Tariff Relief: A Potential Tonic for the U.S. Economy

The strains on the American economy are mounting. They include soaring inflation, a severe workforce shortage, and stubborn supply chain challenges—complicated by Russia’s war on Ukraine and COVID-19 lockdowns in China. There is no panacea for these woes, but tariff relief could help in important ways.

Cutting tariffs would counter the punishing increase of the cost of living that American families are experiencing. It would also enhance the competitiveness of U.S. manufacturers, and address the unfairness of the tariff code, which hits the poor hardest.

The U.S. placed tariffs on nearly $400 billion of imported goods in 2018-2019, and nearly all of them are still intact. The average applied U.S. tariff rose from under 3% to nearly 14% in that period, according to The Economist.

Tariffs are taxes. The Tax Foundation has described the latest wave of tariffs as “equivalent to one of the largest tax increases in decades.” The Congressional Budget Office estimated that they cost the average American household more than $1,200 in 2020 alone.

Contrary to popular misconception, these recent tariffs “continue to be almost entirely borne by U.S. firms and consumers,” according to a study by the Federal Reserve Bank of New York.

The tariffs are especially damaging to the U.S. manufacturing sector, which sources more than one-fifth of intermediate inputs from abroad, according to researchers with the St. Louis Federal Reserve. They found that tariffs “force U.S. manufacturers to raise prices, thus hurting consumers and leading to cuts in production.”

Indeed, the immediate effect of the 2018-2019 tariffs was to push the U.S. manufacturing sector into recession (it contracted by 1.3% in 2019) despite high consumer spending and an otherwise booming domestic economy. States such as Michigan, Wisconsin, and Pennsylvania saw net manufacturing job losses, and blue collar wages fell nationally in 2019.

Tariffs on these imports hurt U.S. manufacturers’ exports too. Another study found that “84% of total U.S. exports were by firms facing at least one import tariff increase,” which added $900 in additional costs per worker and undermined these companies’ export competitiveness.

And that’s before foreign retaliatory tariffs hit U.S. exports. China, for instance, remains the fastest growing large market for U.S. exports but its tariffs on U.S. goods were raised from 8% in early 2018 to 21% today, according to research by the Peterson Institute for International Economics.

As a result, U.S. exporters are forced to pay far higher duties on their exports to China today than their competitors based elsewhere. This is a huge brake on U.S. sales, with obvious implications for American workers and wages.

U.S. farmers and ranchers are hit hard by foreign retaliation as well. According to analysis by the American Farm Bureau Federation, about 25% of U.S. farm products by value are exported each year, but foreign tariffs—including retaliatory duties—on agricultural products tend to be the highest of any major category.

Tariff relief would be especially good for the poor. “Tariffs are easily the most regressive of all U.S. taxes, forcing the poor to pay more than anyone else,” writes Ed Gresser of the Progressive Policy Institute. Tariff rates on expensive goods tend to be low; they are far higher on cheaper goods (e.g., 8.5% on expensive leather footwear but 48% on cheap sneakers).

Poorer households also tend to spend a larger share of their income on household goods and other necessities, while the well-off spend more on services. For this reason, the big hike in tariffs in 2018-2019 hit the poor much harder.

The case for tariff relief is strong. It can help counter soaring inflation, shore up the competitiveness of U.S. manufacturers, and remedy the unfairness of a tariff system that hits the poor hardest. What are we waiting for?

Story by John G. Murphy, U.S. Chamber of Commerce

John Murphy, Senior Vice President for International Policy, directs the U.S. Chamber’s advocacy relating to international trade and investment policy.