Trade barrier reduction is the most important anti-inflation competition policy by Lawrence H. Summers published by PIIE (4/2022).
“The Peterson Institute has again produced a very important study making a powerful, analytical, and statistical point with respect to a crucial public policy issue. This study reinforces my conviction that trade barrier reduction can while supporting consumer incomes and economic growth make a significant contribution to disinflation. This contribution dwarfs the potential impact of other competition policies that have preoccupied the White House.
As a discussant, I wish to talk about this paper at several levels.
First, is the core estimate that reasonable tariff reduction in the United States could take more than 1 percent off the CPI [Consumer Price Index] a reasonable one? My judgment after reviewing all the statistical machinations is that the answer to that question is decisively yes.
The key analytical point is this: When you reduce tariffs, you have two effects of reducing the price level. One is that people no longer have to pay the tariffs. That is the direct effect, and that is the effect that some previous Peterson Institute work had suggested was relatively limited. The other is that there are people who compete and firms who compete with the tariff good. And so just as if you reduce the price of Pepsi, you force Coca-Cola to reduce its prices, when you reduce the price of imported goods, you reduce the price of domestic goods as well. That turns out to be the larger of the two effects…”
