Tariff Laws Face Political Challenges, Despite Major Benefits

July 26, 2013

I reported on free trade agreements and their many benefits not long ago. But even more recently, another major component of trade policy—“unilateral” tariff law (a fancy word for domestic trade law)—has been moving in Congress. Legislation to renew the Generalized System of Preferences (GSP), backed by Ways and Means Chairman Dave Camp (R-MI), has been introduced. The GSP is a program that lowers tariffs on imports from poor and developing nations.

This program, unlike far more contentious free trade agreements, is generally favored by both free-traders and so-called “fair-traders” who usually push for restrictions on trade. This support stems from the fact that GSP reduces tariffs on goods from a long list of developing nations, helping integrate them into the global economy and improve their welfare by improving access to international trade. The GSP is a legal enshrinement of the idea that free markets and voluntary exchange improve the welfare of both participants: even if one is rich and one is poor, both can benefit.

Usually, passing the GSP is a simple matter. However, a recent factory collapse in Bangladesh led to the Obama Administration suspending that country’s GSP participation. Meanwhile, in response to the Edward Snowden affair, Ecuador has simply rejected GSP benefits. If GSP continues to be used as a tool to push developing countries on domestic regulations, like in Bangladesh, or foreign and human rights policies, as in Ecuador, its cherished non-political status may be threatened. The status of these benefits as powerful diplomatic tools demonstrates just how important and beneficial trade actually is.

Even bigger political challenges face another traditionally popular tariff law also currently before the House Ways and Means Committee: the Miscellaneous Tariff Bill (MTB). This bill eliminates tariffs on imported business inputs, like chemicals or materials, if those inputs are not produced in the US or are prohibitively expensive to produce here. We have written previously on the problem of business input taxation many times (see here and here, for example). The MTB reduces tax pyramiding: without it, taxes become stacked on taxes as goods move through the production chain. Consumers face higher prices as tax costs become baked into the price.

But as the MTB process has become politicized with accusations of earmarking, the bill has struggled—so much that it was not renewed last year despite usually being an easy sell. It expired on January 1, 2013, leading to a steep tax hike on many business inputs. Sadly, many conservatives who would oppose tax pyramiding and favor free trade in other contexts have opposed the MTB because its benefits go to specific firms, and thus constitute “earmarks,” though, as always, there are two sides to this debate.

Criticisms of the MTB process as being prone to lobbying and back-room influence may have some validity. Furthermore, it is true that programs like GSP and MTB are really second-best solutions: broad-based tariff reform liberalizing trade would be ideal (as would the elimination of all business input tariffs, like Canada is doing). Senators Rob Portman and Claire McCaskill have proposed an interesting bill to make the MTB process more transparent, and which would free it from accusations of earmarking, though it’s unclear why such a cosmetic change would matter much for earmarking.

But the perfect should not be made the enemy of the good. MTB and GSP are both criticized and opposed because they don’t free trade enough. Even in the case of a popular bill like GSP which is almost certain to pass eventually, Congressional hesitancy has caused delays which may lead to a brief spike in tariffs. With the summer trade legislation season heating up, it will be interesting to see if legislators repeat last year’s protectionist measures, or if they opt for freer trade instead—even if that freer trade made not be perfect.

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