Tariff increases did not cause inflation, and their removal would undermine domestic supply chains

January 19, 2022
10:19 am

Justice News Flash Report

Tariff increases did not cause inflation, and their removal would undermine domestic supply chains

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An earlier version of this blog appeared in The Hill.

The pronounced inflation uptick in 2021 has attracted enormous attention from both the media and policymakers. While it would be better for working families if inflation were lower, by far the biggest danger this episode poses is the prospect that policymakers will overreact, prescribing a cure that is worse than the disease. One obvious example of a policy overreaction would be a swing toward more-contractionary monetary and fiscal policy, most notably an increase in interest rates.

However, another potentially damaging overreaction to last year’s inflation would be a return to pre-2016 trade policy. Yes, it is true that the Trump administration’s trade policy amounted to little more than unfocused rhetoric. In particular, the Trump administration’s tariffs on steel, aluminum, and other specific products—as well as the general tariffs of up to 25% on more than half of all U.S. imports from China—were treated too often as an end goal rather than a strategic tool to pair with other efforts to restore American competitiveness.

But it is equally true that the pre-Trump status quo in trade policy for decades was deeply damaging to working families and domestic business. Many of those who inflicted this damaging status quo on U.S. workers have tried to leverage the current inflationary episode to roll back all tariffs introduced under the Trump administration in the name of containing inflation. This is a deeply dishonest linkage. Tariffs introduced over the past five years were not large enough, and the timing of them is completely inconsistent with them being a cause—or plausible significant solution—for today’s inflation.

Further, rolling tariffs back would return efforts to reshore key elements of global manufacturing supply chains to the United States back to square one. Given how damaging fragile global supply chains have proven to be—and how important it is to reshore production back to the United States—claims that tariff rollbacks are an answer to inflation are dangerous. Below, we point out the following salient facts:

The timing of the tariffs clearly shows no correlation with inflation and eliminating tariffs could not plausibly restrain it. The bulk of the tariffs were in place before 2020, yet inflation only began accelerating in March 2021. Clearly, inflation was driven by many sources besides tariffs.
In theory, tariffs do not need to have caused inflation for their removal to help restrain it. In practice, however, the size of the tariffs introduced after 2016 are simply insufficient for their removal to make a dent in current inflation. A top-down estimate that compares tariff revenue (a good proxy for the upper bound on price effects) with personal consumption expenditures shows that removing all 2016 tariffs would lead to a one-time, 0.3-percentage-point reduction in consumer prices.
- In the best-case scenario, eliminating tariffs would offset just 7.2% of the total increase in consumer prices, but provide no buffer to price increases thereafter.
If tariff removal was costless, then it would be worth considering. But it is not costless. The current global supply chain chaos is just the latest sign that global trade needs to be rebalanced and the U.S. manufacturing footprint should be reinforced. Until a coherent overall strategy is put into place, tariffs can give key industries breathing room.

Total U.S. tariff and customs duties collected rose from $36.6 billion in the fourth quarter of 2016 to $85.7 billion in the third quarter of 2021. This increase of $49.1 billion represents only 0.3% of total U.S. personal consumer expenditures of $16.0 trillion (Bureau of Economic Analysis). Rolling back or even eliminating U.S. tariffs would have only a minimal and transitory impact, at best, on price levels and inflation in the United States.

Further, tariff increases took effect in early 2018 and early 2019—well before inflation accelerated in March 2021—as seen in Figure A below, which shows the inflation rate and total U.S. customs duty revenues as a share of personal consumer expenditures.

Tariff increases occurred well before COVID inflation and were too small to explain it: Year-over-year change in quarterly personal consumption expenditure (PCE) and duties, 2017–2021

	Inflation in personal consumer expenditures	Change in customs duties/PCE
Jan-2017	2.0%	0.0%
Apr-2017	1.7%	0.0%
Jul-2017	1.7%	0.0%
Oct-2017	1.9%	0.0%
Jan-2018	2.0%	0.0%
Apr-2018	2.3%	0.1%
Jul-2018	2.3%	0.1%
Oct-2018	2.0%	0.2%
Jan-2019	1.4%	0.3%
Apr-2019	1.5%	0.3%
Jul-2019	1.5%	0.3%
Oct-2019	1.5%	0.3%
Jan-2020	1.7%	0.3%
Apr-2020	0.6%	0.2%
Jul-2020	1.2%	0.2%
Oct-2020	1.2%	0.2%
Jan-2021	1.8%	0.3%
Apr-2021	3.9%	0.3%
Jul-2021	4.3%	0.3%

ChartData