The Protectionist Swindle: How Trade Barriers Cheat the Poor and Middle Class
OUR POLITICIANS LOVE TO SAY that the United States is “the most open economy in the world,” and it’s true that America’s trade barriers are relatively low compared to most other countries. But we are not the most open economy in the world, not even close. Our generally low average tariff rate disguises high tariff “peaks” on certain goods and other barriers against a range of imports important to millions of American workers and families. Those remaining trade barriers slow our economy and cost American consumers and producers tens of billions of dollars a year.
If an Olympics were held for the most open economy, the United States would be out of medal competition. According to the most recent annual Economic Freedom of the World Report, people living in 26 other countries enjoy greater “freedom to trade internationally” than do Americans. The report considers not only tariffs on imports but regulatory barriers, exchange rate and capital controls, and actual levels of trade. Bragging rights for most open economies belong to, in descending order, Hong Kong, Singapore, the United Arab Emirates, Chile, the Netherlands, Ireland, Hungary, Switzerland, the Slovak Republic, and Estonia. The United States lies back in the pack, in 27th place among the 140 ranked nations.
Despite the claims of openness, our government imposes significant barriers against imported clothing, footwear, leather products, glassware, watches, clocks, table and kitchenware, costume jewelry, pens, mechanical pencils, musical instruments, cutlery, hand tools, ball and roller bearings, ceramic wall and floor tile, railway cars, processed fruits and vegetables, rice, cotton, sugar, milk, cheese, butter, and canned tuna. Through 232 separate antidumping measures, the government imposes tariffs as high as 280 percent on products from 39 different countries, most against imported steel and chemicals. Federal law prohibits or restricts foreign competition in domestic airline service, broadcasting, intercoastal shipping, and government contracting.
Declaring War on Consumers
The official Harmonized Tariff Schedule of the United States rivals the U.S. income tax code for random complexity. It fills 2,959 pages, encompasses 99 chapters, and features 10,253 separate tariff lines.
American workers and families pay for those tariffs every day in the form of higher prices and fewer choices when they shop. The tariffs are really discriminatory sales taxes imposed on imports. Those taxes drive a wedge between prices received by producers abroad and those paid by consumers in the United States. A 20 percent tariff will typically mean U.S. consumers will be stuck paying a higher price for the good than they would under free trade, while the foreign producer of the good makes fewer sales and earns less revenue than he would under free trade. The U.S. government, of course, collects revenue from the tariff, but at the expense of less trade and a less efficient use of our own productive resources.
Among the most damaging trade barriers for American families are those imposed on what they wear and what they eat.
Clothing. When Americans shop to clothe themselves and their children, they pay higher prices, sometimes much higher, than they would otherwise because of government trade barriers. According to the U.S. International Trade Commission (USITC), the trade-weighted average tariff on imported clothing in 2005 was 10.6 percent. (A trade-weighted average takes into account the volume of trade, with more heavily traded items accounting for a proportionally larger share of the average.) That is a lot higher than the overall average trade-weighted applied tariff rate of 1.4 percent. Congress imposes some of its highest tariff rates on items that are most popular with American consumers. For example, certain women’s and girls’ man-made fiber pants face a 28.2 percent tariff, blouses 32 percent, and man-made fiber sweaters 32 percent. Men’s and boys’ woven shirts, man-made fiber knit shirts, man-made fiber trousers, and swimwear imported from China and Vietnam face tariffs of more than 20 percent.
Our government artificially jacks up the cost of clothing for American families through tariffs, quotas, and complex “rules of origin” that require foreign apparel makers to use American-made textiles in order for their clothing exports to qualify for the lowest import duty rates. A 2004 “Memorandum of Understanding” with China limited clothing imports from 2005 through 2008 by imposing 21 quotas covering 34 categories of textile and apparel products. The MOU required China to hold shipments to no greater than 7.5 percent above the previous year. The alleged purpose of the MOU was to avoid “market disruption” and promote the “orderly development of trade.” The real purpose was to shield domestic producers from the full effects of liberalized trade with China, all at the expense of American consumers. The USITC calculates that restrictions on imported clothing and textiles are the most costly trade barriers of all.
