Commentary

Congress Must Do Better Than Its 3% Solution on Tariff Reform

At great expense to producers, consumers, and taxpayers, the U.S. government maintains “protective” tariffs on thousands of imported products, including many items not even produced domestically. To mitigate those 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. producers to make 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 — about $750 million per year.

In 2012, then-Senator Jim DeMint (R-SC) led a successful effort to derail the MTB that was moving through the 112th Congress, declaring that duty suspensions provide only “limited tariff benefits” (defined under GOP House rules as benefiting 10 or fewer entities) and as such were “earmarks,” which congressional Republicans had taken a pledge to oppose. Yesterday, after two new Congresses came and went without any resolution to the matter, House Ways and Means Committee leadership and 15 other members of Congress introduced The American Manufacturing Competitiveness Act of 2016 (AMCA) to reform and reinvigorate the stalled MTB process.

The crux of the bill descends from De Mint’s proposal in 2012 to insert the U.S. International Trade Commission into the process so that individual duty suspension requests don’t go directly from constituents to Members and Senators, but are vetted first by a disinterested, objective third party. Though the bill seems to do nothing about weeding out duty suspensions with “limited tariff benefits,” the insertion of the USITC into the process presumably puts enough distance between constituents and Congress to moot concern over whether duty suspensions are earmarks at all.

It’s time for Congress to start thinking big on tariff reform, like its neighbors to the North and South do.

Although AMCA provides resolution to the GOP impasse, that debate was unnecessary in the first place. 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? Congress can and should do much more about costly tariffs than what is proposed in AMCA.

House Ways and Means Trade Subcommittee Chairman Dave Reichert (R-WA) points out that since the last MTB expired in 2012, American companies have faced an annual $748 million tax hike on manufacturing. That may be true, but since 2012 U.S. Customs has collected roughly $43 billion annually in tariff “revenue,” approximately $26 billion of which was from duties on intermediate goods. In other words, AMCA fixes $748 million (less than 3 percent) of a $26 billion problem. That’s not good.

Although trade barriers have been reduced considerably since the end of the World War II, U.S. policy continues to reflect an intolerable amount of protectionism, including tariffs assessed on approximately one-third of all U.S. imports. Eliminating — or at least reducing — these burdens should be a congressional priority because duties raise the cost of production, reduce investment and hiring, dissuade foreign companies from establishing operations in the United States, and encourage existing producers to relocate to countries where the burdens are less onerous.

In most tradable industries, global production sharing has become the norm. About half of the value of all U.S. imports in 2015 consisted of industrial supplies, other intermediate goods, and capital equipment — the purchases of U.S. producers, not end-use consumers. According to estimates from the World Trade Organization, intermediate goods (excluding oil and fuels) account for about 60 percent of the value of global trade.

In order to compete more effectively at home and abroad, U.S. companies (and the U.S. operations of foreign-headquartered companies) need access to imported inputs at world market prices. Production costs in the United States must be competitive. Yet, under U.S. tariff policy, many imported inputs are subject to duties — even when there are no domestic suppliers to “protect.” These taxes raise production costs, deter investment, and chase producers offshore, where they can access needed inputs at market prices. The consequence of all of this is reduced economic output and job loss or suppression.

In the 21st century global economy, where capital is mobile and businesses have options regarding where they locate production, distribution, and research and development activities, governments are competing to attract job-creating, value-added investment in their economies. Public policies — including tariffs and other trade policies that increase the cost of production — are on trial. Nibbling around the edges with small, temporary tariff reprieves via legislation like the AMCA is an inadequate gesture that does little to put the United States in a better position to win more investment location decisions going forward.

During the financial crisis and subsequent recession in 2009, as G-20 governments were reassuring each other that they would not resort to beggar-thy-neighbor protectionism, the Canadian and Mexican governments took an entirely different tack, slashing duties on imported intermediate goods. Each government properly recognized import duties as business costs and, since business revenues were projected to plunge on account of the global economic contraction, chose to limit the adverse impact on their businesses by reducing their import tax burden. That logic is universal, and does not only apply in times of economic recession.

It’s time for Congress to start thinking big on tariff reform, like its neighbors to the North and South do.

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