Originally written on 6/11/2024

The Biden Administration recently announced an increase in tariffs on select Chinese imports. One of our readers asked us: “Will new tariffs on Chinese goods increase inflation? Or will the tariffs just cause price increases in the targeted industries/products or could there be a ripple effect across the entire U.S. economy?” Great question! Here is our take. 

The U.S. government imposed tariffs on selected goods such as Chinese electric vehicles (EVs) and EV batteries. Perhaps the most dramatic increase is raising the tariff on Chinese E.V.s from 25% to 100%. The tariff on Chinese EV batteries will rise from 7.5% to 25%. However, since the items subject to the tariffs account for only $18 billion in US-China trade, it is unlikely they will have much impact on our inflation rate. Oxford Economic Consulting reports, “Last year, China exported around $400 million in battery E.V.s to the U.S. while the European Union exported nearly $7.5 billion to the U.S.” That is why their models indicate that the new tariffs will increase the USA inflation rate by a minuscule 0.01%. 

However, the impact on specific industries and regions may be more profound. Recent research from economists Lorenzo Caliendo of Yale University and Fernando Parro from Pennsylvania State University indicates that, as expected, industries that directly compete with imports expand domestic employment due to increased trade protection. The tradeoff is that the tariffs increase prices, and industries that use the now higher-priced goods as inputs in their production hire fewer workers. A simple illustration: a tax on imported sugar increases employment at domestic sugar plantations but reduces employment at domestic candy-making factories. In addition, given that trade partners inevitably retaliate with increased taxes on products imported from the U.S., those industries sell less and hire fewer workers. They conclude that when the previous administration raised tariffs between the U.S. and China, there was a “small decline in the manufacturing employment share of about 0.03 percentage points as a consequence of the trade war.” (p.32)  

Although economists from Adam Smith to Milton Friedman have recognized that trade restrictions may be warranted by national defense concerns, waving the flag is an overused and irresponsible approach to trade policy. Unfortunately, exploiting legitimate concerns about national defense has led both parties to expand purely protectionist rhetoric. Special interest routinely use trade policies to benefit themselves, while consumers are hurt by higher prices. We do not think this bodes well for our future.