When the government is not taxing the shirt on your back, it is taxing the shoes on your feet. Some of the highest rates in the tariff schedule are reserved for imported footwear, especially the less expensive shoes families buy at discount stores. The USITC reckons the average tariff on shoes and other imported leather products was 10.7 percent in 2005. Again the average disguises tariff peaks as high as 67 percent aimed at the more popular, mass market footwear.
The anti-consumer nature of the shoe tariffs prompted a bipartisan group of more than 150 members of Congress to sponsor the Affordable Footwear Act of 2007. The bill would eliminate tariffs on more than half of shoe imports. The bill’s preamble notes that the government collected $1.8 billion in duties on imported shoes in 2006, a tax burden that falls disproportionately on low- and moderate-income families because they spend a larger share of their disposable income on shoes and other necessities. Shoe tariffs don’t even “save” a significant number of jobs. The American shoe sector is so uncompetitive that even when hiding behind tariff walls, imports now account for 98 percent of domestic shoe sales. There are virtually no jobs left to save.
Not content to tax our shoes, the government also taxes imported socks. In January 2008, the Bush administration imposed a temporary 13.5 percent tariff on the 8.3 percent of imported socks that come from Honduras. The tariff was meant to placate a certain Republican lawmaker in Alabama with several sock factories in his district, and a few other lawmakers whose votes were thought necessary for upcoming trade deals the administration wanted. The trade agreements never came to a vote, but 300 million Americans were socked with higher prices to keep their feet warm and dry. All this for the sake of a domestic sock industry that, by its own count, employs only 20,000 workers in jobs that are not well paid.
Food. Americans who have struggled to pay rising food prices may be surprised to know that it is the explicit policy of the U.S. government to keep the domestic price of certain foods fixed well above prices paid on world markets. Our government conspires with producers to restrict domestic supply by imposing tariffs and tariff-rate quotas on imported sugar, rice, milk, butter, and canned tuna.
Tariff rates quotas (TRQs) allow a certain amount of a good to enter from a designated country under a low or zero tariff, but any imports above the quota face prohibitively high rates. In all, 195 tariff lines are subject to TRQs, with in-quota rates averaging 9.1 percent and out-of-quota tariffs an intimidating 42 percent. The intended result is to drive a wedge between the lower global prices and a higher domestic price. Domestic producers and our own government reap extra revenue from the higher prices, while American families and food-processing industries are stuck paying the difference.
One of the most protected commodities is sugar. Because of subsidies and tariff rate quotas in place since 1981, Americans have been paying two to three times the world price for sugar. Higher sugar prices also drive up what we pay for candy, soft drinks, bakery goods, and other products that contain sugar. The federal government guarantees domestic producers a price of at least 22.9 cents per pound for beet sugar and 18 cents for cane sugar. To maintain those prices, it enforces a rigid system of quotas that virtually guarantees domestic producers 85 percent of the nation’s sugar market. The Godfather himself could not have devised a more effective protection racket.
The sugar program redistributes money from the many sugar users to the few sugar producers. According to a 2000 study by the General Accounting Office, the higher prices engineered by the sugar program cost American households and sugar-consuming industries $1.9 billion a year. Of that, $1 billion goes into the pockets of a relatively small number of sugar producers—about 5,000 sugar beet growers and fewer than 1,000 sugar cane growers. Another $400 million goes to the favored sugar producers abroad who are allowed to sell into the inflated domestic U.S. market, what economists call “quota rents.” With tariffs, at least our own government collects the revenue, but with the quota system, the money goes to foreign exporters and their governments. And the other $500 million? It just disappears in lost efficiency. The sugar program enriches a few thousand sugar producers by ripping off consumers and by making our nation poorer.
