Are Tariffs to blame for swelling inflation?
Morning Wake Up Call
June 1, 2021
U.S. Manufacturers Blame Tariffs for Swelling Inflation
(WSJ) WASHINGTON—Economists and policy makers are debating whether stimulus spending and easy monetary policy are fueling inflation. Many businesses say there is another culprit that should share the blame: import tariffs.
The Trump administration implemented tariffs on products including lumber, steel and semiconductors to shield American companies from a glut of cheap imported products from China and other countries.
The tariffs have long been opposed by U.S. companies that import the goods and pay the levies. They are making a new push for the Biden administration to lift them, on grounds that tariffs contribute to rising prices and product shortages that are accompanying the post-pandemic recovery. “I have had 15 price increases from my primary steel supplier since September,” said Scott Buehrer, president of B. Walter & Co., a Wabash, Ind., maker of fabricated metal products. “What’s the justification for these tariffs when you have sky-high steel prices?” Some economists say the tariffs have had only muted effects on prices and that their removal won’t do much to ease the price pressure.
Mr. Buehrer’s company was among more than 300 manufacturers that wrote to Mr. Biden on May 6 asking him to immediately terminate 25% tariffs on steel and 10% levies on aluminum. The Biden administration has said it is reviewing the tariff policy but has no immediate plans to lift the tariffs.
The manufacturers say the tariffs make their companies less competitive at a time when U.S. buyers, facing red-hot domestic demand, are paying 40% more for some steel products than their European peers.
Mr. Buehrer said he has cut his payroll by 10% to reduce costs as the prices of rolled steel nearly tripled since last fall. But labor unions and the steel industry are urging Mr. Biden to keep the metal tariffs in place, saying in a May 19 letter that the policy has enabled the industry to “restart idle mills, rehire laid-off workers and invest in the future.”
“The tariffs have been in place since 2018 and there has been no inflationary pressure since then,“ said Roy Houseman, legislative director at United Steelworkers. “The U.S. has put trillions of dollars of stimulus in the economy. That is going to impart some inflationary pressure.”
Another industry wrestling with soaring prices is home-building.
Futures contracts of lumber in May reached more than $1,600 per thousand board feet—a record that is more than four times the typical price this time of year. The National Association of Home Builders estimates the higher lumber prices have added $36,000 to the price of a typical single-family home.
“It doesn’t make any economic sense to be taxing things when you don’t have sufficient domestic supply,” said Robert Dietz, NAHB’s chief economist. “Appliances, washing machines, literally the nuts and bolts that go into making a home—screws and nails—are subject to some of the metal tariffs.”
Home builders and lawmakers have pressed Mr. Biden to eliminate tariffs imposed in 2017 on Canadian softwood lumber, part of a decadeslong disagreement between U.S. and Canadian lumber producers.
Instead of removing the duty, the Commerce Department issued a preliminary decision May 21 to double the levy to 18%, concluding that Canadian imports are heavily subsidized. The tariffs will remain at the current 9% until a final decision on the proposed increase is made before November, a Commerce Department official said.
To provide relief from Trump-era tariffs on a broader range of Chinese imports, a bipartisan group of 40 U.S. senators in April asked the Biden administration to restart a process to grant importers exclusions for more than 2,000 items ranging from pillows to auto parts. The exclusion process, introduced by the Trump administration, expired in December but hasn’t been renewed.
When the Trump administration’s tariffs first went into effect, some economists warned they could spur inflation. But there appears to be a consensus that the impact has been muted.
“Given that the tariffs didn’t have a big impact on consumer prices in the first place, I probably wouldn’t expect their removal to result in significant downward pressure either,” said Andrew Hunter, economist for Capital Economics, a research firm.
The muted impact is partly because tariffs only affect imports, which typically make up a relatively small share of the domestic market. For steel, imports represent roughly one-third of the total U.S. demand. And the share of the taxed imports is even smaller as the largest exporters to the U.S.—Canada, Brazil and Mexico—are exempted.
Import prices of the goods subject to tariffs did rise initially. But many importers absorbed much of the increases, rather than pass the full increase on to consumers. Meanwhile, the prices of many goods not subject to the tariffs were declining, keeping the overall inflation rate low.
David Weinstein, a Columbia University economist, says tariffs may actually lower prices over the long term.
Mr. Weinstein and his colleagues examined changes in financial markets’ inflation expectations based on bond-market yields around the time of 11 new tariff announcements by the U.S. and China between 2018 and 2019.
To their surprise, he said, they found that the events lowered inflationary expectations so that prices were expected to be roughly 1 percentage point lower five years later and 1.3 points lower 10 years later. Stock prices also fell.
“What the markets are predicting, and our data is suggesting, is that the trade war will have negative impacts on productivity,” he said, referring to tariffs’ hit to companies’ operations. “When you hold down productivity, you’ll have really big impacts down the road on the success of your economy, and prices as well.”
The U.S. Trade Representative’s Office, which is conducting a review of U.S. tariff policy, is studying whether easing tariffs, among other factors, could relieve the supply shortage for lumber and other products, Cecilia Rouse, chair of the White House Council of Economic Advisers, said during a May 18 briefing.
