This summer, the Obama Administration has carried out major negotiations for the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP). These agreements would link together many U.S. trade partners under common international trade frameworks, such as lower or eliminated tariffs and reduced non-tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. trade barriers. The first would create a free trade area and harmonize many trade-related laws and regulations with eight Southeast Asian and Pacific nations. The second would reduce barriers to U.S .trade with the European Union countries. Combined, all of these nations represent over $700 billion in annual U.S. exports.
Put simply, tariffs are excise taxes on goods produced abroad. Every category of goods has specific rates set by law and implemented by the U.S. International Trade Commission. They’re often implemented as a way to “protect” American industries from foreign competition and provide an additional source of government revenue. As far as consumers are concerned, tariffs drive up the prices of the goods we buy. A tariff on Chinese tires in 2009, for example, caused $1.1 billion in higher costs to U.S. consumers.
Freer and more open trade has many benefits. For example, international trade in information technology, governed by the Information Technology Agreement, has been exempted from all tariffs since 1997. This tariff-free global market in IT products has allowed a massive global explosion in innovation and exchange of these goods. U.S. companies like Dell and Apple have profited enormously and created prosperity here at home while the average price of computers has remained steady or fallen.
But even beyond higher consumer prices, tariffs are simply bad taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy: they create tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. , they are characterized by a lack of transparency, and the differing rates for different products and industries are distortionary.
Tariffs often lead to tax pyramiding because many imported goods are business inputs, such as car parts, packaging materials, or fertilizers. Tariffs applied to business inputs have similar effects of sales taxes applied to business inputs, a practice we have often criticized due to the way it causes taxes to pile up upon one another over the production process. Although the U.S. has a law known as the Miscellaneous Tariff Bill (MTB) whereby companies obtaining inputs from abroad can be exempted from tariffs in some cases, they may only do so if they can prove those goods cannot be produced (or are prohibitively expensive to produce) in the U.S. Since this rule doesn’t apply to all business inputs, tax pyramiding results.
On top of this, consumers are rarely aware that the price of an international product they purchase may include a passed-on tax. While this is a problem for all imported goods in which consumers do not know or understand the extent of the tariffs applied, it is especially true for products with multiple production stages in various countries. When products are re-exported across multiple national lines, tariffs pile up and become embedded in the price of the product.
Furthermore, while U.S. tariffs are generally very low (about 1.6 percent on average), they vary widely. Some special cases can range as high as 100 percent, while many goods have no tariff at all. These wide differences in tax rates for different industries and products, alongside pyramiding taxes at different levels, can create major economic distortions.
With a growing share of U.S. and global economic output connected by international trade, it is imperative that trade not be taxed in an excessive, untransparent, and distortionary fashion.
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