Cut and drop

Most feasible way for US to lower its inflation is to reduce the tariffs on Chinese imports

In 2018, the United States launched a trade war with China, which was totally unreasonable and an abrupt departure from its historical leadership in advancing globalization. In the following years, the economic consequences of this trade war initiated by the US, not only slowed the global growth, but also deeply disrupted the global supply chains. As a result, the "beggar-thy-neighbor" trade policy not only failed to reduce the US' trade deficit with China, but also put the US' own economy under pressure.

Over the past year, coupled with the COVID-19 pandemic and geopolitical conflicts, the US has been hit by rising inflation. Stepping into this year, the inflation rate in May hit a 40-year high of 8.6 percent. In response to this serious problem, the US has mainly adopted two types of policies－tightening its monetary policy, such as raising interest rates and shrinking the balance sheet, and strengthening antimonopoly competition policy against large businesses, such as meat and oil producers.

However, these policies have not fully paid off, fueling strong public dissent. Multiple polls show that President Joe Biden's approval rate fell to a new low in May, with his inability to deal with high inflation being one of the main reasons.

The policy space for the US to deal with its high inflation is stretched. There have been reports saying that cutting tariffs on imports from China should be a policy option for the US to deal with the inflation.

A recent study by the Peterson Institute for International Economics pointed out that as a result of the tariff war, US imports from China totaled $506 billion in 2021, and the average tariffs imposed on Chinese goods increased by about 16 percent. The study suggests that lowering tariffs on Chinese imports would reduce US inflation by 1.3 percentage points from current levels.

On May 10, Biden said that the White House was considering reducing the tariffs imposed on China during the Donald Trump administration in order to ease high inflation, but a decision has not yet been made. US Treasury Secretary Janet Yellen said recently that "unacceptable high level of inflation" will continue, and tariffs may need to be lowered to deal with it. On June 5, the US Secretary of Commerce Gina Raimondo said in an interview that Biden required steps to be considered to remove some of the tariffs on Chinese goods introduced by the previous administration. The US Chamber of Commerce has also expressed support for tariff relief. Meanwhile, the Office of the US Trade Representative has announced the initiation of a statutory four-year review process for Section 301 tariffs imposed on Chinese imports to determine whether the tariff policy should continue.

Even so, there are still differences in the US over whether to lift tariffs on China. Within the Biden administration, Trade Representative Katherine Tai and others are reluctant to give up tariffs on China, and some industry interest groups, such as those from the steel and textile industries, have said they want the tariff policy to remain unchanged.

However, in the face of ultra-high inflation that may not yet have peaked, reducing tariffs on China is a pragmatic choice for the US. From a practical point of view, the US has numerous specific ways for lowering tariffs on China.

The US still maintains the current Section 301 tariffs on $370 billion of Chinese imports. That includes 25 percent additional tariffs imposed on goods on List 1($34 billion), List 2($16 billion) and List 3 ($200 billion), and 7.5 percent tariffs on goods on List 4A($120 billion).

Among them, the review process of goods on List 1 and List 2 has already started, and the USTR will make a ruling before the beginning of July and the end of August respectively. Most of the goods in these two lists are high-tech products and closely related to China's high-end manufacturing industry. But tariffs on non-tech products that are closely related to final consumption can be partially reduced.

In addition, goods on List 3 and List 4A will go through the review process before the end of September and the beginning of September 2023 respectively. These two lists include more daily necessities such as textiles and furniture, which are closely related to consumer prices. A complete cancellation of their tariffs would contribute more to the US' fight against inflation. The review process on goods on List 3, which involves the largest amount, can be completed by the end of September. Canceling tariffs on this category of goods is a feasible option for the Biden administration to reduce inflation before the mid-term elections.

Meanwhile, the resumption of tariff exclusions may also be a policy option for the USTR, especially for goods on Lists 1 and 2, which could still be subject to additional tariffs, and goods on List 4A, which will require a longer waiting period for the review process. The USTR still has policy space to expand tariff exclusions. Over 2,200 Chinese products were previously granted tariff exclusions by the USTR.However, most of the exclusions have expired except for the exclusion of 352 products that were reinstated in March. According to the existing policy, Chinese products that have not been covered by the policy previously will no longer be eligible for tariff exclusion. In order to come up with a strong response against inflation, the USTR should innovate policies as soon as possible. It may learn from the practice adopted by its counterpart in China that enables the tariff exclusion of market-based importer. The flexibility of tariff exclusion measures can help the US quickly and substantially reduce tariffs and alleviate the problem of high inflation.

The reduction of US tariffs on Chinese imports would undoubtedly facilitate a positive interaction in China-US economic and trade cooperation. Amid the complex global geopolitical landscape and the economic slowdown, such a move would play a crucial role in stabilizing supply chains and help the economic recovery.

Yao Xi is an assistant researcher of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. Xu Qiyuan is a researcher and deputy director of the IWEP at the CASS. The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn