Time for US to lift China tariffs, ‘toxic’ monetary policy biting global economy

US President Joe Biden has finally considered resorting to the option of dropping China tariffs in an effort to quell skyrocketing domestic inflation, an efficient move that could have been adopted much earlier to curb surging US consumer costs.

Though fully aware of that, the reluctance of the Biden administration to make any substantive moves suggests it is weighing whether the benefits to its people are worth undermining political goals, observers pointed out, calling for immediate efforts to scrap China duties and warning aggressive "toxic" rate hikes will threaten the global economy.

Addressing the nation from Washington on Tuesday, Biden said he could drop some of the tariffs imposed against Chinese imports to help control rising consumer prices in the US, noting that the White House is reviewing the penalties and could opt to "remove them altogether."

"We're looking at what would have the most positive impact," Biden said, adding that removing the tariffs was currently under discussion.

Biden's remarks, which came after similar signals from other US senior officials, show the administration's anxiety and desperation in the face of worsening inflation woes, Gao Lingyun, an expert at the Chinese Academy of Social Sciences in Beijing, told the Global Times on Wednesday.

Previously, Treasury Secretary Janet Yellen, White House press secretary Jen Psaki and Trade Representative Katherine Tai all indicated that China tariff relief is an option as prices soar.

Latest data showed that the US consumer price index (CPI) hit 8.3 percent in April on a yearly basis, slightly moderate than the 8.5 percent increase recorded in March, but still hovers near four-decade high. The figure is also higher than a previous market expectation of 8.1 percent increase.

The current dilemma faced by the Biden administration is the bitter fruits of its own policy, analysts said, as surging inflation resulting from the high energy prices, previous extremely loose monetary policy and tariffs on Chinese imports has worsened the situation.

Best solution

"It's time for the US government to reconsider and lift additional tariffs imposed on Chinese products as soon as possible," Zhao Lijian, a spokesperson for China's Foreign Ministry said when asked about Biden's remarks at a regular press briefing in Beijing on Wednesday.

"The unilaterally imposed tariffs by the US not only harmed China but also the US as well as the world," he said.

In a recent interview with Forbes, Chinese Ambassador to the US Qin Gang said that the trade war has not reduced the US' trade deficit so far; on the contrary, the trade war has increased US companies' and consumers' costs. The tariffs have cost US corporations more than $1.7 trillion and increased US household spending by $1,300 per year on average.

Additionally, US exports to China in the three years since the start of the trade war - 2018, 2019 and 2020 - were lower than the level in 2017 before the trade war, according to Zhao. During the period, the US lost more than 240,000 jobs due to the trade war.

Dropping tariffs imposed under former president Donald Trump, which caused price rises on everything from clothing, furniture among other daily necessities of US residents, is also believed by economists to be the most apt decision to address the woes.

"A feasible package of liberalization could deliver a one-time reduction in CPI inflation of around 1.3 percentage points, amounting to $797 per US household, about half the size of pandemic relief in 2021," according to research by the Peterson Institute for International Economics (PIIE) in March.

Moreover, if the US adjusts its tariffs on China, China will also reciprocate and reduce tariffs on US imports, which could be a win-win results for firms and people from both countries, Gao noted.

"Our members have opposed tariffs from the beginning. They are an added cost paid by US businesses and consumers. They contribute to inflationary pressures which have become a major concern for Americans. It's likely that tariffs in many consumer goods will be lifted first," Douglas Barry, Vice President of the Communications and Publications at the US-China Business Council, told the Global Times in an e-mail on Wednesday.

Lower prices will stimulate demand. Companies will have more money to invest, Barry said.

"On the other hand, lifting the tariffs would lead to skepticism about the administration's toughness toward China, and a softer stance may cause Biden to lose some political support at home," Gao said.

According to a report from the Wall Street Journal, citing people familiar with the matter, Biden officials are divided over easing China tariffs to slow inflation. Trade Representative Katherine Tai and others are reluctant to "relinquish US leverage over China in a continuing effort to reshape Chinese economic behavior," according to the people.

'Toxic' medicine

Last week, the Federal Reserve announced its sharpest rate hike in more than two decades as one of the few options to quell the inflation, but analysts pointed out the rate hikes could be a toxic medicine for the world as well as its own economy.

The Fed's current policy of accelerating monetary tightening will help relieve the situation in the long run, but will need time to take effect. Besides, rate hikes will not help to ease energy prices or address problems on the supply side, Wei Hongxu, a researcher at ANBOUND, a multinational independent think tank, told the Global Times on Wednesday.

Wei warned that if high inflation continues for a while, the US economic growth rate will decline while the Fed maintains its tightening policy.

Fed officials, now committed to a series of half-percentage-point rate increases, said their aggressive efforts to curb consumer and business demand for goods and services through higher borrowing costs were needed to slow the fastest inflation in 40 years, but they also acknowledged it will be "a painful ride," according to a Reuters report Wednesday.

The recent volatility in asset markets is "painful," Cleveland Fed President Loretta Mester told Reuters, but it is also a necessary part of tightening credit conditions in the economy.

Even worse, the spillover risks of a toxic US monetary policy shift have already emerged, as moving from an extremely loose monetary policy to being forced to tighten it to deal with inflation, US monetary policy will cause chaos in international capital flows, which poses great risks to international financial markets and other economies, especially highly indebted countries.

The increase in investment costs has led to a new round of adjustment in the global capital market, including the US, and triggered the return of international capital. This has already happened, Wei said

Furthermore, the appreciation of the US dollar will have an impact on the currencies of other countries, especially emerging markets which will face increased pressure on capital outflows, thereby affecting the monetary, financial and economic stability of these countries. In particular, countries with heavy external debt burdens are constantly experiencing sovereign debt defaults, Wei warned.