Commentary

A Tariff-Reduction Plan for U.S. Jobs

In his address to Congress Thursday night, President Obama offered a tepid endorsement of the idea that reducing trade barriers could help put Americans back to work. But if the president is serious about creating jobs, he must take more decisive actions to spur trade and investment and reject protectionism. That means convincing trade-hostile Democrats of the merits of the long-pending bilateral trade agreements with South Korea, Colombia and Panama, which he plans to submit to Congress this month or next. He will also need to steer Congress away from inciting an unwelcome trade war with China.

As important as access to foreign markets is, however, some of the most significant obstacles to U.S. export success aren’t foreign-made but homegrown. If the president is genuinely committed to spurring economic growth and job creation, he will take the lead on reducing or eliminating duties that U.S. producers pay on imported raw materials and components they need for manufacturing. This would instantly boost the competitiveness of U.S. products at home and abroad.

The same demographics that have created growing foreign markets also mean there are more foreign suppliers of raw materials, industrial inputs, and other intermediate goods used by U.S. producers in their own production processes. Last year, U.S. Customs and Border Patrol collected $30 billion in duties on $2 trillion of imports, 55% of which were ingredients for U.S. production — such as chemicals, minerals and machine parts. Purchases of imported inputs accounted for more than $1 trillion of U.S. production costs, a price tag that was roughly $15 billion higher than it might have been without U.S. import duties.

Improving access to foreign markets, through trade agreements and other measures, will be essential to continued U.S. economic growth.”

What is the point of negotiating a 5% reduction in a foreign tariff on behalf of certain U.S. exporters while ignoring the fact that, to produce those exports as domestic manufacturers, they are required to pay a 50% import tax on the most crucial raw materials? Reducing import barriers has the same effect on profit as does improving market access abroad, but with the added benefit of increasing U.S. competitiveness. And it can be achieved without waiting for consent from abroad.

President Obama understands this. Last year, when signing into law the Manufacturing Enhancement Act of 2010 (a bill to temporarily reduce or eliminate duties on certain imported raw materials) the president acknowledged that the new law “will significantly lower costs for American companies across the manufacturing landscape — from cars to chemicals; medical devices to sporting goods” and will “boost output, support good jobs here at home, and lower prices for American consumers.”

Now the president should push Congress to reduce or eliminate, on a permanent basis, all tariffs on industrial inputs so that U.S. producers are more competitive in the global economy and so that America is a more appealing destination for foreign direct investment. That approach has produced good results in Canada, where the government has been reducing tariffs on manufacturing inputs for the past few years.

Meanwhile, some import duties can be eliminated with a stroke of the president’s pen. First should be antidumping duties, imposed on inputs needed by U.S. producers. The antidumping law is purported to penalize foreign producers accused of injuring U.S. firms by selling in the United States at lower prices than they charge at home. Some U.S. industries lobby vigorously for such duties simply because they hobble the foreign competition.

Yet more than 80% of the nearly 300 U.S. antidumping measures in force today restrict imports of raw materials and intermediate goods, thus penalizing U.S. producers. Antidumping duties on magnesium or polyvinyl chloride or hot-rolled steel may allow domestic producers of those inputs to raise prices and reap greater profits. But they hurt many more downstream U.S. producers of auto parts, paint and appliances, who consume those inputs in their own manufacturing processes and who are more likely to export and create new jobs than are the firms that seek trade restrictions.

Earlier this year, U.S. Trade Representative Ron Kirk unintentionally made the case for antidumping reform while describing the consequences of Chinese restrictions on exports of nine raw materials. He noted that “these measures skew the playing field against the United States and other countries by creating substantial competitive benefits for downstream Chinese producers that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products.”

What Amb. Kirk failed to mention is that the U.S. government itself maintains antidumping restrictions on three of those nine raw materials, which raises production costs in the same manner he described but also chases U.S. producers offshore, where these inputs are available at world market prices. (My recent study, “Economic Self-Flagellation: How U.S. Antidumping Policy Subverts the National Export Initiative,” explains how antidumping restrictions on magnesium and silicon metal are encouraging high-value-added industries to move offshore.)

Improving access to foreign markets, through trade agreements and other measures, will be essential to continued U.S. economic growth. But for maximum effect, the president should strongly advocate the elimination of duties on imported manufacturing inputs and other domestic impediments to U.S. competitiveness abroad and at home.

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