tariff

Which U.S. Industries Will Bear the Brunt of Trump’s China Tariffs?

This morning, as anticipated, the Trump administration broadened the scope of its punitive tariffs on imports from China. The list of products subject to 25 percent duties increased from 818 to 1,097 harmonized tariff schedule (HTS) subheadings. Last year, the value of these imports from China amounted to roughly $50 billion, so the tax incidence (ceteris paribus), for the sake of the argument, will be roughly $12.5 billion. 

As expected, Beijing retaliated in kind, assessing similar duties on a commensurate value of U.S. exports, which is certain to cause revenues to fall for U.S. producers of the industrial goods and agricultural products subject to those retaliatory tariffs. But let’s not forget the adverse impact of our own tariffs on our own manufacturers, farmers, construction firms, transportation providers, miners, wholesalers, retailers, and just about every other sector of the U.S. economy.

About half the value of U.S. imports consists of intermediate goods (raw materials, industrial inputs, machine parts, etc.) and capital equipment. These are the purchases of U.S. businesses, not households. The vast majority of the Chinese products on the tariff list fit this description. They are nearly all inputs to U.S. production. By hitting these products with tariffs at the border, the Trump administration is, in essence, imposing a tax on U.S. producers. Trump is raising the costs of production in the United States in sector after sector.

How significant is a roughly $12.5 billion tax in a $19 trillion economy? Well, not especially significant when put in that context. But that context masks the burdens directly imposed on the companies that rely on these inputs and indirectly imposed on their workers, vendors, suppliers, and downstream customers.

The Input-Output tables produced by the U.S. Bureau of Economic Analysis reveal—among other things—information about the relationships between industries in the United States. The “Use” tables map the output of all industries to their uses by other industries as inputs, as well as by end users.

The most recent “detailed” tables present the U.S. economy in 2007. The value of total commodity output at the time was $26.2 trillion, of which $14.5 trillion was consumed for end use and $11.7 trillion was consumed as intermediate inputs to further production. The $11.7 trillion dollar value of output from each of 389 industries (defined at the 6-digit NAICS level) is mapped to the input of each of the other 388 industries. In other words, $11.7 trillion of commodity output from 389 industries is simultaneously depicted as $11.7 trillion of intermediate inputs to 389 industries. Although the values of that industry-specific output and input certainly have changed over 10 years, it is not unreasonable to assume a roughly similar composition of input use on a percentage basis.  (Sure, production processes change and, consequently, the inputs demanded change too. But the 2007 table provides the best information available and it should produce some useful results.)

Weighing Trump’s Trade Apologists

In the wake of the recent “trade agreement” between President Trump and EU Commission President Jean Claude Juncker, we have seen a surfeit of commentary heaping praise on the U.S. president for his strategic trade policy vision and tactical brilliance. Much of that praise has come from people who share the president’s flat-earth view that trade is a zero-sum game played by national governments where the objective is to promote exports, block imports, and secure a trade surplus. Trump throwing U.S. weight around to assert the rule of power over the rule of law is music to this crowd’s ears.

But then there are the apologists who know better; the enablers. They are the bigger problem. In their obsequious tones, they explain how our brilliant president is blazing his own path toward free trade and that the evidence of his success is all around us. If we just disregarded Trump’s nationalist rhetoric, ignored his belief that the trade deficit means the United States is getting ripped off, shoveled away his mounting pile of destructive, protectionist actions, and stopped believing our own lying eyes, we too would rejoice in the greatness of a man who is committed—above all else and above all others—to free trade. 

Engaging in such extreme mental contortions is no easy task, but that’s exactly what an op-ed by tax reform luminaries Steve Moore, Art Laffer, and Steve Forbes in the New York Times last week expects readers to do.

Moore, Laffer, and Forbes (MLF) portray Trump’s “gunboat diplomacy” (you open your markets fully or I’ll close ours!) as strategic genius, akin to Reagan’s nuclear arms race, which broke the Soviets’ backs.  They conclude: “Just as no one ever thought Mr. Reagan would stem nuclear proliferation, if Mr. Trump aggressively pursues this policy, he could build a legacy as the president who expanded world commerce and economic freedom by ending trade barriers rather than erecting them.” Well, yeah, maybe he could.  But so far Trump has only increased trade barriers, more are coming, and there are no negotiations underway—with anyone—aimed at lowering tariffs or other barriers to trade.  But just close your eyes and imagine.

A Trade Armistice in the Works?

