In light of high inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and rising prices, the Biden administration announced it’s considering dropping its current tariffs on Chinese imports to ease inflationary pressures. The tariffs have indeed hurt both U.S. industry and workers. Another consequence of the U.S. imposed tariffs is that they invited retaliatory tariffs, primarily from China, on U.S. exports. Retaliatory tariffs have further hurt American firms and workers, with certain geographies and industries bearing the brunt of the impact.
The Biden administration’s reevaluation of tariffs on Chinese imports comes as the first tranche of Section 301 tariffs on $34 billion worth of goods are set to expire on July 6. Another tranche on $16 billion will expire on August 23, and a third on approximately $100 billion on September 4. The expirations are due to the four-year time limit on the tariffs under Section 301, after which the tariffs expire unless a review results in extension. Whether the Biden administration extends the tariffs, modifies the tariffs, or allows them to expire after the United States Trade Representative (USTR) review remains unknown.
In total, China focused its retaliatory tariffs on agricultural and seafood products, and while tariffs were imposed on auto exports for a short duration, they were lifted and not reimposed. As China represents the U.S.’s largest agricultural export market, a large percentage of agricultural goods, including soybean and pork exports, were targeted by the retaliatory tariffs. Across all retaliatory tariffs (including retaliation from other jurisdictions), 8.7 percent ($134 billion) of U.S. exports were targeted by retaliatory tariffs, including $30 billion in agricultural products.
For example, in response to the U.S. imposed tariffs on washing machines and solar panels, China imposed tariffs of 179 percent on U.S. sorghum exports—resulting in an immediate halt of shipments and harm to the U.S. industry. While the sorghum tariffs were promptly removed, tariffs on billions of dollars’ worth of other exports remain as part of the escalated trade war. In response to the U.S. Section 301 tariffs targeting $350 billion of Chinese imports, China imposed tariffs on more than $100 billion of U.S. exports ranging from 2.5 to 25 percent, and in response to Section 232 tariffs, China imposed tariffs on $2.5 billion of U.S. exports ranging from 15 to 25 percent.
A U.S. Department of Agriculture study found the retaliatory tariffs reduced U.S. exports of agricultural products by $27 billion from mid-2018 when the tariffs were imposed to the end of 2019. Soybeans in particular accounted for the majority of the decline, at 71 percent, followed by sorghum and pork. The losses were primarily concentrated in states exporting the products, such as Iowa and Kansas. Due to the tariffs, the U.S. lost market share to Brazil, which increased its exports of agricultural products to China by $8 billion in 2018. Another analysis found in total, the U.S. lost nearly $16 billion in trade with retaliatory countries in the agricultural market alone.
As part of the U.S.-China Phase One Agreement, China agreed to purchase nearly $40 billion of U.S. agricultural products in 2020 and 2021, cut its retaliatory tariffs in half, and exempt a variety of agricultural and energy products from the retaliatory tariffs. Following the exemptions, U.S. exports to China of the affected goods rebounded significantly, rising from a low of 16 percent of market share in 2019 to 26 percent from March 2020 to February 2021. Although market share remains below 2017 levels, U.S. exports to China likely would have increased more had it not been for the COVID-19 pandemic.
Automobile exports were also affected by the retaliatory tariffs. Using county-level data, economist Michael Waugh found that a one percentage point increase in exposure to the Chinese retaliatory tariffs led to a one percentage point decrease in auto sales through 2018. He also found some spillover effects into other markets: county-wide retail employment declined due to retaliatory tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. exposure. Affected firms reconfigured their supply chains and laid off workers. The affected workers will reduce their spending elsewhere in the local economy, leading to county-wide negative impacts. Another analysis found that by the end of 2020, auto exports had still not recovered, despite China’s purchasing commitments in the Phase One agreement.
Looking at aggregate economic impacts, Pablo Fahjelbaum and his co-authors found the retaliatory tariffs caused total U.S. exports to fall by 9.9 percent, reducing U.S. GDP by 0.04 percent. Mary Amiti and her coauthors similarly identified a large negative effect from the retaliatory tariffs. Their analysis found a 10 percent increase in tariffs caused the value of U.S. exports to decline by $32 billion, costing U.S. firms about $2.4 billion per month in lost exports. Both quantities and prices of exports fell, as one analysis found the export prices declined by nearly 50 percent after one year. Rather than pass on the tariffs to Chinese consumers, most U.S. firms simply bore the costs.
The trade war has not yielded any tangible benefits for U.S. firms and workers. While the U.S. tariffs were intended to protect American industries, they have largely hurt the U.S. economy. And they incentivized foreign countries to retaliate with their owns tariffs, which have damaged the economy even more. The Biden administration should provide relief to U.S. industries and workers by bringing the U.S.-China trade war to an end.
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