Tariffs are Taxes!

By Tim Grady,
Executive Producer, Manufacturing Talk Radio

The Trump administration has decided to use several tariff acts to impose penalties on international trading partners in the name of national security and the pervasive trade imbalance between the U.S. and other nations.

As is his practice, the President tweeted, “We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S.,” he wrote. “Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!”

Oh – okay – so, if it looks like a duck, walks like a duck, and quacks like a duck – it isn’t a duck?!? As is often the case, politicians presume that We, the People, are idiots. We cannot comprehend their grander plan of grandeur, but we should be willing to take the hit as patriotic Americans regardless of their approach to almost anything.

So far, these are the tariff actions the Administration has taken:

Under Section 201 of the Tariff Act of 1901, the President imposed tariff rate quotas on solar panels and washing machines from all countries. These duties were imposed to offset what was determined to be huge increases in import quantities. The duties are very large, on the order of 20% or 30% depending on the product, and they go up after the minimum quota limit is imported.

Who suffers the pain? U.S. consumers, who pay more for imported washing machines and solar panels. This makes solar panels more expensive and less attractive as an alternative energy solution and inhibits the development and implementation of new solar technology solutions, which also prolongs the use of less desirable fuels like coal and fossil fuels.

Under Section 232 of the Tariff Expansion Act of 1962, as of March 23, 2018, the president imposed a 25% duty on certain steel products and a 10% duty on certain aluminum products. The items tagged are described by specific Harmonized Tariff Schedule of the United States (HTS-US) Code numbers. Products from certain countries have been exempt until April 30, 2018 and they may be exempt in the future – we don’t know yet.

Manufacturers can file a petition to have their product excluded from the list if they can show it is not made in the U.S., or is necessary for the national defense or for some other good reason. There is a process for domestic producers to challenge the request and there is a process for review of each petition – but no review has yet taken place.

Who suffers the pain? U.S. manufacturers, who now pay more for the steel and aluminum they use to make their products, and any purchaser of those parts or products, including other downstream manufacturers, U.S. consumers, as well as local, municipal, town, city, county, and state governments, and the federal government itself.

Under Section 301 of the Tariff Act of 1930, the Administration has posted a list of 1300 articles which could be subject to 25% duty increases on $50 billion of goods from China. People can file petitions to have their articles excluded from the list. There will be a public hearing for comments.

China has developed their own list that will increase duties of U.S. goods imported into China that is estimated at $150 billion. The U.S. has ratcheted up their duty number to match the Chinese $150 billion, and China has responded that they will double their number to $300 billion. Ah, but of course, this is not a trade war.

Who suffers the pain? U.S. farmers, particularly in pork and soy beans where a glut and price collapse could form as early as June, more manufacturers, and even more U.S. consumers, as well as many of the Chinese people. And to the lay person, this simply makes no sense to anyone, but get ready for inflation and quite possibly the tipping point of a great economy suddenly headed South!

Reacting to this nonsense is a new group, The Coalition of American MetaManufacturers and Users, recently formed by the:

• Industrial Fasteners Institute,
• National Tooling & Machining Association,
• North American Association of Food Equipment Manufacturers,
• Precision Machined Parts Association,
• Precision Metalforming Association, and
• American Wire Producer Association

Their spokesperson, Paul Nathanson, recently stated that, “These tariffs will do nothing to uphold their stated purpose of protecting U.S. national security. They will instead hurt U.S. manufacturers in the near term by raising the price of essential inputs they need to make finished products, and do long-term harm to domestic steel producers by eroding their own customer base.”

The Coalition contends that tariffs are taxes which should be imposed by Congress, and in fact, tariffs are taxes – consumption taxes. The “conventional wisdom” is that tariffs protect domestic manufacturers against overseas competitors who can produce and deliver goods at lesser prices, but often are able to because they are subsidized by their own governments. Unfortunately, what conventional wisdom often reveals is incredible folly, so one has to ask, do tariffs work?

A Brief History of U.S. Tariffs

‘Those who do not learn history are doomed to repeat it.’ – George Santayana

Let’s go back to the first president who thought tariffs were a sound practice, which happens to be the first president of the United States, George Washington. One of the first acts of Congress Washington signed was a tariff among whose stated purpose was “the encouragement and protection of manufactures.” In his 1790 State of the Union Address, Washington justified his tariff policy for national security reasons: “A free people ought not only to be armed, but disciplined; to which end a uniform and well- digested plan is requisite; and their safety and interest require that they should promote such manufactories as tend to render them independent of others for essential, particularly military, supplies.” 2

Since then, other presidents have supported and/or tried the same tactic, and history does not seem to indicate very favorable results for the populace although this form of taxation did feed the coffers of the U.S. government out of the pockets of the populace. These presidents include, but are not limited to, Thomas Jefferson, Andrew Jackson, James Monroe, Abraham Lincoln, William McKinley, Theodore Roosevelt, Herbert Hoover, George W. Bush, Barack Obama, and Donald J. Trump.

