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Removing China tariffs won't ‘have any effect on inflation,’ economist says

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Derek Scissors, AEI Scholar, member of the US-China Economic and Security Review Commission and the chief economist of the China Beige Book, sits down with Yahoo Finance Live to talk about how the Biden administration is considering ending Trump-era tariffs on China, in addition to inflation and rising food prices.

Video Transcript

[MUSIC PLAYING]

RACHELLE AKUFFO: Trump-era tariffs on Chinese goods aimed at narrowing the trade deficit aren't having the desired effect. Now lifting those tariffs is being offered as a solution to ease stubbornly high inflation in the US. For more on this, let's bring in Derek Scissors, AEI Scholar, member of the US-China Economic and Security Review Commission, and a chief economist of the China Beige Book. Good to have you on, Derek.

So first of all, help our viewers understand, what exactly is being proposed in terms of these tariffs? And what is the correlation between potentially reducing these tariffs and inflation?

DEREK SCISSORS: So I mean, conceivably, the proposal is just to get rid of all the Trump-era tariffs, go back to the old set of tariffs we had on Chinese goods in 2016 and 2017. That's proposed, it's not what's going to happen. What's going to happen is a much smaller change from the Biden administration, where they remove tariffs on a handful of goods and then open up the process to more appeals to reduce more tariffs.

Really, none of this matters very much to inflation. Current inflation is highway sign inflation. It's gas, food, lodging. We don't import any of that from China. So what's causing prices to go up, what's causing consumers to feel pinched is not going to be affected by removing China tariffs. The tariffs were imposed in 2018 and 2019. Obviously, they didn't cause inflation then.

They're a small part of US consumption, affecting a few hundred billion dollars, which sounds like a lot, except US consumption is 50 times that large. So we have a narrow proposal that will probably come from the Biden administration. It's not going to have any effect on inflation.

If you want to have an effect on inflation, it's something that was mentioned a few segments ago, which is a stronger dollar. A stronger dollar reduces the cost of all imports. And that would be a more powerful tool than reducing the Trump tariffs.

DAVE BRIGGS: Let's go back a little bit, Derek. What was accomplished by the Trump tariffs?

DEREK SCISSORS: I would say nothing. They weren't very high. They were described originally as lockout tariffs at 25%. When we imposed countervailing duties or anti-dumping duties, we can go to 250%. So the tariffs weren't that high.

They didn't initially reduce the trade deficit. The trade deficit then fell because of COVID. And now it's rising again. We're on pace for a record goods trade deficit this year.

The counterargument you might get from the Trump administration is it brought China to the table. The tariff threat brought to the table, we got the phase one deal. The problem with that is the phase one deal fell apart pretty quickly, possibly due to COVID and possibly due to China not being interested in implementing it.

So in terms of the trial balance the tariffs, did almost nothing. In terms of negotiating with China, they seemed to do something that also went away. It's a really overblown issue, both on the positives and the negatives.

RACHELLE AKUFFO: And I want to ask you about some of the nuances because we recently spoke to some farmers who said that they would like the tariffs listed. These were soybean farmers, et cetera. And they're saying it's so that they don't have to pass onto consumers and add to food inflation. What would you tell them about potentially the impact, good or bad, of potentially lifting these tariffs?

DEREK SCISSORS: Again, I mean, what's really going on here-- and you touched on it by saying soybean farmers. We export a ton of soybeans to China. It's one of our largest exports. And we're the primary supplier of soybeans. So cutting China tariffs isn't going to directly affect food inflation because the tariffs aren't on Chinese products coming in, on Chinese soybeans coming in.

What those farmers probably want is a better US-China relationship so they feel better about exports. That's certainly what a lot of the US business community wants. That's a reasonable thing to lobby for, to say, hey, if we cut the tariffs, we'll have a better relationship, we'll explore more to China. But it has very little to do with US inflation.

DAVE BRIGGS: And Derek, early on it appeared that the Biden administration was largely supportive of those Trump-era tariffs. And now, clearly inflation is complicating it. But do you get a sense of what the Biden administration's plan is to rein in the Chinese?

DEREK SCISSORS: I'm sorry to sound so cynical, but there's no way they have a plan. I'm sure some people in the administration have a plan. And some people administration don't have a different plan. And we're not getting anywhere.

The Biden administration stuck to the phase one negotiation results even though they weren't working and even they were negotiated-- sorry about that-- by the previous administration, which they didn't like. And that enabled them not to have a China policy.

They don't have a China policy now. They're hoping a China bill passed the Congress. So I'm not saying that everyone in the Biden administration doesn't have an idea of what to do on China. But they haven't resolved the differences in the administration, say, the Department of Defense, the United States Trade Representative, the Department of the Treasury. So as a result, the Biden administration as a whole doesn't have a policy.

RACHELLE AKUFFO: So then, since there isn't one currently in place, is there anything that you would like to see perhaps in a proposed policy between these two superpowers that would actually help strengthen the US economy?

DEREK SCISSORS: Well, right. So the business community is going to say, well, our proposal to strengthen the US economy is more engagement with China. I disagree with that. I think more engagement with China leaves us very vulnerable, for example, to supply chain disruptions of the kind that we've seen over the last couple of years.

A US policy I'd like to see would be to focus on something that's more effective than the tariffs have been. You could target Chinese firms that have received stolen intellectual property or Chinese firms that are heavily subsidized and say, we're only going to punish you in various ways, keep you out of the US market, prevent you from partnering with US firms. And other Chinese firms that are not given these advantages we'll treat as normal firms.

The problem with the tariffs is that they're across the board. They treat all of China like it's the same. But what we want is to discourage the Chinese from stealing American intellectual property and then subsidizing US firms out of business, which they have done over the past 20 years. If you target those firms, it won't have an impact right away. But it will help us a lot over the next decade.

DAVE BRIGGS: Derek Scissors, AEI Scholar, appreciate all this. Thank you, sir.

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