April 15, 2016 5:14PM

Congress Fist Bumps Itself Over Tariff “Reform” Bill That Keeps 97% of Import Taxes in Place

This week congressional trade leaders introduced The American Manufacturing Competitiveness Act of 2016 (AMCA), a bill to reform and reinvigorate the stalled Miscellaneous Tariff Bill (MTB) process.  MTBs are legislative vehicles through which Congress temporarily suspends import duties on certain qualified products typically used as inputs in U.S. manufacturing operations. Soon followed the self-congratulatory triumphalism.

House Ways and Means Committee Chairman Kevin Brady (R-TX) said: “This bipartisan bill will empower American manufacturers to compete around the world, create new jobs at home, and grow our economy.”

Ranking Member Sander Levin (D-MI) added: “The MTB is a critical tool that supports American manufacturers and workers, and I’m pleased that we’re finally moving forward with this legislation.”

Senate Finance Committee Chairman Orrin Hatch (R-UT) boasted: "With this legislation, we offer a smart bicameral and bipartisan approach for MTBs — one that improves transparency and allows domestic firms to receive appropriate tariff relief on products that can only be found abroad so that those firms can produce American-made goods here at home."

Ranking Member Ron Wyden (D-OR) moralized: “We need to do everything we can to make U.S. manufacturers more competitive — that includes passing a miscellaneous tariff bill that reduces costs of components we don’t make here in the U.S."

Let's unpack this. 

At great expense to producers, consumers, and taxpayers, the U.S. government maintains “protective” tariffs on thousands of imported products, including thousands not even produced domestically.  To mitigate these costs, since 1982, Congress has passed eight so-called Miscellaneous Tariff Bills, which temporarily suspend duties on certain, “non-controversial” products – usually intermediate goods, such as chemicals, electronic components, and mechanical parts – that are not manufactured domestically, but are needed by U.S.-manufacturers in the production of their own output.  Though limited in impact by its temporary nature, the “no domestic production” requirement, and the caveat that the suspended duty not reduce tariff revenues by more than $500,000, the MTB does provide some cost savings to U.S. producers. The last MTB, which expired in 2012, provided an estimated $748 million of import tax relief.

But relief from what? The MTB provides relief from an abomination of Congress's own making. Why do we even have import duties on products not produced in the United States?  And, if suspending taxes on imported industrial inputs is as good for U.S. manufacturers as the trade leadership jubilantly proclaims (see above), then why not get rid of all duties on industrial inputs -- and permanently?  U.S. Customs and Border Protection collected $45 billion in import duties and fees last year.  About $26 billion were taxes on imported intermediate goods. But Congress wants credit for relieving U.S. manufacturers of less than 3% of that cost burden ($748 million/$26 billion) imposed by U.S. tariffs.  

When I asked someone from the Ways and Means Committee today why Congress doesn't eliminate all tariffs on intermediate goods -- since doing so would help attract investment, valued-added activity, and job creation in the U.S. manufacturing sector, the answer I got explains why trade policy is such a tough slog and so poorly understood.  The answer was that we need to keep those tariffs in place so that we have leverage to negotiate foreign market tariff reduction. Get that?  Even though eliminating tariffs reduces cost for manufacturers and makes them more competitive at home and abroad, the position of Congress is that we should keep self-flaggelating until other governments stop whipping their own producers with tariffs.

To be sure, eliminating duties -- even though temporarily and only on products not made domestically -- helps at the margins.  But the self congratulations is a bit much.  And when one considers the reason that the MTB process was derailed, and that AMCA only gets us back to where we were four years ago, the whole episode is just embarrassing.

In 2012, then-Senator Jim DeMint (R-SC) spearheaded an effort to derail the MTB process, declaring duty suspensions to be earmarks, which congressional Republicans took a vow to oppose, because they provide only a “limited tariff benefit” – defined under House GOP rules as benefiting ten or fewer entities. AMCA is an effort to reconcile the MTB process with the Republican ban on earmarks so that duty suspensions can resume.  It presumably accomplishes that by inserting the U.S. International Trade Commission into the process so that duty suspension requests don’t go directly from constituents to Members and Senators, but are vetted first by this disinterested, objective, third-party intermediary.

Although AMCA provides resolution to the GOP quandary, the impasse should have never happened because duty suspensions are not earmarks.  First, duty suspensions will nearly always have more than ten beneficiaries – meaning they defy the earmark definition – because the number of importing entities is likely to increase after a duty is suspended, and the entities in the supply chains of these importers will benefit, too.  The number of beneficiaries is not static.

Second, and crucially, it is the duties – not the measures to suspend them – that are the real earmarks.  Duties enshrined in the U.S. Harmonized Tariff Schedule constitute transfers from consumers and consuming industries to specific, chosen producers.  Those duties were obtained through a process that included earmarking, logrolling, and other forms of backroom dealing.  Efforts to suspend those duties today are intended to return the tax landscape to a state of neutrality.  That objective clearly differs from measures that would channel resources from the national treasury to projects that benefit a limited few in a particular congressional district.

Under the MTB process, the suspension of import duties on qualified products is an outcome available to anyone, and the suspended duties provide benefits to everyone in the downstream supply chain all the way to the final consumer. The fundamental failure to make this connection – to recognize that there are dynamic, but not immediately observable benefits that will accrue to the economy – helps explain why Congress struggles to see the bigger picture.

Given that duty suspension of qualified products is available to all, the only conceivable sense in which one might consider the benefits limited is that not everyone has equal access to the process.  Some import-consuming companies have the wherewithal to make the formal requests – previously to their Members or Senators; prospectively to the USITC – while other companies do not. 

Accordingly, AMCA aims too low.  Why require formal duty suspension requests at all?  Why not make them automatic?  Why not have the USITC do an assessment of the entire Harmonized Tariff Schedule to identify all items that meet the statutory requirements for duty suspension?  Why have such restrictive criteria at all?

If one has low expectations about how Congress can make the United States a more attractive option for manufacturers to establish and maintain operations, then AMCA represents a laudable – though mostly cosmetic – effort to end a GOP semantics battle and restore the status quo.  But Congress should be thinking bigger – much bigger – than the AMCA. 

Rather than celebrate a bill that leaves in place 97 percent of the taxes collected by Customs on imported inputs used by U.S. producers, Congress should commit to working a little harder to eliminate these costly, investment- and production-diverting import duties.