Tariffs are Taxes and Destructive to the Nation’s Growth and Unauthorized by Congress

Tariffs are Taxes and Destructive to the Nation’s Growth and Unauthorized by Congress


Tariffs are taxes on imported goods. They are a sales tax that the buyers/ US consumers and business must pay. So when the President raises taxes on Chinese goods; he is adding 10% and now 25% to the costs of goods made in China and bought in the US. He also may be raising the prices of goods made in America by indirection as the domestic manufacturers have fewer competitors and are thus able to raise their prices. The same applies to foreign steel and aluminum, to foreign made cars, to washing machines and solar panels.


Taxes on tea were the foundation of the American Revolution; however tariffs are often popular with some domestic manufacturers and some labor unions that do not relish the foreign competition. Alexander Hamilton used them to shelter the nascent American industries just after the nation’s birth. The Smoot Hawley tariffs are credited with contributing to the depths of the Great Depression, and the rise of economic nationalism leading to the Second World War. Since World War Two, we have been leading the way towards freer trade using the foundations of GATT (General Agreement on Tariffs and Trade).


Tax bills start in the House of Representatives under our Constitutional framework; they have to be approved in both Houses of Congress and signed by the President. They are not imposed by the White House willy nilly because the President does not like imports or does not like imports from particular countries whether Canada or China, whether Mexico or Madagascar.


As economic progress and development spread throughout the world, we increasingly have a global supply chain so that inputs from many companies all over the world go into building a car, a computer, an airplane or an i-phone. Trump’s trade wars with Europe, Asia and our near neighbors are a significant threat both to the global economy and to American complex manufacturing, such as cars, airplanes and appliances.


Most economists think tariffs are particularly bad for the economy because they distort head to head price competition and encourage inefficiencies among the protected domestic industries.  Japanese and German car manufacturers took over large shares of the US car market beginning in the 70s by beating “gas guzzling” US carmakers on both price and quality; the Big 3 US automakers have had to innovate and beat the competition. US steelmakers were slow to innovate and therefore lost market share to Germany, Japan and South Korea who renovated and innovated more quickly. Likewise path-breaking US companies took over global markets with products ranging from Coca Cola to airplanes from big Macs to computers to the internet.


Part of the problem with global trading is the difference in wages between the US and countries like Mexico, China or Vietnam, which disadvantages American manufacturers and unions. Part of the problem is that some US manufacturers failed to innovate and increase productivity while others are world leaders; high wage German and Japanese made counterparts may compete quite effectively with lower wage foreign competitors; we need to learn lessons and apply them, not build tariff walls. Part of the problem has been foreign (Chinese and others) subsidies of their own domestic production and the erection of trade barriers to imported US products.


The President is relying on Section 232 of the Trade Expansion Act of 1962 that allows the President to impose tariffs based on an actual threat to the national security. Section 232 was passed during a time of widespread trade liberalization and in the midst of the Cold War and concerns that Russia and its allies would seek to use broader trade to strengthen their armaments industries and nuclear weapons production. Needless to say, our Canadian, Western European and other allies are hard pressed to understand how their cars, steel and aluminum are now designated as a threat to our national security and have filed complaints with the WTO (World Trade Organization). Likewise the Chinese are baffled how their washing machines and solar panels threaten the US’ national security and have filed a WTO complaint as well. The President’s actions have stretched Section 232 beyond its furthest borders, and there really is no Congressional authority at all under Section 232 for many of the President’s actions.


The Tax Foundation, hardly a progressive bastion, concludes that the combined impacts of all the Trump tariffs in question will decrease American’s after tax incomes by over 1%. https://files.taxfoundation.org/20181204145437/The-Economic-and-Distributional-Impact-of-the-Trump-Administration%E2%80%99s-Tariff-Actions-FF-625.pdf


Congress, however, is largely supine. Republicans are historically anti-tariff, pro-trade, but paralyzed by the President’s popularity in their districts. Democrats are split because some important manufacturing unions and some important local industries support and indeed welcome the President’s tariffs.


American farmers are being badly hurt by the retaliatory tariffs from China and the EU that target some of the US’ most successful exporters. The President has responded by approving large subsidies for farmers. The President has again elected to bypass Congress in approving close to $27 billion in farm subsidies; the nation’s farmers want “trade not aid”. https://www.vox.com/policy-and-politics/2019/5/17/18626664/farmers-trump-trade-war-china


President Trump has also proposed to impose tariffs of up to 25% on imports from foreign automakers claiming national security. Recently he postponed this for 6 months. The impacts projected by the think tank for the domestic car industry are over a million in lost car sales, close to $3,000 per car in price hikes and nearly 400,000 auto industry jobs lost. https://www.cargroup.org/wp-content/uploads/2019/02/US-Consumer-Economic-Impacts-of-US-Automotive-Trade-Policies-.pdf


The proper forum for the resolution of trade disputes is the World Trade Organization (WTO). These spurious national security findings enrage our allies, disrupt international trade and hurt the international and domestic economies. The Congressional Research Service has completed an excellent review of the complex and intertwining issues that is worth a read. https://fas.org/sgp/crs/misc/R45249.pdf


Essentially, automation, not imports, has cut jobs in the domestic steel industry sharply, and recycled aluminum has become a major source of materials for the aluminum industry, rather than domestic production of raw aluminum. Most of our imports of steel and aluminum are from Canada, and very little come from China. There is, however, a real issue of global overproduction of steel and aluminum that is depressing the prices of steel and aluminum in global markets; the Chinese are the world’s largest producers (over-producers).


There is widespread agreement that the Chinese have been engaged in thefts of intellectual property and have used non-tariff barriers to inhibit imports and subsidize exports. The right forum for this is the WTO with the strong support of US allies. The President has sadly squandered US credibility by imposing tariffs on our allies with no basis, by withdrawing from promising international trade partnerships with our allies, and by a pattern of lying to and bullying domestic and foreign audiences that beg to differ with him on nearly any subject.


Congress needs to assert leadership in trade and tariffs. Even more importantly, the American people will need to strongly reject at the ballot box the neo-isolationist policies of President Trump and his allies.


Prepared by: Lucien Wulsin

Dated: 5/22/19













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