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Tariffs cause short-term pain — where's the gain?

Tariffs cause short-term pain — where's the gain?
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For nearly two years, American manufacturers have shared how new import tariffs are hurting their bottom lines. Everything from steel to car parts seems more expensive, but supporters of President Trump’s trade policy have tried to refute these claims by pointing to relatively low inflation in the U.S.

A new report by the Federal Reserve, however, confirms the stories of so many manufacturers. The U.S. tariffs of 2018 and 2019 increased input prices for producers and decreased manufacturing employment. Furthermore, retaliation by trading partners also negatively impacted employment in the sector.

Some sub-sectors of manufacturing have experienced modest employment increases, but they have been short-lived. Throughout 2019, U.S. Steel and other domestic manufacturers that touted job increases have subsequently announced layoffs and plant closures. 

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In a nutshell, there has been short-term gain and short-term pain associated with the ongoing trade disputes and tariffs. What does this mean for the health of American manufacturing in the coming years?

If the status quo of higher trade barriers persists in 2020, the short-term pain felt in manufacturing today could have long-term effects. Namely, manufacturers will be increasingly forced to raise prices to make up for their rising production costs. For American families, this means higher inflation and a decrease in purchasing power.

As prices in the U.S. rise relative to the rest of the world, American manufacturers will also experience a decrease in their ability to compete with the rest of the world. This could depress sales and make manufacturing a less profitable business in the U.S., relative to other countries.

Finally, maintaining the status quo could make higher input costs the new normal. Domestic business investment, as well as foreign direct investment, is less than it should be under the current economy. Investment could continue to lag in the future as businesses are forced to pay tariffs rather than expand their operations and workforce.

Tariffs have held U.S. economic growth back in 2019, but with already low taxes and regulatory barriers, the economy is primed for success in 2020. A strategy of lowering trade barriers in the New Year could be the catalyst for future growth. 

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There are four steps on trade that the Trump administration and Congress should take to ensure gains for U.S. manufacturers and the economy as a whole.

1) The newest report by the Federal Reserve confirms that tariffs have negatively impacted the U.S. economy. Eliminating the tariffs that were imposed on imports of washers, solar products, steel, and aluminum in 2018 would be a positive first step.

2) Addressing trade concerns with China should remain a priority in 2020. But the barriers imposed by the Trump administration have hurt Americans with little to no benefit. The goal of ongoing negotiations should be to address structural concerns while eliminating the tariffs that were imposed on imports from China in 2018 and 2019. These tariffs cannot become the new normal.

3) The Trump administration has concentrated on revising or renegotiating existing trade agreements, such as with the U.S.-Korea Free Trade Agreement and the United States-Mexico-Canada Agreement. Very little has been achieved in reaching new trade agreements, aside from a mini deal with Japan in 2019.

The U.S. should focus on seeking trade agreements with the U.K., Switzerland, Georgia and Taiwan, as well as pursue a full-scale trade agreement with Japan. Doing so will help to further lower barriers around the world and improve market access for American exporters.

4) Congress should permanently eliminate tariffs on all intermediate goods. When barriers are high on things such as steel for carmakers, wood for homebuilders and sugar for candy makers, it can be difficult for American companies to compete. Certain preferential tariff programs temporarily eliminate tariffs on some inputs, but making this the regular way of doing business would be a huge boon for the economy.

The short-term pain inflicted on American businesses and the economy writ large is painfully obvious. President Trump should not only reverse this pain, but adopt a new trade agenda that prioritizes eliminating trade barriers at home and abroad.

Tori K. Smith is the Jay Van Andel Trade Economist at the Heritage Foundation’s Roe Institute for Economic Policy Studies.