Saturday, September 10, 2011

A Tariff-Reduction Plan for American Jobs

Cato's Dan Ikenson argues in today's WSJ that we should eliminate the import tariffs taxes that we impose on American companies who purchase imported raw materials, industrial supplies and materials, and industrial equipment and machinery as inputs for production that takes place in the U.S. (see chart above showing that industrial supplies and equipment represent more than 57% of U.S. imports so far this year through July):

"As important as access to foreign markets is, however, some of the most significant obstacles to U.S. export success aren't foreign-made but homegrown. If the president is genuinely committed to spurring economic growth and job creation, he will take the lead on reducing or eliminating duties that U.S. producers pay on imported raw materials and components they need for manufacturing. This would instantly boost the competitiveness of U.S. products at home and abroad. 

The same demographics that have created growing foreign markets also mean there are more foreign suppliers of raw materials, industrial inputs, and other intermediate goods used by U.S. producers in their own production processes. Last year, U.S. Customs and Border Patrol collected $30 billion in duties on $2 trillion of imports, 55% of which were ingredients for U.S. production—such as chemicals, minerals and machine parts. Purchases of imported inputs accounted for more than $1 trillion of U.S. production costs, a price tag that was roughly $15 billion higher than it might have been without U.S. import duties.

Now the president should push Congress to reduce or eliminate, on a permanent basis, all tariffs on industrial inputs so that U.S. producers are more competitive in the global economy and so that America is a more appealing destination for foreign direct investment. That approach has produced good results in Canada, where the government has been reducing tariffs on manufacturing inputs for the past few years.

Improving access to foreign markets, through trade agreements and other measures, will be essential to continued U.S. economic growth. But for maximum effect, the president should strongly advocate the elimination of duties on imported manufacturing inputs and other domestic impediments to U.S. competitiveness abroad and at home."

21 Comments:

At 9/10/2011 10:52 AM, Blogger Buddy R Pacifico said...

The tariffs charged amount to one and one/half percent (1.5%). I would guess the vast majority of people might have guessed much higher tariffs. Substantially lowering or eliminating corporate income taxes is a much more effective fight for American jobs.

 
At 9/10/2011 6:59 PM, Blogger Rufus II said...

Buddy's right. It's the Corporate Income Tax; it's insane.

We ought to just call it a "35% Tax on Investments in America."

It's Nuts. And, it's killing us.

 
At 9/11/2011 2:44 AM, Blogger Ron H. said...

"Buddy's right. It's the Corporate Income Tax; it's insane.

We ought to just call it a "35% Tax on Investments in America."

It's Nuts. And, it's killing us.
"

Are you now in favor of eliminating corp income taxes?

 
At 9/11/2011 3:20 PM, Blogger Wayne Adams said...

Yes, eliminate the corporate income tax.

 
At 9/11/2011 7:09 PM, Blogger Jet Beagle said...

Buddy: "The tariffs charged amount to one and one/half percent (1.5%)."

You apparently derived this percentage by dividing total imports of goods into the total tariffs collected on imported goods. What does that tell you about the burden faced by any single industrial producer? The great majority of goods imported face no tariff burden whatsoever. But some goods face ridiculously high tariffs.

The federal government just last year imposed a 60% duty on copper pipes and tubing imported from China and a 31% duty on such copper pipe imported from Mexico. For those industrial producers who use copper pipe and tubing, the costs of their goods just increased significantly relative to the costs faced by foreign producers.

What's even more important to recognize is that the amount of tariffs collected tells you absolutely nothing about the impact of those tariffs. What's not seen - the industries which stop importing foreign industrial goods - is what is most important. When the federal government raises the cost of doing business above the level of global competitiveness, those industries are simply offshored. So neither are tariffs collected in the U.S. nor are jobs created.

Tariff rates imposed on imported goods are much higher than 1.5%. Your calculation is simply misleading.

 
At 9/11/2011 8:36 PM, Blogger Buddy R Pacifico said...

Jet, it is interesting that you use copper pipe as an example. When I hire a plumbing contractor I insist on U.S. made copper pipe because it is much better quality.

You are probably right that the little bit of tariffs the U.S. has are skewed towards a few narrow industries and products.

Overall the average of 4% duties on 4% of goods imported is slight. Compare this with many countries added an EAD (Extra Added Duty) of at least 4% on top their tariff structure on most goods.

The little bit of U.S. tariffs is non-consequential compared to fighting for multi-lateral Free Trade agreements and eliminating or substantially reducing corporate income taxes -- within the context of American job creation.

