Tariffs on Chinese imports have raised costs for US consumers and firms, but to a modest degree compared to the current rate of inflation. The direct impact of removing lingering tariffs on Chinese products could lower the level of the consumer price index (CPI) by 0.26 percentage point and the personal consumption expenditures price index (PCE) by 0.35 percentage point. But this one-time drop in the price level would put only a small, short-lived dent in overall inflation.
Tariffs make imports more expensive; importers often pass these additional costs through to consumers, leading to higher prices and inflationary pressure. More than 66 percent of Chinese imports have been subject to tariffs, with an average levy of 19.3 percent, adding significant costs to imported metals, solar panels, and other products. But Chinese imports account for just 2 percent of goods included in the CPI measurements, and 2.7 percent in the PCE index. As such, the direct impact of the tariffs on measurements of inflation has been limited. Their removal, while improving economic efficiency, would only marginally ease US inflation.
Similarly, tariffs imposed in 2018 raised producer prices by an estimated 1 percent. Given conversion of some of the steel tariffs to quotas such as in the recent US-EU agreement, removal of remaining tariffs likely would affect the producer price index by less than 1 percent, and only as a one-time drop.
One study of prices charged by two large retailers shows less than one-twentieth of the tariff being passed through into the price the consumer pays on targeted goods. This may be because retailers spread the cost of the tariff across many goods, even those not targeted by the tariff, in a way that the study cannot disentangle. It may also take a long time for retailers to adjust their prices or they may absorb the cost of tariffs, lowering their own profit margins without increasing consumer prices.
As evidence is still emerging on how readily tariff hikes appear in the form of higher consumer prices, the table below presents estimates with costs being fully passed on to consumers, along with a lower-bound showing how much removing the tariffs might affect inflation if only one-twentieth of the cost of the tariffs is passed through into retail prices.
The costs imposed by tariffs go beyond direct price increases on goods. The rapid introduction and scaling up of tariffs increased policy uncertainty for businesses that affected investment and hiring decisions and slowed economic activity. However, the small contribution of tariffs to CPI and PCE inflation shows addressing price increases will depend more on monetary policy and on the United States' ability to control the pandemic and resolve supply chain bottlenecks than it will on removing Trump-era tariffs.
|Index||Chinese import content||Fraction of Chinese imports facing tariffs||Average US tariff on Chinese goods||Impact on price index of removing tariffs (pp)||With lower bound conversion (pp)|
|Sources: Import content from Hale and Hobijn (2011) for PCE, Borusyak and Jaravel (2021) for CPI. Coverage of tariffs and average tariff from Chad Bown. Lower-bound estimate with conversion from Cavallo, Gopinath, Neiman, and Tang (2021).|
This PIIE Chart features original research from Katheryn (Kadee) Russ using data from Chad P. Bown's PIIE Chart, US-China Trade War Tariffs: An Up-to-Date Chart.