Lessons for ‘tariff-curious’ Americans

You know you’ve wondered. Maybe you aren’t in the, “Tariffs are the greatest!,” camp, but you’re tariff-curious. Might it not be a good thing to give domestic companies a helping hand? And if tariffs are so bad, how come other countries get to use them and we don’t? Couldn’t tariffs at least be useful in getting countries like China to behave?

To start, one key selling point for tariffs is often “fake.” People often like the idea that a tariff is a tax on imports from another country. Other things equal, wouldn’t you rather have a foreigner pay? Only that’s not usually how it works.

{mosads}Tariffs are a tax on American consumers. If buyers around the world are willing to pay $900 per metric ton for coated steel sheet from Japan, that’s the price that Japanese sellers will demand.

If the United States tried to make the Japanese pay a 25-percent tariff, the sellers would only receive $720. Why would they settle for that if they could get $900 selling elsewhere?

So, instead, they sell to the United States for $900 and American buyers get to pay $225 in new taxes. Now, this can be a boon for domestic producers (if there are any who make the same kind of steel; there’s a lot of specialization in that industry).

If their foreign competitors will only sell at $1,125, those domestic producers get to raise their prices to match. It seemed more than a little disingenuous when Commerce Secretary Wilbur Ross talked about domestic steel firms engaged in “illegal profiteering” from steel tariffs — it was a textbook example of how tariffs raise domestic prices! Tariffs are a tax on consumers coupled with a subsidy to producers.

What’s wrong with helping producers a little? Nothing, necessarily. But in general, if we decide we need to subsidize certain producers, there are more efficient ways to raise the money than taxing certain particular consumers. Further, tariffs cut off the competition that pushes domestic producers to innovate and improve.

Finally, in the world of global supply chains, tariffs help some producers but hurt many others. To illustrate, there are about 140,000 U.S. workers engaged in the production of steel; there are roughly 2 million U.S. workers in industries that use steel intensively as an input.

As an example of this, consider the Whirlpool whiplash. The company was the beneficiary of “safeguard” tariffs in January, which protected it from Korean competitors, among others. But half a year later, the company’s share price had fallen 15 percent as it was forced to deal with the effects of increased steel and aluminum costs due to the Trump administration’s “national security” tariffs.

But if tariffs are so bad, why do other countries get to use them while the United States cannot? More “fake” news. In 2016, the U.S. average tariff rate was 2.9 percent. For comparison, the number was 2.5 percent for the European Union; 3.0 percent for Canada and 3.5 percent for Japan.

This reflects decades of reciprocal tariff liberalization, mostly under the General Agreement on Tariffs and Trade (GATT), which is now part of the World Trade Organization (WTO).

Those averages usually mean zero tariffs on most goods, with tariff spikes on particular, politically-sensitive categories. The reciprocal negotiations did not mean that the United States would drop its tariff on autos if Europe dropped its tariff on autos. 

Instead, it might have been the United States lowering its tariff on autos in exchange for a drop in European tariffs on machines tools or something that the United States wanted even more. Hence, Europe retains a 10-percent tariff on autos, while the United States applies a tariff of just 2.5 percent. But the United States imposes a 25-percent tariff on imports of pickup trucks.

All that trade liberalization took place under the GATT because countries recognized that tariff wars hurt; they would be better off if they mutually lowered their barriers. And there’s strong evidence that the liberalization paid off.

While trade liberalization surely hurt some workers, it has more often served as a scapegoat for the ravages of automation. U.S. manufacturing output is at or near an all-time high, but all that output is being made with many fewer workers.  

Finally, what about tariffs as a lever. A country like China has distinctly higher trade barriers than the United States. Why not threaten, as President Trump just did, to slap 25-percent tariffs on ever more Chinese goods until they relent?

There are two reasons. First, by breaking past commitments it made under the WTO, the United States threatens to tear apart a global system from which is has benefited perhaps more than any other country. Second, and more practically, such tariff threats against China are unlikely to work.

Rather than backing down, China will respond with tariffs of its own — as they just did, again — and we will end up having to live with the painful effects of tariffs and retaliation for some time to come.

Some lessons, evidently, have to be relearned the hard way.

Philip Levy is an adjunct professor at the Kellogg School of Management at Northwestern University and a senior fellow on the global economy at The Chicago Council on Global Affairs.