Why the elimination of US tariffs on Chinese goods is significant?

George Kessarios
Chief Economist & Fund Manager

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It has been reported for a while that the Biden Administration wants to lower and even eliminate tariffs that were imposed during the Trump Administration. This is positive in many respects.

To start with, by default all tariffs are inflationary because the consumer is the one who ends up paying for them. With inflation being a high priority of the Biden administration, tariffs as a mean of lowering inflation are being studied very closely.

While we don’t know how current inflationary pressures might diminish under such a policy, Economist Megan Hogan from the Peterson Institute thinks initially inflation in the US will fall by 0.26%, but the end-result might be a full percentage point, as US corporations race to compete with imports. To the extent this estimate proves correct, my take is that this is significant.

Another reason why eliminating tariffs is good news, is because it will alleviate political tensions. For many years now we have had political tensions between the US and China which have hurt everyone in the global economy. Tariffs and political tensions have been somewhat responsible for what many say is, a trend towards deglobalization. This among other things leads to less trade, less competition, lower productivity, and will likely put pressure on innovation on a global scale. And yes, deglobalization is also inflationary.

The bottom line is that less political tensions and lower tariffs are always good. If lower tariffs can help with inflation also, then that will be a bonus. To the extent that the US acts on the news headlines we have been reading for months, it is a positive for the global economy and equities.

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