How U.S Tariffs on Chinese Goods Impact Inflation

by Kayla Zhu · Apr 23, 2024

By Kayla Zhu

Almost six years after the Trump administration enacted the first major round of tariffs on Chinese imports, the U.S–China trade war still has shown few signs of slowing down. 

In the spring of 2018, the U.S under former President Donald Trump imposed a series of heavy tariffs on Chinese goods, sparking retaliatory tariffs from China and setting off a years-long trade war between the two countries. 

The motivation behind the tariffs was to force China to reduce the trade deficit – the gap between imports and exports – between the two countries by having China buy more U.S goods. Trump also accused some Chinese companies of stealing U.S companies’ intellectual property (IP) and called for Beijing to address this issue.

Since then, President Joe Biden has kept a majority of the tariffs on Chinese goods during his term, and has even discussed raising tariffs on certain goods from China.

It’s clear that tariffs are still on the minds of both presidential candidates. Ahead of the 2024 election, Trump mentioned the possibility of imposing tariffs of 60% or  higher on Chinese goods if he’s elected, in addition to a blanket 10% tariff on all U.S imports, which experts have criticized as detrimental to the U.S. economy and consumers.

Currently, the United States is imposing a 25% tariff on approximately $250 billion of imports from China and a 7.5% tariff on approximately $112 billion worth of imports from China. 

As these tariffs persist, they cast a shadow over a period marked by historically high levels of inflation in the U.S. and the global economy. Annual inflation rates in the U.S. surged to a peak of 7% in 2021, the highest rate since the early 80’s. 

While these rates have calmed down somewhat, standing at 3.2% so far in 2024, the remaining tariffs continue to exert pressure on prices across various sectors.

While it’s difficult to assess the direct impact of tariffs on overall inflation, several economic indicators suggest that tariffs on Chinese goods are making things more expensive for U.S citizens and firms across the board.

As imported products become more expensive due to tariffs, businesses may either absorb the additional costs or pass them on to consumers through higher prices. This dynamic has the potential to amplify inflationary tendencies, especially in sectors heavily reliant on imports from China, such as electronics, apparel, and machinery.

Impact on U.S consumers

In 2022, China emerged as the leading supplier of goods to the United States, accounting for a substantial 16.5% share, equivalent to $536 billion in total goods imports. 

Given the significant reliance on Chinese imports, tariffs on these goods inevitably reverberates through consumer prices, affecting households across the nation.

Examining the U.S CPI data reveals significant fluctuations coinciding with key tariff announcements. Following the imposition of tariffs on steel and aluminum imports in March 2018 – which affected many Chinese companies – the CPI jumped from 236.29 in March to 251.58 in May 2018 – a notable increase of 6.5% within just two months of tariff implementation.

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The CPI has continued to steadily increase over the past six years, with a sharp increase during the pandemic in 2021. COVID-19-related supply chain issues, federal stimulus packages and other factors related to the pandemic all contributed to the sharp increase, as well as the possible delayed effect of the 2018-2019 series of tariffs. 

Tariffs on imported goods can directly increase the cost of production for domestic manufacturers, leading to higher prices for consumers. Additionally, tariffs can trigger retaliatory measures from trading partners, further distorting global trade flows and contributing to inflationary pressures.

It’s difficult to assess the direct impact that U.S tariffs on Chinese goods had on costs for everyday American consumers. The impact of tariffs on inflation is also dependent on if U.S manufacturers absorb the cost of tariffs or pass them along to consumers, which varies between companies and sectors.

One 2019 Liberty Street Economics report found that U.S tariffs on Chinese goods in 2019 cost the American household an average of $831 per year. 

Another report by the Peterson Institute for International Economics published in 2022 suggested that tariffs on Chinese imports have raised costs for U.S consumers, but at a modest degree compared to the current rate of inflation. The report estimated that  removing current tariffs on Chinese products could lower the level of the CPI by 0.26 percentage points, but would only produce a brief drop in overall inflation.

Impact on U.S manufacturers and importers

Beyond consumers, research has suggested that tariffs impact U.S importers and U.S manufacturers using imported goods the most. Reports by the United States International Trade Commission and American Action Forum found that the brunt of the cost of tariffs were being passed to U.S firms.

While these companies often eventually pass those additional costs to consumers, tariffs most often directly hurt these U.S importers first. Smaller U.S manufacturers in particular have been impacted the most from these tariffs, often having to find new suppliers or even move manufacturing processes overseas to avoid paying heavy tariff prices. 

U.S Import Price Index data shows that tariffs may have had a delayed effect on import prices month-over-month.

The import price index measures the changes in the prices of goods and services imported into a country  – it helps track the fluctuations in the cost of imported products over time. 

Between March 2018 and October 2020, the monthly import price index percent change of Chinese goods was  minimal, fluctuating up and down by at most 0.2%. 

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December 2020 saw the highest jump in month-over-month import price percent change at 0.4% with another significant jump of 0.7% in July 2021. 

The overall import price index value steadily increased from 2021 into late 2022 and early 2023, to as much as 104.8 in April 2022.

Another metric to assess the impact of tariffs on inflation is the Producer Price Index (PPI), which measures the average change over time in the selling prices received by domestic producers for their goods. 

An increase in the PPI can be an indicator of the impacts of tariffs on inflationary pressures. When tariffs are imposed on imported goods, domestic producers may face higher costs for raw materials or intermediate goods, which can lead them to raise prices for their output. An increase in the PPI suggests that U.S companies are charging more for their goods.

On the other hand, decreases in the PPI suggest that U.S firms are selling their products for cheaper, despite the increased costs of tariffs, to remain competitive in their market.

For example, the PPI for integrated microcircuits, including semiconductor networks, microprocessors, and MOS memories, showed notable fluctuations following tariff announcements on Chinese semiconductors. 

In Spetember 2018, the PPI experienced a significant decline of 2.3%, coinciding with the imposition of tariffs on Chinese semiconductor imports. 

Notably, the PPI saw a substantial increase of 2.9% in October 2022, when the Biden administration imposed new limits on the export of U.S semiconductor technology to China, a move aimed at inhibiting China’s access to critical technologies.

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The Impact of Tariffs

Tariffs are typically used to address perceived unfair trade practices and to try to rebalance trade relations between the two countries. However, 

Back in 2002, the U.S. put tariffs on steel which caused major issues for U.S consumers and companies. One 2018 Tax Foundation study shows that these tariffs led to more American workers losing their jobs due to higher steel prices than the total number employed by the U.S. steel industry itself.

“If this last round of steel tariffs has anything to teach us, it is that the long-term impact of tariffs are higher prices and smaller quantities for U.S. businesses and consumers that result in lost business, reduced employment, and slower economic growth,” read the study.

Similarly, in 2018, the Trump administration imposed tariffs on imported steel and aluminum. As a result, American automakers faced higher costs for these materials, leading to increased production costs. 

Multiple automaker coalitions representing both domestic and foreign automakers strongly opposed of the steel tariffs back in 2018, stating that the tariffs would cost hundreds of thousands of auto jobs, dramatically hike prices on vehicles and threaten industry spending on self-driving cars

The Alliance of Automobile Manufacturers said its analysis of 2017 auto sales data showed a 25 percent tariff on imported vehicles would result in an average price increase of $5,800, which would increase costs to American consumers by nearly $45 billion annually.

While Trump touted that his aggressive tariff policy would help protect the U.S economy and create more jobs, studies have found that the effect of the original tariffs, retaliatory tariffs from China and various subsidies granted by the federal government in response to the retaliatory tariffs, were “at best a wash, and it may have been mildly negative.”