The quickest way to boost the economy isn’t even being considered. Why?
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At a time when Congress is hotly debating a bailout package that could cost taxpayers several trillion with a tall “T,” it’s remarkable that policymakers are ignoring a powerful stimulus that can be deployed cost-free to blunt the coronavirus crisis: eliminating all tariffs on foreign imports and persuading our global trading partners to drop their duties on U.S. goods. Tariffs are taxes, and lifting them, even temporarily, would substantially lower prices to consumers on everything from washing machines to sneakers, boost the efficiency of U.S. manufacturers, and swell our exports—think of recharging our soybeans sales to China, swelling farmers’ incomes without adding a nickel to the mountainous federal debt.
Though the zero-tariff option is getting no traction in Washington, the idea wins a ringing endorsement from the economists I’ve spoken to in assessing the looming damage from the pandemic. Two of them began advocating the policy weeks ago. “It can be done instantaneously without congressional support,” says Jared Franz, an economist at asset management colossus Capital Group. “These desperate times call for cutting global tariffs to zero, with the U.S. leading the way.”
Weijian Shan, a Ph.D. economist who heads PAG, the largest private equity firm in Asia, lauds the idea as an essential counterweight to coming contraction. “Tariffs take a chunk out of the economy, which is less felt in a booming economy but which will further dampen demand and cost customers at a time when they are stretched,” he says. Shan recommends that the U.S. eliminate all duties and request reciprocal treatment from our trading partners, in a reversal of the tit-for-tat tariff hikes that have so damaged our economy over the past two years.
A wide swath of American business is calling for action. While industries such as steel and aluminum prize high tariffs because they curb competition from low-cost imports, most sectors benefit from free trade, and say so. As the steepest economic slide in decades quickens, they’re requesting trade relief from Washington. In early March, more than 100 business groups representing industries as varied as lighting, juices, and recreational vehicles wrote to President Trump and other officials requesting the elimination of the duties that the administration imposed on imports of Chinese goods, as well as steel imported from around the world. Trump trade adviser Peter Navarro waved off their plea, telling the Wall Street Journal, “To eliminate or lower the China tariffs would amount to a bailout for the China economy at the expense of even more American jobs and growth.”
How much of a boost would scotching tariffs provide? Currently, $360 billion in Chinese imports are covered by Trump-imposed duties that average 19.3%. In addition, he’s hit over $30 billion in global steel and aluminum imports with heavy tariffs. The price these taxes exact consists mainly of what economists call “deadweight costs.” When U.S. companies keep buying machine tools or textiles from China in spite of the higher duties, the U.S. collects tax revenue that offsets the higher prices to manufacturers and consumers. For example, the U.S. is channeling that revenue to furnish several billion dollars a year in subsidies to farmers whose revenues got hit by the barriers China raised in retaliation. Hence, the tariff revenue compensates for higher prices, so for the most part, the exchange is a wash to our economy.
But the higher tariffs rise, the more U.S. producers stop buying from China and source from suppliers in other countries that charge more than the Chinese used to. Say an automaker was buying a part from China that cost $100 last year. Tacking on the new tariffs is forcing the Chinese producer to raise its price to $120. So the U.S. manufacturer shifts orders to a Malaysian supplier that charges $110. The U.S. gets no tariff revenue from that sale. But the carmaker is paying $10 or 10% more, strictly because the duties prevent it from sourcing from the world’s most efficient producers in China. When those differences are multiplied by hundreds of thousands of products, U.S. consumers end up paying a lot more for much of what they buy than they did in the pre-Trump-tariff era.
That extra cost—the $10 in our example—is the deadweight burden. Every dollar in deadweight cost reduces national income by the same amount and is a direct hit to our economy.
In a paper published last May for a New York Federal Reserve website, economists from Columbia, Princeton, and the N.Y. Fed calculated the deadweight costs of Trump tariffs then covering around $350 billion in Chinese products. They put the annual burden at $620 per U.S. household, or a total of $80 billion. Keep in mind that Trump also hit over $30 billion in steel and aluminum imports with heavy duties. All told, a reasonable estimate of the deadweight costs on almost $400 billion in exports is around $90 billion. The trade war’s toll doesn’t stop there. Trump’s offensive prompted China to fire back with high tariffs on $110 billion in U.S. exports, chiefly agricultural commodities and steel. Those big taxes have hammered our sales to China. By Fortune’s estimate, the retaliatory duties are subtracting another $20 billion a year from the U.S. economy.
If the administration erased tariffs only on Chinese and global steel and aluminum imports, and China responded by erasing duties on our exports, our economy would swell by roughly $110 billion a year. That’s the $90 billion from eliminating deadweight costs on Chinese goods plus steel and aluminum, plus $20 billion from boosting our farm and steel sales to China. On last year’s GDP of around $21 trillion, the extra $110 billion would add 0.5 points to growth.
But if Trump managed to eliminate the additional tariffs we impose on other nations, mainly for textiles and farm products, and those nations returned the favor by dropping duties on the goods they buy from us, the zero-tariff policy would likely add another tenth of a point or two, adding, say, 0.7% of GDP to our future rate of growth.
That may not sound like much in a year when most banks and research firms predict that national income will plummet by 5% or even more. But it’s a big number. Adding 0.7% to the widespread forecast of 2% that prevailed before the virus struck would have lifted growth by 35%. That cushion could offset one-seventh of a 5% downturn. Or more. The greatest gift to U.S. industry: the signal that Trump is switching from trade warrior to peacemaker. It was the ratcheting up in tariffs during 2018 that took the spark out of the Trump economy. Assurances that protectionism is no longer a core policy could unleash animal spirits that went dormant even before the virus hit.
Of course, Trump is unlikely to reverse a signature policy that has so far proved popular with his base. But who knows? He’s already shown flexibility on the issue. In 2018, he reversed course by removing duties on steel and aluminum imports from Canada that he’d previously imposed. In January, he signed the Phase One deal that lowered tariffs on $112 billion in consumer goods from China and put threatened tariffs on another $160 billion in its exports to the U.S. on hold. Phase One cheered the markets and helped lift the nation’s growth prospects at the start of 2020.
Trump is a maverick who often veers in new directions and dumps once-trusted advisers. “Trump is a dealmaker,” says Franz. “He can show global leadership on trade.” That Trump will do it is a long shot. But going even part way would pay off bigly.
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