This week, the White House blamed Russia for an inflation rate that has not been this high seen since the 1970s. First it was just gasoline prices that were the fault of Russian president Vladimir Putin. Now, it’s everything.
The “Putin price hike” has been a talking point for the White House since February, when Russia started a full-fledged war with Ukraine.
There is at least some truth to the fact that higher gasoline prices are due to the U.S. embargo on Russian oil, Europe saying they will immediately import less Russian crude, and Russia returning the favor by limiting natural gas supplies to the Euros. All of these actions were because of the war. Market speculators reacted and pushed up oil prices. Supplies are also low, making matters worse.
Then there is food.
Sure, Ukraine is an important wheat producer. It used to be the bread-basket of the Soviet Union. But when has a bad Ukrainian wheat crop ever crushed U.S. commodity markets? (Hint: never.) No one in the U.S. is importing Ukrainian, Russian or European chicken, beef, eggs and milk and all of those prices are rising.
Inflation is bad for the Democrats heading into the midterms even if the President, no matter who is in the White House, only has so much control of the economy.
Biden’s team is deflecting blame. To him, inflation is all because of the Russia-Ukraine war.
Global corporations, smelling blood in the water, are circling the White House and trying to remove the China tariffs, known as the Section 301 tariffs imposed by the Trump administration, by arguing that such a move will reduce inflation. These tariffs are now under review.
Free traders at the Peterson Institute for International Economics are also making the case, though even they admit that the direct effect of removing tariffs on imports from China would lower the consumer price index (CPI) by 0.26 percentage points.
Fed Chairman Jerome Powell said this week that inflation was rising, pre-“Putin price hike”.
“Certainly inflation was rising even before the war in Ukraine broke out,” he said in a hearing this week.
In a separate Senate hearing on Wednesday, members of the Appropriations Committee interviewed U.S. Trade Representative Katherine Tai about the China tariffs and inflation.
“We need to be keeping our eye on the bigger picture,” Tai told the Committee, which was often against the China tariffs. This was especially true for Senators from food exporting states like Alaska and Maine, where seafood exports to China have been reduce by a third to as much as half due to retaliatory tariffs.
Tai disagreed China tariffs would fix the inflation problem in any meaningful way. She also said numerous times that existing tariffs were needed to play defense and part of a broader platform to rebuild the U.S. China trade relationship.
“With respect to all the economic pinches that we are experiencing right now…it is our responsibility to do what we can to provide relief, but I will be very clear that with respect to tariffs, we can impact the competitiveness of our economy long term. But with respect to tariffs in the short term, there is very little it can do with respect to inflation,” she said.
Senator Bill Hagerty (R-TN), a member of the Appropriations Committee that heard from Ambassador Tai on Wednesday, asked if removing tariffs in the guise of fighting inflation might encourage more bad behavior from China on trade.
“What kind of message would removing tariffs send to China?” Hagerty wondered out loud.
Tai seems to think the Biden administration is sticking with the Section 301 tariffs, and will only make some exemptions to them, as was the case earlier this spring.
“We are responsible for the formulation of U.S. trade policy and guiding the U.S. economy through the challenges of today, but we are also tasked with setting up the U.S. economy for success in the future,” she said, calling the China tariffs a significant piece of leverage.
“A trade negotiator never walks away from leverage,” Tai said. “The question for us…with respect to a number of different Section 301 tariffs is how to convert this leverage into a program that will strengthen the U.S. economy. We need to use our tools more effectively. We need an entirely new approach. And I think that doing that should be done on the backs of the tools we are using right now.”
Hagerty said that removing tariffs would have no impact on inflation. “Inflation was at or below 2% when the tariffs were originally imposed,” he said.
Tai could be thrown under the bus by a generally pro-big business, pro-Wall Street White House.
The White House has alreadt made some surprising trade moves recently.
Biden issued an Executive Order waiving tariffs on China solar panels made in Southeast Asia. The move essentially upended a Commerce Department investigation into dumping by Chinese multinationals in the four Southeast Asian countries, led by Vietnam and Thailand, which have become major solar exporters to the U.S. since anti-dumping and countervailing duties, plus solar safeguard tariffs, were imposed on mainland China companies as recent as 2018.
A poll by Morning Consult showed that registered voters are fine with keeping the Section 301 tariffs and a separate one noted that Democratic voters were increasingly supportive of keeping the tariffs imposed by their arch-nemesis — Donald Trump. The poll was released in May.
Biden’s gutting tariffs might make him look soft on China, a charge the Republicans have made since the presidential campaign in 2020.
Democrats will be forced to pick a side. Their voters, according to two Morning Consult polls, have already picked a side.
Some investors doubt cheaper imports will cut inflation, even if it gives the market a reason to rally for a bit.
“The administration is desperate to look like they are doing something on inflation, but unless they want to tell (Ukraine leader Volodomyr) Zelensky to call a truce then there is nothing they can do about it and that includes cutting tariffs,” said Brian McCarthy, founder of Macrolens, a global investment research firm out of Stamford, Conn.
“I think there is another angle to the tariff situation. My feeling is that it was Biden’s intentions all along to roll them back because certain business lobbies don’t like them. So he can couch it as a response to inflation, but it has been my thought from day one that he has been looking for a reason to roll back those tariffs,” McCarthy said.
For now, Tai is the main voice speaking in favor of keeping the China tariffs within the Executive Branch.
“We will one day find ourselves on the other side of these challenges,” Tai told the Senate this week about supply chain issues that have also impacted prices. “It is very important we do not undermine the need to defend our economic interests from a global system that has eroded our leadership in many different areas of our economy.”