The Biden administration is tying itself in knots as it tries to decide whether to reduce or eliminate tariffs to slow the rate of inflation.
Treasury Secretary Janet Yellen understands well the relationship between protectionism and inflation as recently explained by economists at the Peterson Institute for International Economics, so she favors cutting tariffs.
U.S. Trade Representative Katherine Tai prefers to keep the tariffs for leverage in hopes of eventually – albeit improbably – wringing concessions out of trading partners.
President Biden, reluctant to be seen as doing a favor for foreign countries, remains firmly in the undecided camp.
Yellen is right that tariffs should be rolled back. But linking that policy change to inflation seems strange. Why not focus on the far stronger arguments for curtailing U.S. protectionism?
The first – and most important – reason for cutting tariffs is that they reduce America’s “economic welfare.” That’s economist-speak for lowering our standards of living and making us poorer.
A nation that curtails imports always harms its own economy. The economic gains accruing to producers simply are not as large as the costs foisted onto consumers. Because costs absorbed by the broad economy are greater than the benefits, society overall will be worse off.
Half of all imports are used by industries rather than by final consumers, so protectionism imposes particularly harmful costs on the manufacturing sector. This can be true even when import restrictions are intended to protect a specific group of manufacturers.
Steel import restrictions, for instance, are of interest to the roughly 144,000 steel mill workers. In 2019 their output added $31 billion of value to the economy, which is equivalent to 0.15 percent of GDP. Manufacturers that buy steel and make useful things out of it, however, have a much bigger footprint. They employed 6.7 million workers and produced an economic value-add of $1.1 trillion (5.4 percent of GDP). Steel users employ 46 times more people and add 35 times more to GDP than do steel producers. And, of course, hundreds of millions of consumers buy products made with steel.
Tariffs have put the United States in the unfortunate position of having the highest steel prices of any major country. As of late June, the market analysis service SteelBenchmarker reported the price of hot-rolled steel in America to be 40 percent higher even than in high-cost Western Europe. This is a big deal. Artificially high steel prices make U.S. manufacturers less able to withstand competition from imported finished goods produced with world-price steel.
Reduced manufacturing competitiveness helps explain the large job losses associated with protectionism. A pre-pandemic February 2020 analysis found tariffs may have led to the addition of roughly 1,000 workers in steel mills. But they caused the elimination of 75,000 jobs at value-added manufacturers.
Other reasons to lift trade restrictions include:
- Tariffs exacerbate economic inequality. As Edward Gresser of the Progressive Policy Institute has written, “Because consumer goods tariffs are high for cheap goods, and low for luxuries, they single out the poor.” In other words, tariffs have the effect of lowering living standards for low-income people relatively more than for those who are middle class or affluent.
- Tariffs are an economically expensive form of taxation. They curb economic output by piling unnecessary costs on manufacturers, thus reducing their ability to compete, prosper and pay income taxes.
- Tariffs allow political leaders to foster cronyism by picking winners and losers.
- Tariffs are of limited use as tools of foreign policy because they very seldom persuade other governments to change their behaviors in ways we would wish.
- Tariffs significantly constrain individual liberty. Import restrictions are a nasty form of coercion that discourage people from buying what they most would like in favor of buying something the government prefers, thus undermining the functioning of an open, market-oriented economy. Free markets are an integral part of what makes the American people free.
- And, on top of all that, eliminating tariffs would help curtail inflation.
So, by all means, let’s end tariffs. And if fighting inflation serves as the justification, that’s fine.
But Biden would do a good deed for the country by explaining both the broad damage inflicted by trade restrictions and the numerous benefits of revoking them. He should not be bashful in articulating that freer trade promotes economic growth and enhances Americans’ freedoms.
Lifting tariffs is not about doing a favor for other countries. Rather, it is about doing a favor for ourselves.
Dan Pearson, a former chairman of the U.S. International Trade Commission, is a trade policy fellow at Americans for Prosperity.