Since assuming office, President Trump has shaken the foundation of global trade with his use of tariffs. Tariffs, in simple terms, are taxes levied on imported goods. Trump’s intentions, in line with his America First campaign promise, are to boost the domestic manufacturing industry, reduce the U.S. trade deficit, and to leverage foreign countries into new trade agreements that benefit the United States. While his goal is well-intentioned, research suggests that tariffs cause inflation, depress aggregate demand, lessen capital expenditures, and lower productivity levels. Furthermore, history suggests the rampant use of tariffs tends to come with harsh consequences. This paper will focus on the recent failures of tariffs in American history and conclude by demonstrating how the current administration’s use of tariffs is hurting those they aim to help.
A 1976 USITC study traces U.S. tariff usage back to the inception of the Constitution in 1789.Until the establishment of the direct income tax in 1913, tariffs were primarily used as a federal revenue stream and accounted for between 50% and 90% of the total federal income. Tariffs now represent less than 2% of federal income.Consequently, the primary motive behind these import duties has shifted to protecting domestic industries and promoting domestic manufacturing. Unfortunately, as the motives have shifted, the impact of tariffs has largely become negative.
Throughout the 1920s, despite a general economic boom, farmers amassed debt and saw their incomes decrease as they struggled with competition and diminishing prices for both commodities and land. The Republican Party recognized that there was both lower wages and a lower cost of living overseas which allowed foreign producers to sell at low prices that U.S. producers could not match.Overproduction of American agriculture combined with this competitive disadvantage left American farmers struggling to succeed. Herbert Hoover won the election in 1928 with the promise to raise duties on agricultural imports to protect farmers. In 1930, following the collapse of the stock market and continued agricultural struggle, President Hoover implemented the Smoot-Hawley tariffs which raised the average import duty by nearly 20% and set up the highest rates the U.S. had ever experienced.According to Economics Professor Douglas Irwin, of Dartmouth College, the average tariff peaked at more than 59% in 1932.
European countries retaliated quickly by heightening their own trade barriers against U.S. exports, leading to a widespread protectionist policy that deteriorated global trade. In the years following Smoot-Hawley, U.S. imports/exports fell approximately 40%, and American farmers, the targeted beneficiaries of the act, saw crop prices crumble and exports diminish substantially.
Before embarking on a more modern expedition through U.S. protectionist policy, it is worth noting that the Smoot-Hawley tariffs stand alone in their extremes. Tariffs today are typically levied ad-valorem, meaning the magnitude of the duty is a set percentage of the import value. Most of the tariffs under Smoot-Hawley were specific, meaning a set value for each imported good. During the 1930s, prices of many goods were declining sharply, causing the specific tariffs to become an increasing percentage of the value of each good. This caveat exaggerated the effects of the Smoot-Hawley tariffs when viewing them as a percentage increase. Nonetheless, the Smoot-Hawley Tariffs stand as an important lesson for trade policy experts in how well-intentioned tariffs can spiral out of control due to other economic factors.
Despite the lessons of Smoot-Hawley, the last two decades provide further examples from both sides of the ideological aisle about the negative impacts of tariffs. In 2002, in an attempt to protect the U.S. domestic steel industry from foreign dumping, the George Bush administration placed tariffs on imports of certain steel products. These “safeguard measures” were designed to span three years and progressively decline following WTO requirements. Planned duties ranged from 30% to 8% percent ad-valorem in the first year, 24% to 7% ad-valorem in the second, and 18% to 6% ad-valorem in the third.As in 1930, the EU retaliated with heightening duties on U.S. exports.
A 2003 study conducted by the Trade Partnership Worldwide examined the unintended impact of these tariffs.In 2002, 200,000 Americans lost jobs to high steel prices that resulted from the tariffs, representing approximately $4 billion dollars in lost wages. The amount of jobs lost to high steel prices was higher than the total number of employed U.S. steel workers. The Bush administration halted the steel tariffs just eighteen months after their implementation to protect against further economic crisis.
In 2009, President Obama imposed tariffs on Chinese tire imports in an effort to protect the U.S. auto industry and bring jobs back to the country. Similar to the tariffs Bush administered in 2002, Chinese tires were subject to three years of duties, with ad-valorem rates progressively declining from 35% to 25%.Like its predecessors, these tariffs were met with prompt retaliation, taxing American consumers far more than their foreign targets.
US Tire Tariffs: Saving Few Jobs at High Cost, a 2012 Peterson Institute study, examined the impacts of Obama’s tire tariffs on the U.S. economy.According to the study, the tariffs saved 1,200 jobs in the auto industry, which alone is a success. However, this silver lining was offset by the estimated 2,531 total jobs lost as a result of the tariffs. In addition, the tariffs cost American consumers approximately $1.1 billion in 2011 due to increased prices of manufactured goods. By dividing the cost to American consumers with the number of jobs saved, each job saved resulted in costs to American consumers of approximately $900,000. Furthering the negative impact, China imposed retaliatory duties on U.S. exports of chicken parts, costing that industry approximately $1 billion.