Smoot-Hawley Tariff Act, formally United States Tariff Act of 1930, also called Hawley- Smoot Tariff Act, signed into law by President Herbert Hoover, had been incorrectly blamed by some for causing The Great Depression. While this has been debunked, there is little doubt that the tariffs prolonged The Great Depression.

More recently, the 8-30% steel tariff imposed by President George W. Bush on March 20, 2002 and reversed December 4, 2003 that is widely considered the cause of the loss of 200,000 jobs in the U.S. and a softening of the U.S. GDP. President Obama tried a 35% tire tariff in 2009 in an effort to boost the domestic tire industry because too many Chinese tires were flooding the U.S. market. While President Obama declared that over a thousand U.S. jobs had been saved, a 2012 Peterson Institute study estimated that the price increase of non-Chinese tire imports was $817 million, and domestic producers’ price increases of $295 million resulted in each of the 1,200 saved jobs costing $900,000 each, with that $1.112 billion total cost being borne by U.S. consumers of vehicle tires, reducing other retail spending which cost that sector 3,700 jobs. The end result was a net loss of 2,500 jobs at a totally unnecessary cost of $1.112 billion, but the U.S. government and other countries selling tires to the U.S., like
Canada, South Korea, Japan, Mexico, and Taiwan, all made out like a bandits.

Now we have tariffs being imposed by President Donald J. Trump as if he has some magic formula that at least 10 other presidents did not have before him. But we have something worse – we have Administration officials and advisors, including Trump’s top economic advisor Larry Kudlow, flatly stating that the tariffs imposed on March 23, 2018, have not yet taken effect when, in fact, U.S. Customs is collecting tariffs from customs brokers who represent their clients importing goods from non-exempt countries, especially China.

According to Bob Silverman, partner with Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, one of the nation’s largest law firms devoted exclusively to international trade and customs matters, when asked directly on Manufacturing Talk Radio if tariffs were being collected by U.S. Customs, replied, “Definitely – if your steel or aluminum product covered by one of these tariff provisions from a country that was not excluded was imported on or after March 23, they are definitely collecting custom duty.”

These tariffs, in conjunction with President Trump’s efforts to renegotiate NAFTA or scrap it, his withdrawal from the Trans-Pacific Partnership (TPP), then comments to reconsider TPP, soon followed by his comments not to reconsider TPP, have heads spinning among our allies and international trading partners around the world. Perhaps this is President Trump’s secret to negotiations, throwing everything into disarray and then sorting through the chaos until an agreement he will approve is formed from the ether.

In the meantime, domestic U.S. steel and aluminum producers are raising their prices rapidly and dramatically as manufacturers using steel and aluminum for production inputs shift their purchasing from overseas suppliers to domestic producers, causing lead times to extend and shortages to occur that will clearly hamper the production of goods in a favorable economy – precisely the same thing that occurred in 2003. There are already reports of manufacturers being unable to source certain steel alloys in the U.S. where they have not been produced in decades. In addition, those tariff costs that cannot be passed on to users or consumers will be offset just as they were in 2002-2003, by reducing overhead through job reductions since wages are the next largest cost on a company’s bottom line.

Sadly, steel producers are firing up old, less efficient steel mills with little indication that they will build new, more efficient mini-mills to protect the steel and aluminum for our national defense, or become able to compete in the future on the world stage when the tariffs falter and most likely will be withdrawn, but perhaps not before the U.S. economy crosses its tipping point and shifts from expansion into contraction.

Unless President Trump pulls off something no other president has done before him, he will get the same results of a cooling economy nowhere close to his campaign rhetoric of 4% GDP, mounting inflation, and increasing Fed interest rates that feed the vicious cycle that further cools the economy and accelerates the contraction. All of this being said, there must have been other ways to deal with China’s theft of U.S. intellectual property and the trade imbalance besides a mechanism that has repeatedly failed in the past and punishes the little guy across America, but it remains to be seen how it all plays out with the Administration’s approach of throwing the baby out with the bath water.

Tim Grady is an author, writer, public speaker, Editor-in-Chief of Metals & Manufacturing Outlook ezine, Executive Producer and co-host of Manufacturing Talk Radio. He can be reached at execprod@mfgtalkradio.com.

1 This Act is also known as the Smoot-Hawley Tariff Act, formally United States Tariff Act of 1930, also called Hawley-Smoot Tariff Act, U.S. legislation (June 17, 1930) that raised import duties to protect American businesses and farmers during the Great Depression.

2 https://en.wikipedia.org/wiki/Tariffs_in_United_States_history#George_Washington