 
At 9/11/2011 9:04 PM, Blogger Jet Beagle said...

Buddy Pacifico,

You seem to be missing both my points.

First, the amount of tariffs collected says absolutely nothing about the impact of tariffs. The purpose of tariffs today is not to collect revenue but to discourage or even prevent imports. We cannot say how much more industrial goods would have been imported - and how many more jobs would have been created - if no tariffs existed whatsoever.

Second, the "non-consequential" argument makes no difference to the particular company which sees it's costs raised to much higher levels.

One more point, if imported copper were deemed inferior by U.S. producers, there would be no need to impose any tariff whatsoever. It is obvious that other producers do not share your opinion, or else the federtal government would have had no reason to impose these tariffs.

 
At 9/11/2011 9:10 PM, Blogger Jet Beagle said...

Buddy: "Compare this with many countries added an EAD (Extra Added Duty) of at least 4% on top their tariff structure on most goods."

This is not an economic argument at all. Perhaps a misguided appeal to "patriotism".

As famous economist Joan Robinson wisely remarked:

"If others throw rocks into their harbour, that is no reason to throw rocks into your own."

 
At 9/11/2011 10:14 PM, Blogger Buddy R Pacifico said...

Jet John, the amount of U.S. tariffs is so small that maybe no net job gain would be achieved by their elimination. You effectively live in a uniliateral free trade country.

I probably do have a patriotic slant but I am also a multi-lateral free trader. The benefits of multi-lateral Free Trade are mcuh greater than unilateral Free Trade for U.S. consumers and the world.

 
At 9/12/2011 1:53 AM, Blogger Ron H. said...

"Jet John, the amount of U.S. tariffs is so small that maybe no net job gain would be achieved by their elimination. You effectively live in a uniliateral free trade country."

Buddy, if US tariffs are so small as to be inconsequential, and don't protect US businesses or jobs, and aren't used for revenue, you haven't left any reason to keep them in place.

 
At 9/12/2011 9:04 AM, Blogger Jim said...

One more point, if imported copper were deemed inferior by U.S. producers, there would be no need to impose any tariff whatsoever.

Let me reword this statement and see if you agree with it. "If imported Toyota Corollas were deemed inferior to Cadillacs by US consumers, there would be no need to impose any tariff whatsoever."

Chinese tubing is well known for its variability and increased failure rates. Imported copper tubing, (more often a finished product than a manufacturing input) varies greatly in quality, even from within any one country (e.g., China).

Some producers purchase inferior valves and tubing precisely because it is inferior; it has a lower price.

Personally, I would not accept Chinese tubing because I have seen too many buildings flooded by their failure. But this problem has little to do with blanket applied tariffs which penalize all foreign producers.

All of which illustrates the practical challenge of federally induced regulations:
1. The broad brush tends to smear the good with the bad.
2. Regulation increases bureaucracy and complexity without solving much of anything.
3. American copper tubing is the highest quality tubing in the world, due to both regulations and the quality of the manufacturing process. Americans could produce 'cheaper' copper tubing, but it would require DOWNGRADING their automated manufacturing systems. If you are building a house, the question is not whether you insist on American made (I submit a long term investment warrants quality) but why you would use copper tubing at all, given superior alternatives (many of which are only available to reputable builders). IOW, if you wish to shop in a slum for your house, tariffs will not stop you.
4. Like cigarette taxes, import tariffs are first and foremost a culturally acceptable revenue generation device which serves no consumer purpose. This is the point of the original article, for import tariffs tend to reduce American jobs, not 'save' them.
5. Tariffs reduce consumer choice, almost always reflected in reduced price spectrums. IOW, all taxes are ultimately regressive. Import tariffs tend to be even more so.
6. Import tariffs from lobbying efforts do not usually protect an industry, but one or two firms within it. For example, a number of domestic steel manufacturers were doing fine when Bush imposed steep tariffs on steel pipes. Bethlehem was not, but they went bankrupt anyway.

 
At 9/12/2011 9:57 AM, Blogger Buddy R Pacifico said...

Jim, my point is that U.S. jobs are exponetially adversely affected by U.S. tax policy than latent tariffs.

Futher, multi-lateral Free Trade Agreements eliminate all tariffs with the signatories.

So, let's knock down corporate income tax and extablish trade based on multi-lateral Free Trade.

Your remarks on copper tubing are spot except that you submit that copper has alternatives. I will not use anything but copper for fresh water lines. Also, copper has almost zero expansion and contraction and the joints are less susceptible to failure.