American families also pay more for their milk, butter, and cheese, thanks to federal dairy price supports and trade barriers. The federal government administers a Byzantine system of domestic price supports, marketing orders, tariff rate quotas, export subsidies, and domestic and international giveaway programs. Federal policy blocks American consumers from buying lower-cost dairy products from more efficient producers in New Zealand and Australia. As the USITC staff concluded, “A consequence of government intervention has been to raise U.S. domestic [dairy] prices substantially above world market prices.” According to the USITC, between 2000 and 2002, the average U.S. domestic price of nonfat dry milk was 23 percent higher than the world price, U.S. cheese prices were 37 percent higher, and the price of U.S. butter was more than double the world price.
Hungry for a bowl of rice with your glass of milk? The federal government protects domestic rice producers with an array of tariffs on various kinds of rice imports. According to the Harmonized Tariff Schedule of the United States, rice tariffs range from 0.44 cents per kilogram on lower quality, broken rice to 2.1 cents per kilogram on husked, brown rice. Imported white and parboiled rice face an ad valorem (or percentage) rate of 11.2 percent. U.S. tariffs are significantly lower than tariffs imposed by other developed countries, such as Japan and Korea, but existing U.S. tariffs of 3 percent to 24 percent still keep domestic rice prices higher than they would be if Americans could buy rice freely from producers abroad.
Thinking of a tuna sandwich for lunch? The U.S. government limits imports of canned and pouch tuna through the familiar tariff quota system. Tariffs average 17.7 percent on tuna packed in oil and 10.8 percent on the more common tuna packed in water. The TRQs take their biggest bite in the Pacific island of American Samoa, where three-quarters of the canned tuna for the U.S. market is processed. TRQs add 4 percent to 8 percent to the final cost of tuna (with producers paying the rest of the tariff). The amount of tuna that can be imported at the lower, in-quota rate is limited each year to 4.8 percent of domestic consumption during the previous year. This rule leads importers to stockpile large quantities of tuna in customs-bonded warehouse in late December while they wait for the quota to be determined for the New Year. Once the New Year arrives, they rush to import the tuna before the 4.8 percent quota is filled.
On top of all those tariffs, the government imposes unnecessary regulations designed to advantage American producers at the expense of consumers. In the 2002 farm bill, Congress imposed a new “country-of-origin labeling” (COOL) requirement on beef, lamb, pork, fish, shellfish, and other perishable agricultural commodities. After understandable resistance from retailers, the government finally began in March 2009 to require that such food items have the country of origin stamped on them. This is nothing but a form of regulatory harassment designed to play to anti-foreign prejudices. COOL provides zero health or safety information; foreign meat and produce must conform to exactly the same health and safety standards that apply to domestic-made goods. The U.S. Department of Agriculture estimates the COOL regulations will cost $89 million to implement in the first year and $62 million annually even after 10 years of adjustment. Although the costs are significant, the USDA found the public benefits to be negligible. Country-of-origin labeling was not meant to serve the public but instead to provide yet another unfair advantage to domestic producers at the expense of the public.
The cost of all these restrictions on imported food may sound like nickel and dime stuff, but it adds up to real money out of the pockets of American families. The Organisation for Economic Cooperation and Development estimates that U.S. agricultural trade barriers transferred $11.8 billion from American consumers to producers in 2007. That amounted to an annual “food tax” of $39 on every single American, or $155 for a family of four.
Planes, Cars, Cutlery, and Clocks. Government tariffs hit us when we travel and when we stay at home. To make public transportation less economical, the government imposes a 14 percent tariff on imported railway or tramway passenger coaches. Imported motor cars are assessed a 2.5 percent tariff, whereas motor vehicles designed for the transport of goods are socked with a 25 percent tariff. The latter category covers light trucks and at one time even applied to imported minivans.
If you choose to fly instead of drive, you will pay a higher airfare because of government restrictions on airline competition. Foreign-owned carriers are flatly banned from flying paying passengers from one U.S. city to another. Of course, there are legitimate security reasons for not allowing the national air carriers of Syria and Iran to fly across U.S. airspace, but such concerns are silly when applied to British Airways, Qantas, Air Japan, and other established carriers from friendly, developed nations. European Union officials rightly complain that American-owned airlines are free to make money flying paying passengers from London to Berlin or other internal routes in Europe while European carriers are forbidden from serving internal U.S. routes.
