Revoking tariffs would not tame inflation: But it would leave our supply chains even more vulnerable to disruption

Key takeaways:

  • Section 232 and 301 tariffs have nothing to do with the current inflationary spike. The tariffs—implemented in 2018—had little effect on U.S. prices, and inflation only spiked after the pandemic recession began in February 2020.
  • Eliminating tariffs would not significantly reduce inflation. At best, removing these tariffs would result in a one-time price decrease of 0.2%—a drop in the bucket when consumer prices have risen by more than three times as much, on average, every month since January 2021, driven largely by pandemic-related global supply chain disruptions and the war in Ukraine.
  • Removing these tariffs would undermine U.S. steel and aluminum industries and increase domestic dependence on unstable supply chains. Tariff removal would result in job losses, plant closures, cancellations of planned investments, and further destabilize the U.S. manufacturing base at a time of intensifying strategic importance for good jobs, national security, and the race to green industry.

With dwindling options on inflation and a mounting chorus of special interest business lobbies, the Biden-Harris administration is reportedly considering removing some Trump-era tariffs in an effort to moderate rising prices in the U.S. economy.

Tempting as such an action may seem, it is certain to have unnoticeable effects on overall prices—at best. And the action will ensure, moving forward, that our supply chains will be even more vulnerable to the kinds of disruption risks we are seeing play out right now. These tariffs offer a tangible policy response to a real-world economy rife with market failures that invalidate the predictions of canonical economic trade models used to argue against keeping the tariffs.

In the absence of a more comprehensive approach to U.S. industrial strategy, the tariffs are working to resuscitate America’s industrial base and have done so with no meaningful adverse impacts on prices. Pulling the rug from under this rebuild now, without first putting in place other policy solutions to address costly market failures, risks undoing this progress and jeopardizing the financial conditions in industries that are critical to building the infrastructure and renewable energy investments needed to power future economic growth.

Two broad sets of tariffs implemented under U.S. trade law in 2018 are under review by the Biden-Harris administration. The first and biggest group retaliated against findings of intellectual property theft and forced technology transfer in U.S. companies doing business in China, following a United States Trade Representative (USTR) investigation under Sec. 301 authority. This led the Trump administration to negotiate a “Phase One” economic agreement with China.

The second set of tariffs invoked national security concerns under Sec. 232 of the trade act to bolster U.S. steel and aluminum industries, perennially at risk of financial insolvency amid long-running, state policy-driven global supply gluts. Since joining the World Trade Organization in 2001, China’s mushrooming steel investment accounted for nearly 70% of the growth in the world’s steel production capacity—a 423% increase—though the tariffs apply more broadly to cover imports from a range of countries where industrial policies are driving investment on a non-commercial basis, worsening chronic overcapacity in global steel and aluminum markets, among other energy- and carbon-intensive basic industries.

Ever since these tariffs were enacted, business lobbies and orthodox economists have warned that tariffs would devastate the economy. One can debate what alternative policy outcomes were possible or preferable, but it is clear that tariffs didn’t make the sky fall. The data show no material adverse impact on consumers or the broader U.S. economy. Previous EPI analysis has shown that the Section 232 measures on steel and aluminum imports have had no meaningful real-world impact on the prices of the leading metal-consuming products (such as motor vehicles, machinery, construction materials, and more).

The unspectacular effects of these tariffs on prices are plain to see by breaking up the recent experience into three periods. Figure A compares the average inflation rate performance across consumer price and various key industrial goods price measures in the period preceding these tariffs, the nearly two-year period with tariffs in effect prior to the pandemic, and from the pre-pandemic business cycle peak through the latest May 2022 data. Inflation, broadly, decelerated substantially after implementation of the tariffs in the pre-pandemic period. This is true for manufactured goods writ large, as well as for consumer prices overall, measured in the Consumer Price Index (CPI). Tellingly, price increases for steel and aluminum slowed sharply to 0.7-0.8% annually from roughly 10% and 4% annually, respectively—largely attributable to U.S. producers redeploying and reinvesting in domestic production capacity amid improved financial conditions resulting from the tariffs.

Price increases for transportation equipment—the biggest metals-consuming industry, including for cars and trucks and their parts—slowed by more than one-third. In some other leading metal-using industries, prices accelerated modestly, but nothing to affect the overall downward trend in prices, and nothing on the order of doomsday predictions prophesied by tariff opponents. In other words, for two years markets and policymakers adjusted to these measures before the pandemic without a hiccup. Inflation, broadly, only spiked after February 2020; it is simply not plausible to infer that these tariffs had a causal role in pandemic-era inflation.

Tariffs have nothing to do with the current inflationary spike

Pre-tariffs With tariffs, before pandemic Pandemic + Ukraine war
CPI 2.3% 2.0% 50.0%
Total manufacturing 10.2% -3.8% 90.2%
Iron & steel 9.9% 0.7% 64.2%
Nonferrous metals 3.8% 0.7% 58.3%
Machinery & equipment 0.8% 2.0% 50.3%
Transportation equipment 1.1% 0.7% 47.7%
Nonresidential construction 2.1% 4.7% 54.8%
Energy (final demand) 12.7% -0.5% 71.7%
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