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Aug 08, 2023

Amid Trade War with China, Few Industries Support the Tariffs

The United States is fifty-six months into its trade war with China, with few signs of easing it. President Donald Trump launched a campaign of tariffs that escalated over several stages and was

The United States is fifty-six months into its trade war with China, with few signs of easing it. President Donald Trump launched a campaign of tariffs that escalated over several stages and was applied to billions of dollars of U.S. imports from China. He was able to do that by invoking Section 301 of the Trade Act of 1974, which authorizes the president to take actions against foreign trading partners that, after an investigation by the U.S Trade Representative (USTR), are found to maintain “unjustifiable or unreasonable” restrictions against U.S. trade. Since such a broad application of tariffs raised serious concerns about harm to U.S. businesses and the economy more broadly, a process for exclusion from the tariffs was also set up (although the law does not provide for this exclusion process).

President Joe Biden has kept the tariffs and exclusion process in place. But last year, the administration began a review of the tariffs, and asked industry to weigh in. Unsurprisingly, those that benefited from the tariffs continue to lobby for protection. While their arguments could sway the president to become a “Tariff Man” himself, there are ample reasons why the Biden administration should resist the temptation to favor a few industries over the entire U.S. economy.

Clamoring for Protection

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In May 2022, USTR initiated the statutory four-year review of the Trump administration’s initial tariff actions and their subsequent modifications. The first phase of that review gave domestic industries “the opportunity . . . to request continuation of the actions.” USTR received 434 comments from domestic industries and trade associations that outlined several reasons to continue the tariffs, such as incentivizing China to change its economic policies and increasing the competitiveness of U.S. firms. Based on those comments, U.S Trade Representative Katherine Tai determined that, since each tariff received at least one comment in support of its continuation, all Section 301 tariffs would continue to be applied without any changes, subject to a second, more comprehensive phase of review.

The second phase of the review wrapped up its comment period early this year, with over 1,400 submissions from industry, experts, and other interested parties. Of those submissions, only 22 percent wrote in support of continuing the tariffs. While submissions in favor of maintaining the tariffs were fewer in quantity, they made three general points: that the tariffs support U.S. manufacturing and consumption, that they played a role in addressing dumping from Chinese firms, and they serve to counter the distorting influence of Chinese government subsidies on the U.S. market.

For example, some praised Section 301 for helping to create public awareness and shift attitudes regarding buying local, domestically produced goods. Those supporters claimed that Section 301 affirmed the U.S. government’s willingness to protect domestic industry, and thus empowered companies to reduce offshoring and encouraged consumers to seek additional production capacity in the United States, such as in home appliance and chemical manufacturing. Producers of tungsten, a rare-earth metal with several industrial applications (including electrodes, machine tools, and medical equipment), credited the 301 tariffs with ensuring the industry’s health by shifting demand toward domestic producers and reducing dependence on China for this strategic material. On the other hand, tungsten consumers argued that the domestic supply of tungsten electrodes in the United States is insufficient to meet demand, particularly due to a lack of manufacturing knowledge. In fact, the last U.S. manufacturer of tungsten electrodes, GTP Sylvania, stopped producing them in 2012.

With forty-six comments supporting the Section 301 tariffs, the high-precision injection mold industry has been a particularly vocal and active participant in the comment portal, where several argued that the tariffs have protected domestic industry, increased demand, and shielded them from illegal Chinese trade practices. The American Mold Builder’s Association reported the results of an internal survey of its members, which showed that 67 percent have taken on new business from China as a direct result of the Section 301 order. But, while many mold suppliers support the tariff actions, not all share their sentiments. For example, Outdoors, an outdoor goods company, stated that “the precision for key reel manufacturing processes, such as gear hobbing, aluminum die casting and injection molding, are not supported by the scalable production sophistication and skilled workforce of domestic or third country sources.”

Still others argued that the 301 actions, coupled with existing anti-dumping (AD) and countervailing duties (CVD), helped to keep unnaturally low-priced Chinese products out of the U.S. market. Industries that hailed the measures as being particularly helpful in that regard included polyvinyl carbon and activated carbon producers, both of which are protected by existing AD and CVD orders. According to many comments, keeping artificially low-priced goods out of the market not only benefits producers, but has a ripple effect throughout the economy, contributing to shorter lead times, supply security, and a domestic preference for U.S. goods.Notably, 65 percent of the companies supporting the 301 tariffs are already afforded protection with existing AD and CVDs, many of which not only wanted the 301 tariffs to continue, but also favored their expansion. Given that the application of U.S. antidumping laws has a discretionary bias toward protectionism, the overlap of the 301 tariffs and antidumping duties is concerning.

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Lastly, a common issue raised by tariff supporters was the need to curtail the distorting role of Chinese subsidies on the U.S. market. Graphite electrode and plywood manufacturers are two industries whose Chinese competitors receive subsidies. Both argued that the tariffs helped them to avoid being undercut on prices by China. While both industries are covered by AD/CVD orders, the plywood industry specifically noted that the 301 tariffs were welcome because they offered unique protection through broader product coverage. This raises larger concerns about cascading protectionism, whereby companies clamor for additional relief in downstream industries, resulting in higher costs for inputs across the board.

Concentrated Benefits, Diffuse Costs

As the Biden administration undertakes a full review of the Section 301 tariff actions, it faces the task of weighing the costs alongside the benefits. Of course, some industries have profited from the tariffs, but this should come as no surprise—the costs of protectionism are diffuse, while the benefits are concentrated. Furthermore, those costs have been borne largely by U.S. consumers. As Americans struggle with high inflation, maintaining that policy is increasingly questionable. In fact, estimates show that the 301 tariffs contributed between 0.3 percent and 1.3 percent to last year’s inflation spike.

The question before U.S. Trade Representative Tai and President Biden is whether the benefits accruing to a few industries outweigh the harms on the rest of the U.S. economy. It is worth remembering that when Congress delegated much of its tariff authority to the president, it did so to avoid capture by a few vocal industries. The president, after all, represents a national constituency, not special interests that lobby for protection. The Biden administration would be wise to remember this as it mulls over its next steps.