US-China: Trade Duties and Inflation
According to the most recent data released in May 2022, the annual inflation rate in the United States reached 8.6 percent, which is the largest year-on-year increase since 1981. Several factors have led to this increase, some of these factors are of a macroeconomic nature, such as the increase in aggregate demand within the country resulting from low interest rates, an expansionary monetary policy, high levels of employment, while other factors are of a geo-political nature, such as the war in Ukraine and trade tensions with China.
Economic relations between the United States and China altered course in 2018 into what is now known as a trade war between the two major economies, with the introduction of tariffs on broad categories of goods.
If we evaluate the trade trends between Washington and Beijing, the short-term impact of the American restrictive measures is evident: in 2019, the total trade between the two largest economies in the world amounted to 542 billion dollars, a reduction on a nominal basis of 14.5 percent compared to the previous year. While Chinese exports to the United States contracted by 13 percent, US to China trade o plummeted by 21 percent; nevertheless, China's trade surplus from trade with the United States declined from $323 billion in 2018 to $296 billion in 2019.
In 2021, trade with the US exceeded the pre-trade war levels, standing at $756 billion, a 19 percent increase since the start of the trade war. In addition, the trade imbalance, the reduction of which was one of the main objectives of the American tariffs, reached a record value of +397 billion in favor of China.
In the first five months of 2022, the balance of trade between Beijing and Washington has already reached $314 billion, which marks an increase of 12 percent from the same period in 2021.
An analysis published in 2021 by Moody's, one of the leading rating agencies, showed that most of the increase in the costs of imports from China, arising from the application of tariffs was borne by US importers and subsequently passed on to American consumers.
With current levels of inflation, the Biden administration will have to consider the decision to ease and remove many of the tariffs. According to some analysts, a reduction in tariffs on imports of Chinese goods could lighten the supply chain in several production sectors and reduce inflation by about 1.3 percentage points.