Taxes

Biden’s Trade Agenda Should End the Trade War and Promote Free Trade

After the failed approach of the Trump administration’s tariffs and trade war along with the current need to reduce inflation and increase productive capacity, we hoped the administration would reevaluate the tariffs. But under the Biden administration’s new trade policy agenda, most U.S. businesses will continue facing tariffs on billions of dollars’ worth of imported goods. Instead, the tariffs should be rescinded, and the administration should pursue free trade agreements to boost U.S. economic potential.

The tariffs have damaged domestic manufacturing, increased prices for U.S. consumers, and failed to produce better trade with China. Tax Foundation estimates leaving the tariffs in place will reduce long-run GDP by 0.23 percent and eliminate 177,000 full-time equivalent jobs—negative effects which could be avoided, or at least reduced, by reversing the tariffs.

The new trade policy agenda outlines many new policy ideas as it admits the tariffs it largely intends to maintain are harmful to U.S. businesses and workers: 

…As we take these steps, we are mindful of the effects that trade actions can have on American businesses and workers. USTR has restarted a targeted tariff exclusions process to ensure that our economic interests are being served, and we will keep open the option of further tariff exclusions processes as warranted.

Thousands of companies requested exclusions from the tariffs under the Trump administration, but only a limited share received them. Now, the Biden administration intends to extend a portion of the previously granted but expired exclusions through the end of the year. Allowing some companies to escape the harm of tariffs but denying relief to others lacks transparency and is its own form of industrial policy. 

The Biden administration has also reached deals to replace some tariffs on steel and aluminum with tariff-rate quotas (TRQs) in a move toward a managed-trade system as opposed to allowing consumers to freely trade. Under the TRQs, certain levels of imports will no longer be subject to the 25 percent steel and 10 percent aluminum tariffs, but imports over the allowed threshold will continue facing tariffs—in other words, at the margin, the tariffs still apply. The TQR system will apply to imports of steel and aluminum from the European Union and United Kingdom and imports of steel from Japan. The agreements included an end to the tariffs on derivative steel and aluminum imports from the EU and UK and on derivative aluminum imports from Japan.

Rather than opaquely continue a broken exclusion process or move toward managed trade where tariffs still apply at the margin, the Biden administration would be better off lifting tariffs and pursuing other strategies to improve U.S. trade relations.

As the following table illustrates, the Trump-Biden tariffs had a negative effect on trade. Since the tariffs were imposed, imports of affected goods have fallen. For example, after steel tariffs were imposed in 2018, imports fell from their 2017 level of $10.1 billion to $6.6 billion in 2019. Some of the biggest drops are the result of decreased trade with China, as affected imports decreased significantly after the tariffs. Reduced trade means fewer options for U.S. consumers and higher prices.

The Tariffs Reduced Trade and Raised Tax Burdens on U.S. Businesses and Consumers
Tariff and Effective Date 2017 imports, billions   2018 imports, billions   2019 imports, billions   2020 imports, billions   2021 imports, billions   Tariff Rate
Section 232 Steel (March 2018) $10.1 $9.3 $6.6 $3.9 $7.2 25%
Section 232 Aluminum (March 2018) $8.0 $8.1 $6.7 $4.1 $6.1 10%
Section 232 Derivative Steel Article (February 2020; EU, UK, and Japan end in 2022) $0.4 $0.5 $0.5 $0.4 $0.4 25%
Section 232 Derivative Aluminum Articles (February 2020; EU and UK end in 2022) $0.2 $0.3 $0.2 $0.2 $0.3 10%
Section 301, List 1 (July 2018) $31.9 $30.3 $22.7 $20.9 $24.7 25%
Section 301, List 2 (August 2018) $13.8 $14.8 $8.6 $9.8 $10.4 25%
Section 301, List 3 (September 2018; increased May 2019) $187.6 $206.1 $126.9 $112.8 $126.4 25%
Section 301, List 4A (September 2019; lowered January 2020) $101.9 $112.2 $114.7 $103.2 $105.1 15% in 2019; then 7.5%
Section 301, List 4B (Never went into effect) $151.2 $160.0 $159.6 $164.4 $206.3 Suspended
Total imports facing tariffs in given year    $268.7 $286.3 $255.2 $280.7  
Tax in given year   $65.9 $59.1 $45.0 $50.8  

Note: Figures in italics indicates tariffs were not effective in given year.

Source: Federal Register notices; Tom Lee and Jacqueline Varas, “The Total Cost of U.S. Tariffs,” American Action Forum, Mar. 24, 2022, https://www.americanactionforum.org/research/the-total-cost-of-tariffs/; data retrieved from USITC DataWeb; author calculations. 

Retaining the tariffs given all the evidence their costs far outweigh their benefits is throwing good money after bad. Instead of current tariff policy, Biden should pursue free trade agreements with other countries to support U.S. industries and encourage China to reform its trade practices. 

Specifically, President Biden should consider having the U.S. rejoin the Transpacific Pacific Partnership (TPP), which would have included 12 countries in the Pacific region representing 40 percent of the global economy. Negotiated under the Obama administration, the TPP would have reduced tariffs on U.S. exports, liberalized services trade, strengthened arbitration rules to protect U.S. investors in foreign countries, and enhanced intellectual property protection for U.S. multinationals. One 2016 analysis found that the TPP would have increased U.S. GDP and raised wages by 0.5 percent by 2030.

President Trump, however, withdrew from the agreement due to concerns about how the deal would impact U.S. manufacturing employment, and President Biden has expressed little interest in rejoining for similar reasons. Such concerns are misplaced. First, several countries that were signatories to the pact were high-income countries, notably Japan, Australia, New Zealand, and Singapore—unlikely to displace American labor. Second, even the low-wage countries in the pact, in particular Vietnam, would have been more likely to draw manufacturing workers from China rather than the United States, given labor costs are rapidly rising in China. Altogether, TPP would have induced shifts in employment, known as “job churn,” by less than 0.1 percent of the amount experienced in the U.S. in a typical year. 

Meanwhile, the 11 original signatories to the TPP have forged ahead with their own successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which Taiwan and South Korea have also expressed interest in joining, and China has also negotiated its Regional Comprehensive Economic Partnership (RCEP) with other Asia-Pacific countries. While proponents of tariffs and other forms of industrial policy are concerned about the national security risks of having supply chains reliant on China, the U.S. risks increasing China’s sphere of influence by not participating in such agreements. 

The Biden administration should lift the tariffs, as they have failed in their objective to bring better trading practices and instead brought about significant damage to U.S. businesses and workers. Further, the administration should join the CPTPP or sign bilateral trade countries with other Asian-Pacific countries to continue to diversify U.S. supply chains, expand access to foreign markets, and promote U.S. economic growth. 

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