Impact of Tariffs on U.S Trade and Economy

Abstract

This paper analyzes current trade tariffs in the United States and their impact on trade and the overall economy.  It notes that the United States has, over the past three decades, engaged in more open approach to trading with trading agreements like NAFTA.  Although such agreements have had negative effects in jobs losses in certain economic sectors, it has been beneficial in growing trade among the signatories of the agreement.  The paper also notes that the United States has some of the lowest tariffs overall with trade-weighted import tariff at 2% for industrial goods which constitutes 90% of all imports.  The consequences of the liberal trade approach have been the continued increase in American trade deficit that topped $811 billion in 2017.  In spite of the growing trade deficit, the United States has remained has the largest economy and has grown robustly over the decades with the exception of considerable slowdown after the financial crisis. There are ongoing concerns as noted in regard to the trade spat with China that could lead to the imposition of tariffs and counter-tariffs potentially leading to full-scale trade war which would negatively affect the economies of both nations. Existing uncertainty also impacts investment in sectors that are geared towards exports and could lead to lower than projected economic performance.  

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Impact of Import and Export Tariffs on U.S. Trade and Economy

A trade tariff is one form of trade protectionism that is employed by nations creating a barrier to trade.  There are a range of reasons including encouraging local product that prompts governments to impose trade barriers including trade tariffs.  This paper evaluates existing trade tariffs in the United States (U.S.) and their impact on the country’s trade and economy.  It utilizes practical examples of the application of the concept of trade tariffs and economic impact.

Current Trade Tariffs on U. S. Imports and Exports

Trade barriers are imposed for several reasons. Some of the reasons are: protecting local jobs, protecting newer industries, encouraging local production, reducing reliance on foreign suppliers, reducing payment problems, and promoting exporting (Collinson, Narula, & Rugman, 2016).  There are a range of trade barriers including: price-based barriers, quotas, and tariffs. Each of these trade barriers is applied relative to efficacy in meeting intended consequences.  There are other measures such as: international pricing (cartels like OPEC), non-tariff barriers via rules and regulations, foreign investment controls, and exchange controls (Collinson, Narula, & Rugman, 2016, 2012).  A tariff is a tax on goods that are shipped internationally (Collinson, Narula, & Rugman, 2016, 2012, p.177). It is a commonly utilized trade barrier.  It serves the purpose of anti-dumping and protecting specific industries.

Tariffs that can be imposed include: import tariff, export tariff (least used), transit tariff, specific tariff, ad valorem tariff, and compound (combines specific and ad valorem tariffs) tariffs (Collinson, Narula, & Rugman, 2016, 2012).  Ad valorem and specific tariffs are the most commonly used trade tariffs.  The intention is largely to regulate import volumes.  Trade flows are impacted by: inflation, national income, government policies, and exchange rates (Madura, 2011).   According to United States Trade Representative [USTR] (2018), approximately 96% of all imports are industrial goods which are non-agricultural.  The country has a trade-weighted import tariff of 2% on all industrial goods (USTR, 2018).  It mostly employs either specific or ad valorem tariffs; more than 50% of all industrial goods imports enter the country duty free (USTR, 2018).  The United States has largely maintained open markets to international trade.

Ad valorem tariffs are based on the percentage of imported goods value with specific tax based on number of shipped items (Collinson, Narula, & Rugman, 2016, 2012).  Industrial goods imported into the United States include: machinery, chemicals, autos, clothing and textile, leather and footwear, and petroleum among others (USTR, 2018).  A significant proportion of the goods are imported due to trade agreements.  There are multiple bilateral and multilateral agreements.

The country has multiple bilateral trade agreements with countries like Korea, Peru, and Singapore.  It has multilateral trade agreements including Central America/Dominican Republic FTA (CAFTA/DR) and NAFTA.  They are designed to expand opportunities for United States workers/businesses globally and reduce tariff and non-tariff barriers.  The country is able to impose limited specific tariffs with the advantage being greater access to export markets.

  According to World Bank (2018), the value of United States exports was $1.45 trillion and total value of imports was $2.25 billion in 2016.  The country exported 4,563 products to 223 countries and imported 4,558 products from 220 countries (World Bank, 2018).  Consumer goods were the largest imports followed by capital goods, intermediate goods, and raw materials. The bulk of the country’s (96%) were industrial goods (USTR, 2018).  The country’s top five export markets are: Canada, Mexico, China, Japan, and United Kingdom (World Bank, 2018).  The top five import markets are: China, Mexico, Canada, Japan, and Germany (World Bank, 2018).  Canada and Mexico are members of NAFTA along with the United States.  The economic syndicate was established with the intention of reducing trade barriers between the three nations and is currently being reviewed by of the United States.

