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Tariffs Are Bad, and Clever‐​Sounding Substitutes for Tariffs are Just as Bad

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Simon Lester

Last week, my colleague Scott Lincicome wrote aboutNY Times piece that discussed “the Biden White House’s plans to ‘transform the economy’ through ‘dramatic interventions to revive U.S. manufacturing’ — heavy on economic nationalism, industrial planning, and manufacturing jobs.” Scott focused on economic nationalism in the auto sector. I’m going to add a point about different kinds of protectionist measures to watch out for. I hope that Trump’s use of tariffs has given these taxes a bad name and made policy‐​makers more hesitant to use them. We’ll see how things go with the Biden administration in that regard. But even if that happens, there are a variety of other trade measures that act just like tariffs, and it doesn’t seem like the Biden administration has soured on those.

So far, Buy American government procurement has been the administration’s big trade initiative. But the NY Times article mentions another possibility:

As a rough model, [Biden economic adviser Brian Deese] points to a Senate bill, based partly on the U.A.W. electric‐​vehicles paper, that would spend some $400 billion over a decade on cash rebates for consumers who buy U.S.-assembled electric or hybrid cars.

The idea here is that through subsidies provided under a specific statute, the government can steer U.S. consumers away from foreign‐​made products and towards American‐​made ones.

Let’s be clear: Subsidies that are contingent on purchasing domestic goods have basically the same impact that tariffs do. They are an inefficient intervention in the economy which limits competition, can violate international trade rules, and invites similar actions or retaliation from trading partners. (Two economic studies of these measures are here and here.) The inefficiency plays out a little differently, because with these “domestic content subsidies,” the funding for the inefficiency comes through general tax revenue which then gets redirected to specific industries, rather than more directly through the tariff revenue collected from importers. But the result is the same.

With regard to international trade rules, the trading system actually prefers tariffs, in part based on their greater transparency. Tariff schedules are published and tariffs are easy to understand, so at least we know what level of protectionism everyone is using. At the World Trade Organization, tariffs are not prohibited, they are just constrained: Governments promise not to charge above a certain amount.

By contrast, regulatory measures are not very transparent, and foreign producers have to scour every federal, state, and local statute and regulation to see if some protectionist measure has been slipped in. As a result, WTO rules are very strict in this area. To get technical about it, under WTO rules, Article III of the GATT, Article 3.1(b) of the Subsidies Agreement, and the Annex of the TRIMs Agreement all pretty clearly prohibit measures contingent on the use of local content, such as the one noted above.

Former President Trump has given tariffs a bad name, which is good. But there are still plenty of alternatives, and it looks like the Biden administration is going to be considering all of them. It will take a little more work to identify and make the case against these measures than it does with tariffs, but the fight against tariffs needs to be carried over into these less transparent initiatives.


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