Leibowitz on Trade: The Longer They Last, the More They Distort

Anne Krueger, former chief economist of the World Bank, posted a column this week that cites one reason for this: the ability of companies to get exclusions from the tariffs and quotas for specific steel products. Dr. Krueger’s article is available here.

Dr. Krueger’s complaint is that the government chooses the recipients of exclusions. Evidence is inconclusive about how the government chooses which exclusions to approve. But there is mounting evidence that deserving requests (products not available from domestic producers) don’t always get granted. A large number of exclusion requests get no action at all—they sit for months with no decision one way or the other. The Mercatus Center at George Mason University reports that, as of July 30, 2019, 62,797 steel product exclusion requests were submitted, of which 30,545 (49 percent) were granted, 13,261 (21 percent) were rejected and 18,991 (30 percent) were not decided.

Giving a product exclusion could create a competitive advantage to the recipient. However, the existence of the Section 232 tariffs in the first place is a greater distortion. It could be argued that product exclusions reduce the distortion the tariffs caused to begin with. Perhaps the best way to reduce market distortions is to dispense with the tariffs altogether; Dr. Krueger would no doubt agree with that.

Steel-using manufacturers have been busy, as well. In the view of steel users, represented by the Coalition of American Metal Manufacturers and Users (CAMMU), the longer the tariffs last, the more the market distortions pile up. After a while, permanent decisions will be made that will shrink the steel market in this country.

To limit the damage, CAMMU recently wrote a letter to Senators Chuck Grassley and Ron Wyden, the chairman and ranking member of the Senate Finance Committee, requesting legislation to “sunset” the steel tariffs. The full letter is available here. The letter argues that the steel tariffs should be “sunset”—terminated as of a specific date. CAMMU points out that the Commerce Department report on Section 232 set a benchmark of 80 percent capacity utilization as necessary for industry viability. This goal was achieved in September 2018. But the letter points out that “the tariffs are still in place, have not been adjusted, and no end date has been announced.”

The progress of legislation to reform Section 232 has also been frustratingly slow. The sharp divide in the nation over many important issues has created deadlock. The Finance Committee has a difficult job—because the president is likely to veto any bill that limits his discretion to impose tariffs, Senators Grassley and Wyden must craft a bill that will get at least 67 votes in the Senate and 290 votes in the House. So far, they have not been able to meet that goal. CAMMU wants reform to address the issue of sunsetting the tariffs.

Congress traditionally shies away from thorny issues in a presidential election year, and the next such year is about to begin. A recent flurry of activity on the USMCA (U.S.-Mexico-Canada Agreement) put Section 232 reform off for a bit, and the impeachment saga will continue into next year for sure. All these things do not bode well for quick action on the issue of tariffs. China is an entirely different issue—on that one, Congress has shown no interest in reform. All in all, it’s difficult to be optimistic that congressional reform of Section 232 will get done in 2020.

In the meantime, the president has not mentioned any set of circumstances that would cause him to set a termination date for the Section 232 tariffs. The effects on consuming industries that CAMMU and Dr. Krueger speak about also continue, along with harm to other sectors that have lost export sales because of retaliatory tariffs in response to the Section 232 tariffs. The choices steel users (who vastly outnumber steel producers) must make about new investments and new hiring will be impacted by the tariffs and retaliatory-tariffs. It’s about time we talked seriously about how long these tariffs should last.

Lewis Leibowitz

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