At their recent summit in San Francisco, US president Joe Biden and Chinese president Xi Jinping agreed on a few important issues. Notably, the two countries will resume military-to-military communication, thereby reducing the chances of an accidental conflict, and China will do more to restrict the export of chemicals used to make the powerful synthetic opioid fentanyl – a major cause of death in the US. But there is one crucial area where progress remains elusive: tariffs.
In 2018, then-US president Donald Trump’s administration hiked the tariff rate on imports from China from slightly over 3% to more than 21% – a level unseen in the US since before World War II.
This prompted China to retaliate with higher tariffs on US imports from about 8% to some 19%. As China also lowered its tariffs on imports from all other countries, it reduced the competitiveness of US goods in the Chinese market by an even greater amount.
At the end of 2019, Trump and Xi reached a “phase one” agreement that froze the tariffs. The deal was a coercive one, designed to compel China to increase imports from the US at the expense of other trading partners, using means that are illegal under World Trade Organization (WTO) rules.
Ultimately, China could not fulfil its purchase commitments. In any case, a WTO panel ruled in 2020 that the Trump tariffs were incompatible with America’s legal obligation to abide by the organisation’s rules.
US insistence on maintaining the tariffs not only undermines the rules-based international trading system, but also hurts households and firms in both countries. In 2017 – the last year before Trump’s tariff hike – US imports from China amounted to US$506 billion, about 22% of total imports.
Every serious study of the issue suggests that the increased costs arising from the tariffs have been passed onto American consumers. Since imported goods account for about 12% of the US household-consumption basket, the removal of the Trump tariffs would lower the cost of that basket by about half a percentage point.
But that is only the beginning. About 40% of US imports from China are parts, components, and intermediate goods, so removing the Trump tariffs would also lower input costs for American service providers and manufacturers. As a result, the prices of many American-made products and services in the US household-consumption basket would also decline.
Then there are the indirect effects. As Chinese imports become cheaper, competitive pressure on other producers would rise, leading to lower prices on goods made in Mexico, India, Vietnam, and even the US.
Taken together, these effects would permanently reduce the cost of living to Americans by about one percentage point. Put another way, this would be equivalent to an increase in US household income by more than US$250 billion per year (1% of US gross domestic product in 2022).
US firms also stand to gain. Given that China has always characterised its tariff increases on US goods as retaliatory, one can assume that it would remove them if the Trump tariffs were reversed.
This would benefit the competitiveness of US goods in the Chinese market, thereby bolstering jobs and incomes not only for US exporters, but also for their input suppliers.
Such increases in employment and incomes would help US voters, and Biden could certainly use the political win. In a recent poll, just 14% of American voters reported being better off financially now than when Biden took office.
Almost 70% said his policies have either made the US economy worse off or made no difference, with about half believing his policies have hurt the US economy “a lot”.
While no one should be surprised that a majority of Republican voters dislike Biden’s policies, the fact that fewer than half of Democrats believe his policies have helped the economy, even a little, should be setting off alarm bells to the president.
Biden is facing a highly contentious election next year, and the rising cost of living is voters’ number one economic concern. And yet, despite the benefits that reducing tariffs would bring, the US Trade Representative did not attend the San Francisco summit, suggesting that Biden never intended to discuss the issue at all.
It is said that Biden does not want to give the Republicans a reason to say he is soft on China. But he should communicate to voters that removing the Trump tariffs would be good for American households and firms. Not doing so is a failure of leadership.
Shang-Jin Wei, a former chief economist at the Asian Development Bank, is professor of Finance and Economics at Columbia Business School and Columbia University’s School of International and Public Affairs.
The views expressed are those of the writer and do not necessarily reflect those of FMT.