Leibowitz on Trade: Do Tariffs Help Fight COVID-19?

It’s been quite a week. Last Sunday, I mentioned that quite a few trade associations and companies were suggesting to the Trump administration that they call a timeout on tariffs and quotas (on steel, aluminum and China) while we are combating the virus.

The president rejected these calls in a press briefing last Wednesday. He declared that he “can’t imagine” Americans asking for tariff relief, because China (and other countries) are paying billions of dollars in tariffs. The implication is that foreign governments would ask for relief—an interesting idea to think about for those advocating tariff relief to help companies through the crisis.

It’s time for a bit of reality on this.

When goods enter the United States, tariffs are imposed based on what the product is and how much duty is owed on that product. These tariffs are paid by the U.S. importer of the goods and the money goes to the United States Treasury.

Who pays the tariffs?

The answer is clear. U.S. importers pay the tariffs. That company could be a U.S. manufacturer or a U.S. trader. It might be a company that is owned by a foreign trading company or manufacturer. Foreign exporters may reduce prices, too, which reduces the ultimate cost to the importer. But the American importer writes the check to Uncle Sam.

When a 10 percent or 25 percent tariff is collected by U.S. Customs, that is the end of the matter as far as Customs is concerned, but other people in the distribution chain may end up paying more. The importer, if that company is a trader, may pass the entire cost of the tariff to its customer, for instance a manufacturer or distributor. That company may raise wholesale or retail prices to compensate.

The truth is that we have very little information on how companies deal with these tariffs. Anecdotes abound, and some of us in the trade game may have more reliable information about specific cases or transactions, but the real allocation of these tariffs is in reality a fairly black box.

It strikes me as unlikely that China is paying all the China tariffs by reducing the export prices of $400 billion of exports to the United States. Those who believe that the tariffs are completely paid by Chinese exporters or steel exporters in Europe, Asia and Latin America are certainly to think that. It’s more likely that some exporters absorbed some of the costs early on in the trade war by reducing their prices. However, by now those short-term absorptions have already taken place. U.S. importers and their customers are now paying the lion’s share of the increased costs due to tariffs. It’s a mistake to believe that the pain is borne entirely by foreigners.

To me, the immediate question is whether tariff relief on China, steel and aluminum (throw in washing machines and solar panels too) will help the country get through the coronavirus crisis in better shape. A massive relief bill is being written in Congress this evening. The latest information is that the amount of money pumped into the economy will approach $2 trillion.

Tariff relief for purchasers of products from China, as well as steel and aluminum from around the world, will increase the amount of money available to those companies to weather the storm that will probably come. Tariff relief would provide cash to companies so that they will have more cash to pay their workers during the crisis. On the other hand, domestic competitors that buy all their inputs domestically (there are not many of those, but there are some) are not likely to suffer because any price effects from suspending the tariffs would take weeks or months to ripple through the economy.

Steel and aluminum producers and their union are complaining that those who would benefit from tariff relief are foreigners—see discussion above. But the people who pay the tariffs are largely Americans.

In reality, steel and aluminum producers will likely come out pretty much in the same place either way, because protected industries will have less hardship due to all the help they’ve received already. Steel and aluminum producers will likely get less of that $2 trillion in relief money than they would have gotten without tariff protection. I think the China tariffs are in a different position because U.S. purchases from Chinese sellers cannot readily be shifted to domestic companies—they just aren’t there.

The companies that will get the most benefit appear to be those who will resist the temptation to lay workers off during the crisis. The relief will be targeted to help those who are now stuck at home with no income. They all want jobs to come back to. If the U.S. keeps hitting the companies they work for with high taxes in the form of tariffs, the burden will make those companies less likely to return to a competitive position soon.

Without going into too much detail right now, Washington can address these problems in many different ways. Quite a few people here are thinking about how they can get more money. There are many ways to skin that cat, and many advocates to press for solutions that benefit their clients. It’s the unsightly part of bailouts like this.

I want to leave you with a little perspective. The coronavirus crisis is generating the largest single expenditure in the history of the United States. But by comparison, the government is spending relatively less money on this than, say, the Second World War. It’s true that was a bigger deal and took longer (we all pray that this crisis does not take four years to resolve). But the government increased the national debt from 1942-1945 by five times. We came out of World War II with a debt 25 percent greater than gross domestic product. Our debt now is roughly equal to our GDP. If we have to, we can borrow quite a bit more. Here’s hoping we don’t need to.

Good luck and good health to everyone out there. Please keep in touch.

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