August 2022 Volume 4

WASHINGTON UPDATE

Biden’s Bind: Tariffs and Inflation By Omar S. Nashashibi

The President is in a bind, again. No, not on the failure to get climate change legislation through Congress. Nor on the inability to raise taxes on the wealthy. Most of his voters wanted those and more but political reality and the calendar stopped much of Biden’s agenda. The President is stuck in a Chinese finger trap with manufacturers and unions on one side and importers and consumers on the other. For months the White House debated internally about whether to lift all tariffs on Chinese imports, maintain the status quo, or add more while removing a few consumer-oriented goods such as bicycles. Starting in July 2018, former President Trump imposed a 25 percent tariff on over 7,000 Chinese goods and 7.5 percent on an additional 3,000 products. The Section 301 tariff currently applies to roughly two-thirds of all imports from China, which amounts to an estimated $336 billion of goods entering the U.S. in 2021. Dozens of American forgings are currently covered by the 25 percent rate, a start in helping level out the playing field. Despite a strong lobbying campaign by importers, President Biden did not make changes to the Section 301 China tariff structure prior to Independence Day as deliberations within the White House continued. Sources inWashington,D.C. indicate thatU.S.TradeRepresentative Ambassador Katherine Tai supports keeping the tariffs as leverage in talks with Beijing, while Secretaries of Commerce, Gina Raimondo, and of Treasury, Janet Yellen support lifting some of the tariffs in an effort to reduce inflation. This argument continues to pick up steam among advocates who want the Section 301 trade action lifted, and it is politically popular, as is anything, that politicians believe will alleviate inflationary pressure on consumers (read: before voters go to polls in November). Having been a registered manufacturing lobbyist in the nation’s capital for over twenty years, I can tell when politicians are nervous and Democrats in the White House and Congress see the writing on the wall. They likely will lose the U.S. House and possibly the Senate as well. This means they’re willing to pull out all the stops if they believe it will improve the economy and their chances in the coming election. However, those claiming that lifting tariffs on Chinese forgings will reduce inflation are parroting a false narrative. The Peterson Institute for International Economics found that lifting the tariffs on all 10,000-plus imports would reduce inflation in the short-term by 0.3 percent at a time when annual inflation sat at 9.1 percent in June 2022. The reduction this study found assumed that Biden lifts all tariffs, an option not under discussion. Removing tariffs on China is not the panacea being promised when it comes to reducing inflation. But again, this is Washington, D.C. where public policy built on bad ideas occurs more often than you should know.

Politically, the White House knows that voters in top Senate battleground states of Ohio, Pennsylvania, and Wisconsin will see any lifting of tariffs on China as weak against Beijing. This will not help Democrats’ chances of keeping the upper chamber as manufacturers will take notice and unions will revolt. On the other hand, the President has limited options to lower short-term inflation, which leads some to argue for the removal of the tariffs. The Forging Industry Association (FIA) is fighting for the industry and lobbying the Biden administration to keep in place the tariffs on Chinese forgings. FIA mobilized the membership who submitted formal requests to the U.S. Trade Representative (USTR) to keep the tariffs on forgings in place. USTR is considering whether to recommend lifting some or all of the Section 301 tariffs and FIA is strongly pushing back. In addition to generating member company support, FIA filed its own extensive comments with USTR demonstrating how the 25 percent tariffs on Chinese forgings continue to benefit the industry and the American economy. In a June 2022 survey FIA conducted of its members in preparation for the USTR filing, 57 percent of member companies reported that the 25 percent tariff has allowed them to take on business previously offshored to China. Some FIA member companies report that lifting the tariffs could lead to an immediate 15 percent downturn in business with others describing “dramatic losses in revenue.” FIA members report that USTR lifting the 25 percent tariff on imported Chinese forgings would directly lead to lost business. Several companies estimated a 10-15 percent downturn due to lifting the tariffs and the new price differential. Members report that within the past few years, their same quote for a similar product came in at 30-40 percent above their Chinese competitors, with the “China price” today being up to 50 percent cheaper with a company reporting a 70 percent price disadvantage. If you were to ask the typical forger, they would tell you that a 25 percent tariff is a starting point but not a solution. There are discussions ongoing over whether to start a new, separate Section 301 investigation, this one focused on addressing illegal Chinese government subsidies and the use of State-Owned Enterprises that compete with American manufacturers. A study earlier this year found that of the 100 largest listed Chinese companies, wholly or partially government state-owned businesses accounted for more than half of the market share. Were the USTR to initiate another trade case, this could lead to a new round of tariffs on Beijing. From a political posturing standpoint, this is the bind in which Biden finds himself – lift existing tariffs on some goods to appease one constituency and then impose new tariffs for the constituency he just upset. And all this is happening roughly ninety days out from an election.

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FIA MAGAZINE | AUGUST 2022