Both administrations goosed the economy with large pandemic relief packages, which without question added to inflationary pressures. But beyond those bills, which have by now probably worked their way through the system, there is another possible cause. Donald Trump had few tangible achievements in office. But he can credibly point to breaking with decades of bipartisan economic policy — on tariffs. Trump raised tariffs on China as well as on many of the United States’ closest allies in the West.
While candidate Biden criticized those tariffs, President Biden has kept most in place. In addition, the Biden administration has imposed tight “Buy America” provisions in large spending bills such as the Inflation Reduction Act and the infrastructure act. All of these policies ask Americans to pay more to achieve certain political goals — less dependence on China, greater resilience, subsidizing green energy, boosting domestic manufacturing. Even the Inflation Reduction Act, as three economists have convincingly shown, is about five times more expensive as a way to cut carbon emissions compared to a carbon tax. All of the political goals Biden is promoting might well be worthwhile, but they do come at a cost. And one wonders if the cost will be permanently higher inflation.
The tariffs are the most egregious of all these policies. Despite Trump’s rhetoric to the contrary, they are a tax on American consumers. U.S. Customs and Border Protection estimates that so far Americans have paid more than $230 billion in these taxes. In addition, tens of billions of dollars have been handed out to farmers to compensate for their losses in agricultural exports (as a consequence of China’s retaliatory tariffs).
It’s hard to find anyone who believes that tariffs have been effective. They have not altered China’s policies one iota and have cost the American economy in money and lost jobs. According to the Tax Foundation, each year the tariffs cost the U.S. economy nearly 200,000 jobs and 0.25 percent of its gross domestic product, or roughly $70 billion in annual output. Or, to put it another way, enacting a modest set of trade liberalization policies proposed by the Peterson Institute for International Economics in 2022 would reduce inflation by about 1.3 percentage points, which works out to almost $800 of savings per American household.
The Office of the U.S. Trade Representative promised to review the tariffs to determine whether they have been effective. It has been working on this review for about two years with no end in sight — despite apparently having little on its agenda these days (since it has abandoned its core business of promoting trade). A senior administration official confessed to me that the reason is that if USTR admits the tariffs have failed, it will also have to recommend that they be lifted — which the Biden team does not want to do.
There is also a foreign policy cost to the rising protectionism in America. Biden met with his Japanese counterpart this week in a bid to strengthen the alliance between the United States and one of its closest allies. And yet his administration has announced its staunch opposition to a Japanese company buying U.S. Steel — a company that has been foundering for years and is a shadow of the behemoth it once was. Nippon Steel, the Japanese company, promises to invest in U.S. Steel, honor its labor contracts and retain all its workers into 2026. In short, it would rescue an underperforming American company. But the optics seem more important than the substance to the Biden administration.
The conventional wisdom of the past several years has been that America hollowed out its manufacturing base by embracing globalization and efficiency, which in turn led to the rise of right-wing populism. But that argument doesn’t stand scrutiny because countries like Germany and France, which protected workers and invested massively in retraining, have also seen right-wing populism boom. Declines in manufacturing are part of the economic rise of countries — notice that even China, which has prized its factories above all else, has seen manufacturing decline as a share of its economy, from 32 percent in 2011 to 28 percent in 2022.
People around the world, especially in America, have gotten used to the dramatic declines in cost that globalization has brought them over the past three decades. The cost of clothes, appliances, telecommunications and air travel have all plummeted in that period. It has been easy to pocket these gains and complain about the ills of trade. But inflation hits everyone, not just the small percentage unemployed. And when people are forced to bear the costs of higher prices, they tend to lash out at those in power. What an irony it would be if policies designed to keep populists at bay end up punishing mainstream politicians instead.