She added, however, trade policy is a “much bigger issue” than short-term market gyrations and that it needs to be worked out in the context of Washington’s global policy.
China, U.S. can find common ground on tariff exclusions, Chinese think tank says
(Reuters) The Biden administration is unlikely to remove tariffs on Chinese goods in the short term, but China and the United States might find a middle ground by increasing tariff exclusions as a way to reduce tensions, a Chinese think-tank said.
With even free trade advocates in the U.S. lobbying that Washington should use tariff cuts as a tool for new trade negotiations with China, tariffs are likely to remain in place, said a report from China Finance 40 forum (CF40) on Saturday, a economic and finance think tank with members from regulators, academia and financial institutions.
But with the United States facing inflationary pressures in the first half of this year, Washington may look to reduce the tariff burden through tariff exclusions, which would avoid resistance in congress and ease political pressure, the report said.
The Biden administration is conducting a comprehensive review of U.S.-China trade policy, ahead of the expiry of the Phase 1 deal at the end of 2021.
The report noted that the U.S. government still retains additional tariffs on US$370 billion of Chinese exports to the United States.
The report also noted that the Biden administration was more concerned about the impact of China's support for the technology sector and wanted the U.S. to focus on its own tech support.
"During the Biden administration, technological competition and confrontation between China and the United States in cyberspace will intensify, and the possibility of parallel systems will increase," the report said, predicting intensified competition between the two countries over creating international rules around emerging technologies.
U.S. Senate Majority Leader Chuck Schumer said on Friday the Senate would consider a sweeping package of legislation on June 8 intended to boost the country's ability to compete with Chinese technology.
Biden administration could double Canadian lumber tariffs even as wood and construction costs soar
(Fortune) To combat alleged unfair Canadian trade practices, a U.S. Commerce Department report has concluded that the country needs to double the tariff on Canadian lumber from 9% to 18%.
Before the proposed hike, announced on May 21, could go into effect, it'll need to go through a several- month-long review process. Home builders, however, are already expressing dismay about the announcement.
"If the administration’s decision to double tariffs is allowed to go into effect, it will further exacerbate the nation’s housing affordability crisis, put even more upward pressure on the price of lumber and force millions of U.S. home buyers and lumber consumers to foot the bill for this ill-conceived protectionist action," Chuck Fowke, chairman of the National Association of Home Builders (NAHB), wrote in a public statement released on May 22.
Fowke says the decision "could not have come at a worse time" given the ongoing North American lumber shortage. On Tuesday, the cash price per thousand board feet of lumber climbed to a record $1,515, according to industry trade publication Random Lengths. That's up a staggering 323% since April 2020.
As Fortune has previously explained, this historic lumber shortage was spurred by a perfect storm of factors set off during the pandemic. When COVID-19 broke out in spring 2020, sawmills cut production and unloaded inventory in fears of a looming housing crash. The crash didn't happen—instead, the opposite occurred. Americans rushed to Home Depot and Lowe’s to buy up materials for do-it-yourself projects, while recession-induced interest rates helped spur a housing boom. That boom, which was exacerbated by a large cohort of millennials starting to hit their peak home-buying years, dried up housing inventory and sent buyers in search of new construction. Home improvements and construction require a lot of lumber, and mills couldn't keep up. Cue record prices.
The NAHB calculates that current lumber prices are adding $36,000 to the price tag of a typical new single-family home.
Increasing tariffs is "a terrible idea...I think it’ll continue to deter supply from shipping to the U.S.," Stinson Dean, CEO of Deacon Lumber, tells Fortune. Stinson does acknowledge that, on economic "academic" grounds, not everyone in the industry agrees with him that upping the tariff would increase lumber prices.
The biggest supporter of increasing lumber tariffs? U.S. wood producers.
“A level playing field is a critical element for continued investment and growth for U.S. lumber manufacturing to meet strong building demand to build more American homes,” Jason Brochu, U.S. Lumber Coalition co-chair, wrote in a news release. “The U.S. Lumber Coalition applauds the Commerce Department’s continued commitment to strongly enforce the U.S. trade laws against subsidized and unfairly traded Canadian lumber imports.”
In 2017, the Donald Trump administration, citing unfair trade practices, oversaw an increase in the Canadian lumber tariff to 20%. To help alleviate soaring lumber prices, the administration cut the tariff to the current level of 9% at the end of 2020. But the more recent procedural review by the Commerce Department—which finds that Canada is still heavily subsidizing its timber industry—puts a higher duty back on the table.
The Commerce Department's "preliminary determination" will now undergo a review before any final duties can be put into effect. Neither President Joe Biden nor his appointee, Secretary of Commerce Gina Raimondo, have publicly stated a stance. However, Raimondo did tell Congress she'd like to reach a long-term resolution to the U.S.-Canadian lumber dispute.
“The silver lining could be that we use this as an opportunity to all get around the table, including USTR [Office of the U.S. Trade Representative], to find a long-term solution with Canada,” Raimondo said at a Senate Appropriations subcommittee on Wednesday.
According to Fastmarkets, more than 25% of lumber consumed in the U.S. comes from Canada.