Federal law also prohibits foreign investors from controlling more than 25 percent of the voting stock of a domestic airline. Those restrictions preclude entrepreneurs such as Britain’s Richard Branson from starting and controlling a low-cost carrier to serve passengers within the United States—making it more expensive for low-income grandparents to visit their grandchildren. The result of those restrictions is less investment in our domestic airline capacity and less competition for service and airfares. On top of airline restrictions, the U.S. government sticks the flying public with high tariffs on imported luggage.
If you decide to stay at home and build your household nest, the U.S. customs service will not leave you alone. The tariff code imposes an average, trade-weighted tariff of 7.9 percent on ceramic tile; 6.4 percent on costume jewelry; 4.6 percent on cutlery and hand tools; 4.5 percent on glassware; 3.9 percent on musical instruments; 5.1 percent on pens and mechanical pencils; 5.4 percent on tableware, earthenware, and pottery products; and 5.1 percent on watches, clocks, and parts.
Taxing Imports, Taxing the Poor
Import taxes on food, clothing, and shoes fall especially hard on the poor and middle class. The lower a family’s income, the more it will spend proportionately on basic necessities. As the Organisation for Economic Cooperation and Development concluded in its study on rich-country farm programs, tariffs on imported food “can bear heavily on low-income consumer households, for whom food constitutes a larger share of total expenditures.” In this way, U.S. trade barriers against farm products act as a regressive tax. Higher prices at the grocery store negate some or all of the income support the government seeks to deliver to low-income households through such programs as food stamps. What the government gives with one hand, it takes away with the other.
In the same way, U.S. tariffs on clothing and shoes fall disproportionately on the poor. Edward Gresser of the Democratic-leaning Progressive Policy Institute has done more than anyone to expose the anti-poor bias of the U.S. tariff code. Poring over those 3,000 pages and 10,000 lines, Gresser has discovered a disturbing pattern: More expensive, higher-end items enter under the lowest or zero tariffs, while the highest rates fall on the less expensive product lines most likely to land in the shopping cart of a poor, single mother.
For example, synthetic fiber men’s shirts prompt a 32.5 percent tariff, cotton shirts 20 percent, and silk shirts 1.9 percent. Ladies’ polyester underwear is assessed a 16 percent tariff, silk underwear 1.9 percent. Men’s dress leather shoes—the kind worn in Wall Street brokerage houses and Washington think tanks—are charged an 8.5 percent duty, sneakers of more than $20 a pair 20 percent, and sneakers under $3 a pair a whopping 48 percent. As Gresser concludes:
In general, American tariffs are low or zero on high-technology products and heavy industry goods. They are zero or trivial on natural resources and industry goods, and also low on luxury goods. But they are very high on a narrow but important set of products: the cheap and simple clothes, shoes, and food that poor people buy and poor countries make and grow.… Without any particular intention, therefore, the United States has created a system that is open and kind to wealthy countries and rich people, but wildly harsh for the poor.
According to Gresser, a recent welfare system graduate earning $15,000 a year as a maid in a hotel will forfeit about a week’s worth of salary in a year to the U.S. tariff system, while the hotel’s $100,000-a-year manager will give up only two or three hours’ pay. And the defenders of the status quo can’t even argue about saving jobs, since so few American workers are still employed making cheap shoes and clothing.
This is the status quo that so many “progressives” in America, from the Public Citizen Naderites to AFL-CIO labor leaders, are expending millions of dollars to defend. They reflexively oppose any trade agreements that would reduce those regressive tariffs. Their trade policy boils down to keeping barriers high on goods made and grown by poor people abroad and consumed by poor people here at home.
Trade barriers are a costly and regressive form of income redistribution. They take from the many and the disproportionately poor, and give the spoils to the politically connected few. What is fair about that?
Mr. Griswold is director of the Center for Trade Policy Studies at the Cato Institute. This article is an adapted excerpt from his book Mad about Trade: Why Main Street America Should Embrace Globalization, © 2009 by the Cato Institute.