President Trump set off another round of Twitter hyperventilation and financial market selling these past 18 hours with his latest threat to assess duties on another $200 billion of Chinese imports. What to make of this?

Trump to Impose Restrictions on Imports and Investment from China

This afternoon, for the second time in the space of a month, President Trump is expected to invoke his authority under a rarely used statute to levy restrictions on a vast swath of imports and investment from China. The cause for today’s measures is behavior that the U.S. Trade Representative has characterized as rampant, sustained theft of U.S. intellectual property by Chinese entities and the Chinese government.

Although allegations—and the evidence supporting those allegations—that China routinely transgresses in the realm of intellectual property have been accumulating for many years, it does not follow that the appropriate response is to restrict trade and investment. In fact, the collateral damage inflicted by those restrictions will be widespread.

President Trump’s “remedies” are likely to raise production costs for U.S. businesses, diminish U.S. productivity, squeeze real household incomes, reduce the revenues of U.S. farmers and other export-dependent industries targeted by Chinese retaliation, exacerbate tensions with China and other countries adversely affected by the restrictions, and hasten the demise of the rules-based trading system.

Distilling the Trade Policy Signal from the Protectionist Noise

It is not surprising that so many Americans believe President Trump has spent the past year erecting tariff walls around the United States. From Trump’s bombastic, anti-trade rhetoric to media’s and social media’s conflation of that rhetoric with real protectionist actions, hardly a day has passed without publication of an analysis or editorial about how especially protectionist this administration has been. The facts are quite different.

Despite promising 45 percent duties on imports from China, 35 percent duties on re-imports from Mexico, tighter restrictions to limit access to U.S. government procurement markets to U.S. firms and workers, requirements that oil pipeline builders use only American-made steel, and more, the Trump administration has not undertaken any of those actions. There has been no discretionary protectionism imposed by President Trump. None. Not yet anyway.

Certainly, President Trump’s instincts are protectionist. He’s already inflicted incalculable damage by withdrawing the United States from the Trans-Pacific Partnership, playing loose with his aggrandized sense of U.S. indispensability to the trading system, and deliberately throwing sand in the gears of the World Trade Organization’s Dispute Settlement Body. His view of trade as a zero-sum contest played between national monoliths (i.e., Team America vs. Team China), where winning means achieving a trade surplus by way of policies that maximize exports and minimize imports, certainly provides fertile ground for protectionism to take root and flourish. But when it comes to actually imposing tariffs or other trade restrictions, so far Trump has been remarkably circumspect. Why?

First of all, the president’s trade policy actions are constrained legally, politically, and practically. The U.S. Constitution gives Congress, not the president, authority to regulate foreign trade. However, at various points and for various reasons over the past century, Congress delegated—through legislation that became statute—some of its authority to the president. For example, the president can impose tariffs without need of congressional action or consent under several different laws.

Trump’s Wall Plan Is Disgraceful, Belligerent, and Disastrous

Regardless of whether wall construction is funded through a discriminatory tariff on imports from Mexico or the border adjustment taxes envisaged in the GOP tax proposal, U.S. consumers and taxpayers will be flipping the bill.  The very idea of building the wall in the first place is a disgrace, but demonizing our neighbors and hatching plans that could subvert the Mexican economy and put another Venezuela on our southern border, is belligerent and potentially disastrous.

Hitting all Mexican imports with a 20% tariff is, unfortunately, something the president could do.  Under the Constitution, Congress is authorized to regulate foreign commerce, which includes imposing tariffs.  But over the years, Congress has delegated some of that authority to the president through various statutes. All of those statutes require that some condition be met (findings of a surge in imports; subsidized imports; unfair foreign practices that hurt U.S. companies; national security crises; public health or safety threats, etc.) before restrictions can be imposed. Sometimes the restrictions are limited in magnitude and duration, sometimes not.  Sometimes the actions are subject to judicial review, sometimes not.

By and large, these statutes were passed in conjunction with legislation to implement trade agreements, lower tariffs, or otherwise liberalize trade.  They were crafted as safeguards to assuage those concerned that the country’s seemingly inexorable march toward free trade would bring rapid change, which would carry massive adjustment costs and other maladies and threats that the government would be incapable of addressing. The expectation was that the president would use this conditional power sparingly and in the service of greater openness and liberalization. In other words, unlike the Founding Fathers, U.S. Congresses during the 20th century failed to imagine adequately the likes of a Donald Trump as president.

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