Trump’s tariffs are not causing post-COVID inflation

Inflation has increased sharply in the past nine months — and is now grabbing Washington’s attention. Predictably, some policymakers are blaming the tariffs enacted by the Trump administration as the key driver of current, rising prices. In response, they propose to roll back the tariffs imposed in 2018. But this is an overreaction that poses a cure worse than the disease. Far more important would be to reshore production back to the United States, particularly given the fragile state of global supply chains.

The Trump administration’s trade policy often amounted to unfocused rhetoric. In particular, the tariffs introduced were too often an end-goal rather than a strategic tool.

But the pre-Trump status quo was deeply damaging to working families and domestic business. Over the past two decades, the U.S. lost nearly 70,000 manufacturing plants and more than 5 million manufacturing jobs, driven in large part by huge, systemic distortions of the global trading system on the part of China and other countries. This included massive government subsidies, currency manipulation and excessive private capital inflows that have driven a systematic overvaluation of the U.S. dollar by 25 to 30 percent. 

The result was a major dismantling of America’s middle class. Cheap imports replaced domestic production, resulting in growing trade deficits and jobs losses. Americans are now seeing the real-world consequences, with overextended supply chains unprepared to meet the global challenges of the COVID-19 crisis. 

Unfortunately, some are trying to leverage inflation concerns to roll back the tariffs. But this linkage is deeply dishonest. The tariffs introduced over the past five years were not large enough to drive today’s inflation. And the tariff increases took effect in late 2018 and early 2019 — long before inflation began to accelerate in March 2021.

Current inflation is being driven by several factors other than the tariffs. For example, federal data show that total U.S. tariff and customs duties rose from $36.6 billion in 2016 (q4) to $85.7 billion in 2021 (q3), an increase of $49.1 billion. That’s only 0.3 percent of the total $16.0 trillion in U.S. personal consumer expenditures — far too small to make a dent in current inflation. 

This tells us that tariff removal could, in theory, have eliminated roughly 0.3 percent of the inflation seen in the third quarter of 2021. But that would have provided only a momentary, one-off reduction in prices.

Realistically, the tariffs have had only temporary and transitory effects on overall steel prices. For example, after the steel tariffs were imposed in March 2018, price indexes increased by 10.2 percent to 17.7 percent between February and September of 2018. That increase was less than the 25 percent tariffs themselves. And markets quickly adjusted, with domestic steel prices retreating to below pre-tariff levels within the following year. Significantly, once the COVID pandemic took hold, commodity shortages hit in late 2020 — and steel prices surged to historic highs. 

Undoubtedly, the pandemic has been the key disruptor of global commerce, with resulting price surges. In fact, COVID price shocks for steel – from August 2020 to November 2021 – were eight to 11 times larger than those that followed the imposition of steel tariffs in 2018.

On the plus side, the tariffs have provided breathing room for key industries. For example, the aluminum tariffs imposed in 2018 have yielded at least 55 new projects in downstream aluminum industries, and will employ 4,500 additional workers while generating $6 billion in new investments. Similar results have been observed in the U.S. steel industry following the tariffs.  

Essentially, the tariffs have helped numerous domestic industries rebuild and recover from unfair trade. Removing them would threaten these gains, and could result in job losses, plant closures and cancellations of planned investments. That could further destabilize the domestic manufacturing base — and increase domestic dependence on unstable import supply chains. 

Americans are seeing product shortages and price surges that underscore the risks of sprawling global supply chains. It’s regrettable that many of the Trump administration tariffs lacked a strategic purpose and end goal. And there was no underlying policy effort made to restore manufacturing competitiveness. But the tariffs did provide sorely needed breathing room — and are giving Washington time to consider more serious strategies.

Washington shouldn’t pull the rug out from under the administration’s efforts to revitalize American manufacturing by removing tariffs before these new strategies can be developed and implemented. 

Robert E. Scott is a senior economist at the Economic Policy Institute (EPI).