariffs Won't Fix Inflation
But it could throw a wrench into American diplomacy.
Catherine Rampell really does not like tariffs. When President Donald Trump slapped a 25 percent duty on steel from China back in 2018, Rampell decried the plan as a relic of the 1680s that offered no conceivable upside. In the months that followed, she repeatedly warned that the Trump tariffs would raise consumer prices and cause a recession.
They didn't, of course. There was no appreciable uptick in inflation for three years after Trump implemented his tariffs, and when a recession did come, the culprit was a global pandemic. That doesn't mean that the tariffs were a stroke of genius, but it does mean that Rampell's case against them was wrong. And she wasn’t writing in a vacuum. The clear consensus of the economics profession in 2018 was that the tariffs would inflict meaningful domestic damage by elevating prices and reducing economic efficiency. The key word there is “meaningful.” There are plenty of specific businesses and firms that took a hit from the tariffs, and prices for steel paid by intermediaries did rise — but those costs did not generate an economy-wide problem evident in big-picture macro data.
But our unpleasant recent experience with inflation -- consumer prices are up 8.3 percent over the past year -- has invited new attention to tariff reduction as a potential source of price relief. And so Rampell has joined a chorus of free-trade enthusiasts -- Larry Summers, Matthew Yglesias and Jonathan Chait, most prominent among them -- to insist that a Trump tariff repeal is the best option available to combat our post-pandemic price problems. It's a two part program: First, repeal the tariffs; second, ignore everyone harping about corporate concentration, excessive corporate profits, and the political shorthand for the two phenomena: Greed. In this telling, the people blaming “greed” are cheap demagogues, while serious economists know that free trade is smart science. Stick with the economic tools of the 1990s, don’t experiment with techniques from FDR’s New Deal or LBJ’s Great Society.
These arguments rely on the traditional theoretical critique of tariffs, namely that tariffs function as a tax on consumers, so eliminating that tax will make things cheaper. For a closer look at the numbers in today’s economy, Summers and Chait cite this study from the Peterson Institute for International Economics, which concluded that repealing the Trump tariffs would push consumer prices down about 1.3 percentage points. Rampell and Yglesias haven't directly cited the Peterson study to my knowledge, but they’re both all-in on tariff repeal and have each made a very aggressive public case against "greed" as a cause of higher prices. Focusing on record corporate profits as a driver of inflation, Rampell argues, is a "conspiracy theory" (it’s apparently not quite as bad as taking horse dewormer to treat COVID-19, but the same sort of thing). To Yglesias, "Greedflation is fake" and "Democrats have gaslit themselves" by talking so much about corporate profits.
There are plenty of data points that other analysts have cited to explain why excessive corporate price mark-ups are an important part of the inflation story this year, but I'll focus on that splashy Peterson study instead. The point I want to make is that the Peterson analysts rely pretty heavily on excessive corporate profits as a driver of inflation. However you feel about the merits of the Trump tariffs, the argument against them is in large part about corporate greed.
According to the study, eliminating the Trump tariffs will reduce prices by 1.3 percent overall, with 1.1 percent of that total coming from "competition effects" on domestic producers. We won't suddenly start buying all of our stuff from China if the tariffs go, but the availability of cheaper imports from China will force domestic producers to lower their prices. How will they get their prices down? The Peterson economists don’t really say. There is no mention of wages, automation or labor costs in their report. In fact, they don't break down costs at all. They do, however, talk about corporate profits.
"[Import] competition may compel domestic firms to trim their markup margins, especially in this era of high corporate profits," the study reads, noting that "collective profits of the top 5 steel firms soared from $11.0 billion in 2018 to $31.9 billion in 2021." Again, there is no breakdown in the study attributing how much of the predicted price reduction will come from lower profits, and how much will come from miraculous new cost-cutting measures, but the authors aren’t mentioning that $20.9 billion jump in steel profits for fun — it’s a significant part of the equation.
The Peterson study, then, argues that freer trade with China will bring down prices to a substantial degree by reducing domestic corporate profits. Thanks to Matthew Stoller for pointing it out to me.
It is always a bit awkward to defend a policy originally advanced by Trump, because Trump is a racist moron who had no idea what he was doing on the economy (as Rampell has emphasized). Trump’s anti-China rhetoric went hand-in-hand with immigrant-bashing (his personal affection for Communist Party leader Xi Jinping notwithstanding) and his trade policy was a chaotic mess of conflicting aims that never amounted to anything approaching a coherent program, and consistently alienated longstanding U.S. allies for no apparent reason. Rampell was almost certainly right back in 2018 when she dismissed Trump's invocation of "national security" as the formal legal rationale for implementing the tariffs. Whatever your diplomatic perspective on the U.S. relationship with China, there are plenty of more pressing issues that come to mind as national security risks before we get to steel and aluminum (consider, for instance, data).
But Russia's invasion of Ukraine should elevate the significance of economic national security risks involving Russia’s most important international ally, China. The fundamental economic lesson of Putin’s war is that the United States and its allies need to reduce their dependence on resources controlled by hostile foreign governments. And since things aren’t really going so hot with China right now, rewiring our manufacturing economy without regard to that diplomatic situation would be extremely reckless. I agree with Treasury Secretary Janet Yellen -- wherever we can "friend-shore" our trading relationships to more supportive international allies, we should. It would be good for the United States to rely less on authoritarian superpowers for basic economic needs.
Not that we need to go in swinging sledgehammers at every trade deal on the shelf. China has been (to my mind) surprisingly cooperative with the U.S. sanctions regime against Russia. In its official propaganda, the Chinese government is still standing by Putin, but China’s exports to Russia are way down, which is what matters most for the war on the ground. That’s a pretty significant win for the Biden administration’s diplomatic strategy, and it would be a mistake to pursue major shifts in manufacturing policy while that is still playing out.
And the benefits of a tariff repeal just don’t look all that impressive. Nobody is going to complain about a 1.3 percent drop in consumer prices, but they aren’t going to be cheering in the streets, either. And if you take the Peterson study seriously, a good chunk of that 1.3 percent reduction could be achieved by attacking the booming profits of steel producers some other way -- a tax, an administrative antitrust action, whatever. There is more to life than import competition.
That may be the essential lesson in this fracas. Tariffs are not popular in the economics profession, but they rarely have the globe-shattering role that ardent free-traders attribute to them. Tariffs can be good, or tariffs can be bad — it depends on the circumstances in which they are applied, just like any other tax. Adam Smith opposed tariffs in theory when he wrote The Wealth of Nations, but he implemented them in practice when he worked as customs commissioner, reasoning that they were the best way to fund public works, whatever inefficiencies they produced. The Trump tariffs really didn't matter all that much for domestic output, productivity, wages, or employment, and they don’t matter much for inflation today. It's perfectly reasonable to let other policy priorities carry the day.