Should we celebrate Biden's shift from tariffs to quotas? Not exactly

During the recent G20 gathering in Rome, the Biden administration celebrated revisions to trade restrictions imposed by the Trump administration on steel and aluminum imports from China, Europe and most of the rest of the world. But before grabbing confetti and champagne, we should acknowledge that the change will ultimately strengthen participating governments’ hands with importers and exporters. It’s not a return to the more open market economy that was present earlier.

You may recall that the recent tariff surge started in 2016. A self-styled “Tariff Man,” President TrumpDonald TrumpOmar, Muslim Democrats decry Islamophobia amid death threats On The Money — Powell pivots as inflation rises Trump cheers CNN's Cuomo suspension MORE saw himself as America’s gatekeeper. He was not reluctant to limit the flow of goods across our borders and tax American consumers by way of tariffs, even as he took pride in successfully reducing other taxes. Trump claimed that when steel and aluminum crossed our borders, tariff revenue would bolster the position of the Treasury. Perhaps it would even help to offset diminished income tax revenues. (These points notwithstanding, tariffs and other trade restrictions are commonly shown to impose costs on consumers.)

The new Rome agreement, which basically excludes China, replaced a 25 percent tariff on steel and 10 percent tariff on aluminum with quotas that limit the total amount of specific metal products that can freely enter American markets. It’s not simple. In all, there are 54 distinct quotas for different types of steel and 16 for different types of aluminum. A new crop of U.S. gatekeepers will keep score on who and what is shipping into the country.

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Now, when those metals cross our borders, there will be no accompanying flow of tariff money to the U.S. Treasury. Instead, higher corporate income and wealth taxes, if approved by Congress, may generate revenues that help replace the diminished tariff flows. Meanwhile, inflation-weary consumers may get a wee bit of relief, since tariffs are inevitably passed on to them by U.S. importers.

The new agreement was celebrated by some U.S. manufacturers of metal-using products, organized labor and by a leading national association of U.S. steel producers — but not by the aluminum industry, which preferred a simple tariff phase out. Dealing with the quotas’ score-keeping complexities raised major concerns for some importing firms, especially smaller ones that lack the specialized personnel for managing such matters. As with most federal regulations, larger firms with more money and compliance personnel will enjoy economies of scale while operating in this more complicated regulatory environment.

All steel and aluminum importers will become more engaged with, and therefore more dependent on, government officials. Opportunities for favor seeking and beneficial political influence will abound. 

And unlike tariffs, quota-managed imports strengthen the hands of foreign officials in the countries we import from. They must determine which of their firms should receive permission to export a limited amount of products, how much they will ship and how it will all be managed. Past U.S. experience with quotas on textiles and apparel, and with similar “voluntary restraints” on Japanese automobiles, shows how quotas became marketable across individuals and borders, and how decisions became biased.

For example, Hong Kong became the textile and apparel center where quota “owners” profited, instead of American taxpayers, who would have gained from simpler tariff revenues. And in Japan, some smaller auto manufacturers were shut out of the U.S. market entirely, while their larger competitors gained sway. Eventually, major Japanese producers built U.S. plants so that they would no longer be affected by tariffs or quotas.

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In short, trade restrictions always inspire adaptations and include winners and losers, determined sometimes in unexpected ways.

Biden’s revision of the policy opens the door to America’s markets for tariff-free shipments of some needed basic raw material, but the complexities involved make it difficult to know whether to celebrate or run for cover. Yes, there will be winners and losers, but it is hard to know which group is largest and which countries will gain the most. 

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson College of Business and Behavioral Sciences.