A Break With China Could Fan U.S. Inflation Fears

With America running a $23 billion trade deficit with China, some observers argue that China will be the big loser if its actions cause the U.S. to revoke its most-favored-nation (MFN) trading status. But economist Neal M. Soss of CS First Boston Corp. warns that such an outcome also has potentially harmful implications for the U.S., too.

Soss estimates that loss of MFN would raise the U.S. tariff rate on Chinese goods from about 8.8% to over 50%. Noting that China's exports to the U.S. are mainly toys, apparel, footwear, and electronics (including nearly half of all toys sold in the U.S.), he figures that such a hike would push up the consumer price index by 0.15% directly. But if other toy, apparel, and footwear prices also rose in response, the CPI could well increase by 1% or 2%, prompting the inflation-wary Federal Reserve to step harder on the monetary brakes.

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