Correct Decision to Exempt Canada and Mexico Assures that New Tariffs Won’t Work as Planned

March 9, 2018

Yesterday, President Trump signed two tariff proclamations, imposing a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum. Most economists have questioned the benefits of tariffs compared to their economic costs, especially in light of the global competitive boost from the recently enacted Tax Cuts and Jobs Act. But in particular, the administration’s correct decision to exempt Canada and Mexico from the new tariffs almost assures that the policies will fail to meet the Department of Commerce’s capacity targets for the steel and aluminum industries. 

According to the Commerce report that made the case for tariffs, the ostensible goal of these measures is to limit the amount of imported goods in order to allow domestic producers to raise their production from its current level of 73 percent of full capacity to 80 percent, which the Department deemed a level commensurate with the industry’s long-term financial viability.

The Commerce report recommended two tariff options to boost U.S. capacity to 80 percent. The first instituted global tariffs of 24 percent on steel and 7.7 percent on aluminum—with no exemptions. The second option placed a 53 percent steel tariff on a select group of countries (Brazil, South Korea, Russia, Turkey, India, Vietnam, China, Thailand, South Africa, Egypt, Malaysia, and Costa Rica), which includes essentially all the major exporters of steel and aluminum except for Canada and Mexico.

By exempting Canada and Mexico, the Trump administration has exempted 26 percent of the value of all steel imported into the U.S. and 40 percent of the value of imported aluminum. Thus, it would seem mathematically impossible that the tariff levels called for in the proclamations could achieve the protections of U.S. steel and aluminum that the Commerce report set out as goals.

By Commerce’s own admission, this is just the latest in more than 40 years of government efforts to rescue the steel industry. The report acknowledges that “[p]rior significant actions to address steel imports (quotas and/or tariffs) were taken under various statutory authorities by President George W. Bush, President William J. Clinton (three times), President George H. W. Bush, President Ronald W. Reagan (three times), President James E. Carter (twice), and President Richard M. Nixon.” The question then is: why does Commerce think this effort would work when previous policies clearly failed?

The steel and aluminum industries did not need these tariffs to be more competitive globally, because they were already made more competitive thanks to the recently enacted Tax Cuts and Jobs Act (TCJA). The TCJA slashed the corporate tax rate from 35 percent to 21 percent, which instantly made U.S. companies 40 percent more competitive. It also allowed companies to immediately write off the cost of their capital investments, which is a huge benefit to capital-intensive industries such as steel and aluminum production. Lastly, the TCJA moved to a more territorial tax system for multinational firms, which largely eliminates U.S. taxes on the foreign profits for exporters.

These tariffs could also undermine the economic growth generated from the TCJA. Tariffs increase costs on steel- and aluminum-buying industries, which will eventually be passed to consumers through higher prices on final products.  

The administration would have done well to allow President Trump’s signature legislative achievement to do its work in boosting the competitiveness of all U.S. firms, rather than follow the rash path of imposing tariffs that could dampen the economic benefits of the first major tax reform plan in 31 years.

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