Tariffs Targeting Intermediate Goods Go into Effect

July 6, 2018

At 12:01 a.m. Friday, July 6, the Trump administration began imposing Section 301 tariffs of 25 percent on $34 billion worth of imports of Chinese goods, and they plan to soon levy tariffs on another $16 billion. These tariffs target intermediate and capital goods imported by U.S. businesses, or in other words, goods that U.S. businesses use to manufacture other goods. The administration targeted industrial goods to limit the impact on consumers, but this is a misguided notion; it ignores that the party responsible for sending a tax to the government is often not the same party who bears the actual burden of a tax.

According to an analysis by the Peterson Institute for International Economics, of the goods that are subject to the Section 301 tariffs, 52 percent are intermediate goods and 43 percent are capital goods. Further analysis shows that many of these targeted products are imports coming from American– and non-Chinese-based multinational firms. In other words, U.S. firms will initially pay these tariffs when they purchase input-related goods primarily from U.S., or allies’, affiliates located in China.

Minutes from the June Federal Reserve meeting reveal that tariffs are already having ill-effects on the U.S. economy:

However, many District contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy. Contacts in the steel and aluminum industries expected higher prices as a result of the tariffs on these products but had not planned any new investments to increase capacity. Conditions in the agricultural sector reportedly improved somewhat, but contacts were concerned about the effect of potentially higher tariffs on their exports.

Tariffs on imports from China amount to a tax on American manufacturers, and on global supply chains; U.S. firms will initially pay the import tax to the U.S. government when they bring goods into the country. Firms that can will pass these costs on to the consumers of their products, leaving those consumers less money to spend elsewhere after paying higher prices for the goods affected by tariffs. Firms that cannot pass the costs on will, at best, have less cashflow to invest and expand in the U.S., or, at worst, will become unprofitable, lay off workers, or potentially go out of business. Though firms initially pay the tariffs to the government, it is individual Americans who bear the final burden of these tariffs.

Though the tariffs are targeted at businesses, that does not mean consumers will be shielded from the tax increase. The burden of the tax could be explicit, such as when it takes the form of layoffs, business closures, and higher prices. Or, as indicated in the Fed minutes, the burden could be less visible; that is, tariffs could lead businesses to cancel or delay expansions, not invest in new equipment or machinery, or not increase hiring. They could also lead to unseen effects as consumers have less money to spend elsewhere; for instance, in the clothes they don’t buy or the trips they don’t take.

The Administration should consider the full effects of their trade policy actions before further increasing taxes on Americans, noting that tariffs cause more economic harm than help.


 

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