NAFTA eliminated most non-tariff barriers and gradually reduced import and export tariffs between the three countries (Komar, Uniiat, & Lutsiv, 2016).  By 2008, all trade tariffs existing between the three NAFTA members were eliminated.  In addition, agricultural exports that attracted 12% customs rate became duty free (Komar, Uniiat, & Lutsiv, 2016).  It led to massive increase in trade between the nations and boosted inter-country relationships.  There is obligation on each member to maintain the principles of the agreement with few exceptions that would allow for imposition of tariffs (Komar, Uniiat, & Lutsiv, 2016).  Canada and Mexico have since become among the three largest trading partners for United States.  China is the largest trading partner of the United States (Romei, 2018).  The size of trade relates to the $506 billion in exports to the United States (Ip, 2018).

The bulk of Chinese imports including: cellular/wireless phones, portable computing equipment, and communication products that are imported duty free.  The recent move to impose tariffs on Chinese imports does not affect the top five imports (Romei, 2018).  United States imposed varying tariffs on 1,333 goods from China with China retaliating by imposing 25% specific tariffs on 106 American-made products (Romei, 2018).  In 2017, the value of Chinese exports to United States totaled $506 billion or 4% of GDP while United States exported goods worth $130 billion to China representing 0.7% of GDP (Ip, 2018).  The American tariffs on the 1,333 imports goods was about 25% for total goods valued at $50 billion are pending trade negotiation (Davis, Zumbrun, & Wei, 2018).  They come on top of previous 25% tariffs on Chinese steel imports and 10% tariffs on aluminum (Davis, Zumbrun, & Wei, 2018). United States has signaled the intention to levy further tariffs.  The administration has threatened to impose an additional $60 billion worth of tariffs (Davis, 2018).

In addition, it also intends to tighten restrictions on technology transfers and acquisitions (Davis, 2018).  These measures are geared towards reducing the $375 billion trade deficit by at least $100 billion (Davis, Zumbrun, & Wei, 2018).  The United States has preferential trade arrangements with the European Union with Germany and United Kingdom being its largest trading partners in the economic alliance.  However, the current American administration has also threatened to impose tariffs on a range of European imports (Bershidsky, 2018).  The goods that United States has threatened to impose a 25% import tariff on are: steel, cars, and aluminum (Bershidsky, 2018).  European Union threatening counter-tariffs with ad valorem tariffs at 25% on cosmetics, Harley Davidson motorcycles, bourbon, and jeans (Bershidsky, 2018).  The United States has refrained from imposing import tariffs until recently. The current moves have been politically motivated, presumably to address trade imbalance.

It has an effective trade-weighted import tariff of 20% with 50% of imported goods entering the country duty free (USTR, 2018).  United States has leveraged on bilateral and multilateral trade agreements largely to enable its firms and people access more markets.  The recent administration has upended previous trade policies and in addition to imposing tariffs on selected products from China in particular, and is currently renegotiating NAFTA.  The progress of the renegotiation will be evident in the next few months and potential application of tariffs.

Impact of the Trade Tariffs on U. S. Trade and Economy

Free trade has led to significant trade deficits with most of the largest trading partners. The more noticeable trend is the widening deficit that the United States has experienced in trading with China.  Since 1998 with the exception of 2010, the trade deficit has continued to widen to reach $375 billion in 2017 (Davis, Zumbrun, & Wei, 2018).  The United States only have a trade surplus with Africa and South and Central America with low trading volumes between them (Romei, 2018).  According to Romei (2018), the United States had a trade deficit of $811 billion in 2017 and was up $59 billion year-on-year.  China accounted for $376 billion or 46.4% of the trade deficit (Romei, 2018).  Pierce & Schott (2016) noted that reducing of trade tariffs between United States and China after the latter’s ascension to WTO led to significant reduction in manufacturing employment.   The implication is that China has greater access to the American market.

Industries exposed to changes following the elimination of tariffs shifted towards more Chinese imports with gradual shift towards less labor-intensive production (Pierce & Schott, 2016).  There was accelerated mechanization and automation of production.  A similar pattern was not experienced with policy stability with the European Union.  Thus, proliferation of free trade agreements has had varying effects on depending on particular trading relationships.  Cherkashin et al., (2015) noted that trade preferences including reduction of tariffs offered by one country had positive spillover effects to others in reference to trade between the United States and Bangladesh.  They noted that counterfactual agreements promoted exports of intermediate goods especially when applied at later stages of production.  In the case of trade with Bangladesh, there was the strengthening of production capabilities of the country.  China has had significant advantage in the size and cost of labor impacting manufacturing in the United States.