Clearly, history provides ample evidence of the negative impact tariffs have on U.S. consumers and businesses. Yet, President Trump has ignored the failures of the previous administrations and levied tariffs on a drastically large portion of U.S. imports. An American Action Forum study shows that Trump’s Section 232 tariffs on steel and aluminum and Section 301 tariffs on China affect $283.1 billion of U.S. imports would cost American consumers $69.3 billion annually.Furthermore, the same AAF study shows that $110.9 billion of American exports are being impacted by foreign retaliation.
|Tariff||Value of Affected U.S. Imports (Billions)||Tariff Rate||Additional Cost Burden (Billions)|
|Section 232, Steel||$15.5||25%||$3.9|
|Section 232, Aluminum||$9.8||10%||$0.9|
|Section 301, Pt 1||$30.2||25%||$8.1|
|Section 301, Pt 2||$14.8||25%||$3.4|
|Section 301, Pt 3||$212.8||25%||$47.2|
In addition to current policy, the administration is now threatening China with a fourth tranche of tariffs that would place a 25% rate on an additional $300 billion goods.This final round is on hold due to re-opened trade negotiations with China. However, reports have suggested a deal acceptable to both parties is unlikely to materialize in the foreseeable future.If these tariffs are implemented, the additional cost burden Americans face today will more than double.
Protection from the Protectionism?
American companies have two options when it comes to avoiding the impacts of Trump’s tariffs: relocate supply chains or apply for exclusion. Unfortunately, adjusting supply chains is incredibly difficult for many U.S. companies, and the U.S. tariff exclusion process is not reliable.
Polaris Industries, a Minnesota based company that manufactures off-road vehicles, snowmobiles, and motorcycles, is among numerous U.S. manufacturers struggling to avoid the impacts of President Trump’s tariffs. In 2014, Polaris invested $150 million to build a manufacturing plant in Alabama.This decision drew ire from investors who wanted Polaris to follow Japanese and Canadian competitors and manufacture in countries with cheaper labor. Despite these calls, CEO Scott Wine stood by his decision to support U.S. manufacturing. Today, Wine’s company faces $195 to $200 million in additional costs from the third tranche of tariffs on China, costs that will eliminate one third of the company’s net income.Polaris is dependent on highly technical suppliers in China and like many manufacturing firms, Polaris struggles to find alternative suppliers within a reasonable timeframe. As a result, the company is being forced to shift production to a plant in Mexico to be viable against foreign competitors.
Scott Wine made the patriotic decision to support U.S. domestic manufacturing in 2014, a decision directly in line with the rhetoric of President Trump. However, despite this convergence in thinking on trade, Trump’s trade policies have placed Wine’s company at a competitive disadvantage that has forced him to move manufacturing jobs outside of the United States in direct opposition to the President’s America First ideals. Polaris is a case study among countless U.S. companies that cannot adjust their supply chains and in turn face insurmountable consequences from tariffs today.
The second and final option U.S. companies hold in avoiding the President’s tariffs is the exclusion process. As of June 21, the USTR had published exclusion processes for the first and second lists of the Section 301 tariffs on China, the table below displays the success companies have had through this process.
|Tariff List||List 1 – $34B||List 2 – $16B|
|Date Tariff Levied||Jul. 6, 2018||Aug. 23, 2018|
|Date Exclusion Request Process Announced||Jul. 11, 2018||Sept. 18, 2018|
|Exclusion Request Deadline||Oct. 9, 2018||Dec. 18, 2018|
|Total Number of Exclusion Requests||10,828||2,902|
|Requests in Stage 1 (Public Comment Period)||0||0|
|Requests in Stage 2 (Initial Substantive Review)||21 (0.2%)||82(3%)|
|Requests in Stage 3 (Administrability Review)||2095 (19%)||1579 (54%)|
|Requests in Stage 4 (Granted and publication in progress)||0||0|
|Denied||6291 (58%)||1259 (43%)|
From these statistics, one can determine that the adjudication process for exclusion requests is subject to major backlog, and that denial is the most likely outcome. The List 1 exclusion process opened in October 2018, with 20% of cases still pending. The List 2 exclusion process opened in December 2018 with 60% of cases still pending. In that same time frame, of the 9,971 exclusion decisions made, 76% of them have been denied. Businesses have waited an entire year, facing increasing costs and lost profits, to be likely faced with a denial.
On June 31, the USTR opened a web portal for businesses to apply for exclusion from List 3 of the Section 301 tariffs, estimating it will receive 60,000 exclusion requests in the process.With these expected requests being four times higher than the two previous lists combined, it is fair to assume the wait times these companies face will be substantially longer. Furthermore, there are no indications that the acceptance rate for the list 3 inclusions will increase.
U.S. companies are enduring severe impacts from the President’s use of tariffs, and as of now there seems to be no path to protection from these protectionist policies. History warned of the negative consequences associated with Trump’s favorite tool of economic manipulation, and today those consequences are being felt by the American people. Policy makers need to think critically about the changing use of the tariff in U.S. economic history and adjust current trade policy accordingly.
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