I think you, Ron H and Jet Beagle are fighting the last war with regard to tariffs. I agree that tariffs as high as 60% on Chinese tubing is rediculous, but in the large scheme this is a narrow market and an isolated case.

 
At 9/12/2011 10:39 AM, Blogger Jet Beagle said...

Buddy Pacifico: "but in the large scheme this is a narrow market and an isolated case."

Which makes no difference to the argument that copper tubing tariffs reduce American jobs. That other government policies reduce American jobs even more is not the least bit relevant.

This is not an either-or choice. We should eliminate both tariffs on imported goods and corporate income taxes. And we should do so regardless of what governments in other nations do.

 
At 9/12/2011 10:43 AM, Blogger Jet Beagle said...

Jim,

As I understand it, the U.S. government did not impose restrictions on the use of Chinese copper tubing due to perceived quality variances. Rather, they imposed tariffs designed to increase the cost of its use.

I still say that if the quality of Chinese copper tubing was so poor that U.S. companies did not wish to use it, tariffs would not be unnecessary - regardless of what anyone believes to be the purpose of such tariffs.

 
At 9/12/2011 2:09 PM, Blogger Jim said...

@Buddy R Pacifico
I agree with you. And yes, purists insist on copper for drinking lines despite PEX advantages in other areas. And purists like me insist on cast iron over plastic:). Newer is not ALWAYS better.

@jet beagle
That was partly my point; tariffs create government revenue. They do not generally do what people think they do, which is protect American jobs or prevent bad quality. Markets, innovation and pricing do those things. Further, I have never met a customer buying cheap import tubing who, when presented with the facts, did not buy American tubing.

 
At 9/12/2011 4:30 PM, Blogger Jet Beagle said...

Jim: "That was partly my point; tariffs create government revenue."

If you are arguing that the intent of tariff legislation is to increase revenue, then I disagree. I believe that elected officials enact tariffs to reduce imports. Making imports more expensive will reduce them.

 
At 9/12/2011 4:33 PM, Blogger Jet Beagle said...

"I have never met a customer buying cheap import tubing who, when presented with the facts, did not buy American tubing."

If that were true, then all American tubing producers would have to do is present the facts to American purchasers. Presenting such facts would be far cheaper than bribing Congressmen through lobbyists.

That tariffs on copper tubing were enacted is evidence to me that American copper tubing producers do not share your opinion about the persuasiveness of facts.

 
At 9/13/2011 11:53 AM, Blogger Ron H. said...

"If that were true, then all American tubing producers would have to do is present the facts to American purchasers. Presenting such facts would be far cheaper than bribing Congressmen through lobbyists."

That may be what they are already doing through current buyers. I suppose an advertising campaign would attract the ever circling shar...lawyers.

"That tariffs on copper tubing were enacted is evidence to me that American copper tubing producers do not share your opinion about the persuasiveness of facts."

I'm only guessing, but I suspect that in this case, bribing Congressmen through lobbyists produces a higher guaranteed price than the mere facts would.

 
At 9/14/2011 1:34 PM, Blogger Jet Beagle said...

Ron H: "but I suspect that in this case, bribing Congressmen through lobbyists produces a higher guaranteed price than the mere facts would."

I'm not so sure. Consider what happens to the supply of copper tubing in both cases.

Suppose American copper producers could persuade every copper tube purchaser that they should buy American tubing for safety/quality reasons - as Jim asserts has been the case when the facts were presented. Then the effective supply of copper tubing is limited to that produced by American suppliers.

On the other hand, a tariff does not eliminate Chinese tubing from the supply - it merely makes it more expensive. If Chinese manufacturers can still sell copper tubing at the price of American tubing, the supply is now American tubing plus Chinese tubing. With greater supply for the same demand, the price should go down.

That's why I reject Jim's argument. If facts could be used to cause the total rejection of Chinese tubing, American producers should receive higher prices. Instead, those producers sought and obtained tariffs.

 
At 9/16/2011 1:58 PM, Blogger Ron H. said...

Jet: "On the other hand, a tariff does not eliminate Chinese tubing from the supply - it merely makes it more expensive. If Chinese manufacturers can still sell copper tubing at the price of American tubing, the supply is now American tubing plus Chinese tubing. With greater supply for the same demand, the price should go down."

Which at some point, eliminates the Chinese suppliers, which causes prices to rise, which allows Chinese suppliers to renter the market, which causes prices to go down...

I suspect that both the tariff and "the facts" are working to benefit American producers.

 
At 9/16/2011 9:10 PM, Blogger Ron H. said...

That's re-enter, not renter.

 

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