Trade barriers like tariffs and quotas are additive and increase the median price by up to 14% according to Irarrazabal, Moxnes, & Opromolla (2015).  They noted that “an additive import tariffs reduces welfare and trade by more than an equal-yield multiplicative tariff” (Irarrazabal, Moxnes, & Opromolla, 2015).  Tariff changes impacts how industries operates. American firms took advantage of cheaper production costs in China to increase imports at lower costs.  In China, the reduction in import tariffs following its entry to the WTO changed the structure and organization of ordinary exports and processing trade (Brandt & Morrow, 2017).  It has been a contributing factor in the ballooning trade deficit between United States and China.  Cut in input tariffs increased Chinese content in exports (Brandt & Morrow, 2017).  There was the realization that the country could not only produce intermediate goods but finished goods as well.

Some firms produce intermediate products in certain markets and then re-export them for finishing (Manova & Yu, 2016; Bai, Krishna, & Ma, 2017; Jäkel & Smolka, 2017).  Increasing importance of factors of production influenced international trade.  Factor abundance from free trade policies and factor prices change via policies such as trade tariffs influence trade structure in different countries (Jäkel & Smolka, 2017). Thus, the impact varies from country to country.  Economic policies have significant economic impact, such as fast growth of South Korea through reduction in trade tariffs and bilateral FTA with the United States (Connolly & Yi, 2015).  Trade policy uncertainty impacts investment even in low tariffs trade regimes (Handley, Kyle, & Limão, 2015).  Posturing among countries during negotiation creates such uncertainties. The current trade squabble between the United States and China is one such example.

The posturing between United States and China as well as other trading partners threatens to reduce investment in the economy.   Handley, Kyle, & Limão (2015) noted that the level of export investment during periods of uncertainty was lower. Free trade agreements have had positive impact from an overall perspective in promoting trade (Cooper, 2014).  The influence of having bilateral and multilateral FTAs is that it creates certainty that promotes investment.  In the United States, there has been concern about the impact of FTAs on employment. According to Coşar, Guner & Tybout (2016)  the trade-off in regard to open economies is higher national income and higher unemployment.  Higher unemployment is countered by labor market reforms reducing aggregate job turnover (Guner & Tybout, 2016).  Despite losing jobs in certain industries, the United States has gained in overall employment boost.

In analyzing the Brazilian economy, Dix-Carneiro & Kovak (2017) noted that regions that had significant cuts in trade tariffs experienced declines in formal employment and lower earnings.  Liberalization is generally positive from a national perspective but adversely affects certain areas relying specific commodities.  It informs the need for countries to have the ability to impose specific tariffs.  The United States has applied such tariffs to protect the steel industry.  Therefore, there are counter-effects that are specific to different regions depending on the structure of trade relationship.  Trade liberalization has also been positive for enhancing corporate social responsibility (Flammer, 2014).  

The United States having liberalized its economy with few import tariffs has experienced significant increase in trading deficits with major trading partners. Even with the ballooning trade deficit with China, it has greater leverage (Ip, 2018).  The driving factor with the increased trade deficit that United States has experienced with China is driven by American consumers.  However, the comparative size of the imports relative to each country’s GDP favors United States at 0.7% compared to China’s 4% (Ip, 2018).  In the event of imposition of widespread trade tariffs, China is likely to be impacted more.  The current situation creates uncertainty for both countries in the industries that have been targeted. There are worries notably in the automotive industry about NAFTA renegotiation and trade issues with China.

The negative impact of trade tariffs is that they increase the cost of goods which directly impacts the consumers.  The level of trade imbalance that has been created by liberalization of trade has been significant in the context of the trade between United States and China.  The country has trade deficits with close trading partners in NAFTA due to factors of production.  It has created political concerns about trade fairness and potential negative economic impact.  Mexico is a cheaper production alternative to American automakers which has been the bone of contention in the renegotiation of NAFTA.  The current standoff between United States and China is likely to persist.  China has indicated that it will only make the tariffs effective in circumstances where the United States does the same (Romei, 2018).  Therefore, the measured approach to the trade now could simmer for some time prior to any settlement negotiations.  China is waiting for the signal from United States prior to actualizing the tariffs creating uncertainty.  There are existing discrepancies in the trade deficit with the European Union due to skewed bilateral agreements (Bershidsky, 2018).  The reality is that the trade deficit could slow down due to imposition of tariffs. There could beneficial negotiations that eliminate the tariffs.     

Conclusion

The United States has accumulated significant trade deficits with its largest trading partners.  The deficit has been increasing but has not negatively impacted economic growth.  The threat of trade tariffs could upend relationships, creating uncertainty and impacting global value chains.  In the end, the United States remains as the most important consumer markets.  The purposed tariffs by the U.S. and from the U.S will have a huge effect on the economy of the United States and China but also the rest of the globe.

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