Taxes

Trump’s Previous Tariffs Foreshadow the Economic Harm of Latest 10% Tariff Proposal

Products You May Like

What can Former President Trump’s previous tariff efforts—specifically the safeguards he authorized on imported washing machines in 2018—tell us about his most recent proposal for a 10 percent tariff on all imports? That each job saved would come at a severe cost to consumers and taxpayers.

The U.S. International Trade Commission (ITC) recently released an assessment of the effectiveness of the special washing machine tariffs that were imposed from February 2018 through February 2023. If protecting incumbent domestic manufacturers was the goal, it would appear the safeguards were a failure.

The International Trade Commission report focuses on how the tariffs impacted producers, shedding little light on how they impacted consumers and taxpayers. However, an insightful study by independent academics found the tariffs on washing machines raised the price of both washers and dryers while costing consumers and taxpayers more than $800,000 per job saved.

Efforts to Protect Domestic Washing Machine Manufacturers Span Three Administrations

Protectionist measures for domestic washing machine manufacturers began in 2011 during the Obama administration after Whirlpool Corporation filed a petition to the International Trade Commission stating that large residential washers from South Korea and Mexico were being sold in the U.S. at “less-than-fair-value” and subsidized by the South Korean government.

The International Trade Commission responded to the complaint in 2013 by issuing antidumping duties (a form of tariff) on washers from Mexico and South Korea. Korean manufacturers Samsung and LG responded by moving their production to China, which was not subject to the antidumping duties. Trade experts call this reaction “country hopping.”

In 2015, Whirlpool filed another complaint about a flood of Chinese imports, and the International Trade Commission responded with an antidumping duty on Chinese-made washers in 2017. Samsung and LG moved their production to Vietnam and Thailand in response.

A Whirlpool complaint in 2017 prompted another International Trade Commission investigation which found that the increase in imports led to lower prices and declining financial performance for the domestic industry. This report provided the justification for then-President Trump to authorize a global safeguard measure in January 2018. Samsung and LG promised to build factories in the U.S.

The safeguard was a three-year tariff rate quota (TRQ) on imports of large residential washers no matter the source country (Canada was excluded). The measure set two tariff levels. On washers below the first 1.2 million units imported, the tariff rates were 20 percent in the first year, 18 percent in the second year, and 16 percent in the third year. On washers above the 1.2 million unit threshold, the tariff rates were 50 percent in the first year, 45 percent in the second year, and 40 percent in the final year.

Whirlpool filed for an extension of the policy in 2020, which Trump approved in January 2021. The extension was terminated in February of this year.

The Lesson of Tariffs: Be Careful What You Wish For

Through one lens, the tariff policy was a success. Imports of washers declined steadily between 2017 and 2022. The ITC reports that imports were 90 percent lower in 2022 than they were in 2017. As a consequence, the “domestic industry gained market share and improved its financial performance during the 2018-22 period,” the ITC determined.

The irony, however, is that the entire increase in domestic market share was driven by washers made by Samsung and LG in their new U.S. factories. The fortunes of the incumbent domestic manufacturers not only failed to improve—they continued to decline.

The ITC study concluded that since the safeguard measure was put in place in 2018, the domestic industry as a whole increased capacity, production, U.S. shipments, market share, and employment. However, those results were not shared equally between incumbent producers and new entrants. For example:

  • The total sales of incumbent manufacturers fluctuated between 2018 and 2021 but decreased in 2022 to their lowest level of the relief period. New entrant sales increased throughout the period.
  • The capacity utilization of U.S. manufacturers declined during the period while the capacity utilization of the new entrants increased.
  • The number of production-related workers and total wages paid by incumbents declined during the period but increased for new entrants.
  • Total hours worked decreased for incumbents but increased for new entrants.
  • Incumbent producers’ shipments and share of U.S. consumption decreased by quantity and value but grew for new entrants.
  • Prices for all domestically produced washers increased after the safeguard measures were enacted. Prices were higher in 2022 than in 2017, before the imposition of the protections.

The results suggest that cheap imports were not the problem for incumbent domestic producers who sought protections, nor were the protectionist tariffs the solution. Incumbent producers proved unable to compete before and after the protections.

Tariffs’ High Cost to Consumers, Taxpayers, and Complementary Products

Whatever benefits accrued to domestic producers were far outstripped by broader economic costs to consumers, taxpayers, and complementary products such as dryers. A fascinating case study by economists Aaron Flaaen, Ali Hortaçsu, and Felix Tintelnot (hereafter Flaaen et al.) illustrates the unintended consequences of protectionist policies.

What protectionists often fail to realize is that many products are complementary to other products and are frequently sold together, such as washers and dryers, mattresses and box springs, and tables and chairs. And producers have become quite adept at bundling products. So the tariff’s effect on raising the price of one product can effectively raise the price of the complementary good not subject to the tariff.

Flaaen et al. found that the price of dryers rose in lock step with the price increases in washers. While the average price of washers rose by $86 per unit, the average price of dryers rose by $92. Moreover, the study found that domestic producers raised their prices at the same rates as importers. Together, the price increases cost consumers more than $1.5 billion in the first year of the tariff’s implementation alone.

Meanwhile, Flaaen et al. estimate that the cost to consumers for every job created or protected was quite high. Incumbent producers reportedly added 200 jobs while the new entrants added 1,600 jobs. After subtracting the roughly $82 million in tariff revenues from the $1.5 billion cost to consumers, Flaaen et al. estimate that the consumer cost per job for the safeguard tariffs amounted to roughly $815,000. According to ITC data, this is equal to about 17 times the $47,000 average pay per production worker in the industry in 2020.  

Taken together, the two studies suggest that imposing a 10 percent across-the-board tariff on imported goods would not improve the competitiveness of domestic producers but would raise prices on consumers and complementary goods and be costly for every job saved or created.

Stay informed on the tax policies impacting you.

Subscribe to get insights from our trusted experts delivered straight to your inbox.

Subscribe

Share




Products You May Like

Articles You May Like

Millionaires are abandoning the UK in their droves, new research shows
80% of Americans say grocery costs have notably increased since the pandemic started, survey finds
Student loan forgiveness deadline is June 30. Here’s what borrowers need to know
Gen Z is harnessing ‘one of the magical qualities of investing,’ advisor says — how it helps them build wealth
American households have seen their purchasing power increase

Leave a Reply

Your email address will not be published. Required fields are marked *