Commentary

Republican Debate over Tariff Bill Obscures the Bigger Picture

Attention squabbling Republicans: It is the the import duties that remain in place, not their temporary suspension under the Miscelleaneous Tariff Bill, that are the evil earmarks you’ve promised to eradicate. Unfortunately, this debate, which is mostly about semantics and optics, has precluded substantive discussion about why we even have tariffs in the first place and how real tariff reform would encourage domestic investment and hiring.

Since the early 1980s, almost every Congress has passed a Miscellaneous Tariff Bill, which is a compilation of individual requests for temporary suspensions of import duties on specific products sponsored by House members and senators. Most duty suspension requests concern imports of intermediate goods or industrial inputs used by U.S. companies in their own production processes.

Some Republicans claim that duty suspensions benefitting fewer than 10 entities meet the House definition of an earmark, and should be opposed on those grounds. But there is simply no way of knowing before hand how many entities will benefit because the cost reduction associated with the waived duties is likely to spur unforeseen demand — new industrial uses for the input, new firms attracted to the industry, lower prices delivered down the supply chain to more and more end-users, etc.

There are obvious benefits to the process, but the MTB doesn’t come close to approximating the potential gains from real tariff liberalization. Even to qualify for the MTB, an individual duty suspension must be “non-controversial,” which means that there is no domestic production of the item and that the loss of tariff revenue from each suspension will not exceed $500,000 per year. Because of the temporary nature of the tax break and the tight restrictions concerning reduced tariff revenues, the scope for gains is limited. Of course that doesn’t stop politicians from talking up the benefits.

Here’s how President Obama characterized the last MTB upon signing it into law in 2010:

The [MTB] will create jobs, help American companies compete, and strengthen manufacturing as a key driver of our economic recovery. And here’s how it works. To make their products, manufacturers often have to import certain materials from other countries and pay tariffs on those materials. This legislation will reduce or eliminate some of those tariffs, which will significantly lower costs for American companies across the manufacturing landscape—from cars to chemicals; medical devices to sporting goods. And that will boost output, support good jobs here at home, and lower prices for American consumers.

Sure, the MTB gives manufacturers a sugar buzz, but to provide the protein that would help them build muscle and possibly fulfill the president’s claims, duty suspensions must be made permanent and applied across the board to all products regardless of how large the tariff revenue loss or whether — indeed, especially if – the products is made domestically.

According to the Bureau of Economic Analysis, capital equipment and intermediate goods – items purchased by the very manufacturers referenced in the president’s remarks – accounted for 58 percent of the $2.2 trillion worth of U.S. goods imports in 2011. The $32 billion in taxes collected by Customs on those imports represent real costs that handicap U.S. producers, raise U.S. living expenses, and deter investment and hiring.

The House and Senate versions of the 2012 MTB contain, in aggregate, about 2,000 individual duty suspension requests. Those 2,000 suspensions — if they all make it to the final bill — would reduce taxes collected at the border by a maximum of $1 billion and for only three years. So, the MTB helps, but as a measure that would relieve only about 3 percent of the burden of import taxes, it’s a drop in the bucket that reflects small thinking in Congress.

U.S. firms in import-consuming industries need access to intermediate goods at world market prices in order to be more competitive at home and abroad. Meanwhile, domestic producers who are protected by tariffs have less incentive to price competitively or to serve their customers needs in other ways. Instead of giving them artificial license to exercise market power over their downstream customers, they should be exposed to the disciplines of competition by eliminating protective tariffs. This is so easy to comprehend that one can only be cynical over Congress’s failure to act.

One should question the judgment of Republicans who put duty suspensions in the same categorical basket as “Bridges to Nowhere.” But one should question the commitment to real solutions of members of Congress who fail to admit that existing tariffs are the real earmarks that should be eliminated permanently.

Daniel Ikenson is director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute.