So far, 2021 is shaping up to be an awful year for international trade. The bad news starts with reports that the Biden administration plans to maintain taxes on steel and aluminum imports for most of the year pending the outcome of negotiations with the European Union.
This approach is disappointing because there is nothing to negotiate. It never made sense for the United States to tax imports from the EU and other allies in response to steel “overcapacity” in China. President Biden can and should end these protectionist tariffs.
In addition to maintaining current tariffs, the Biden administration recently proposed new tariffs on neodymium magnets, a rare-earth material from China.
U.S. trade policy toward rare earth materials can be summed up in one word: “erratic.”
The Obama administration successfully challenged Chinese restrictions on exports of rare earth elements as a discriminatory restraint that increased prices and harmed U.S. workers. According to President Obama, “We want our companies building those products [like wind turbines] right here in America. But to do that, American manufacturers need to have access to rare earth materials which China supplies.”
Biden’s proposed new tariffs represent a 180 degree turn from Obama’s approach. These new tariffs would have a similar harmful impact to the Chinese export restraints that Obama sought to end.
The Biden administration publicized the new tariffs in its June report, “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth.”
Douglas Holtz-Eakin, president of the American Action Forum, provided a good synopsis of that White House report: “I’m not smart enough to develop a classification system for all the possible kinds of policy errors. Sometimes you just instinctively know something is not right.”
The bad 2021 trade news continued with U.S. Trade Representative Katherine Tai’s misguided remarks to the AFL-CIO on a worker-centered trade policy. According to Ambassador Tai, “In the United States, real wages have stagnated for decades … the percent of workers in unions — a good indicator of higher wages and job stability — is half of what it was 40 years ago.”
The percent of workers in unions is not a good indicator of anything besides how many Americans want to join unions. According to U.S. Bureau of Labor Statistics data, real hourly compensation is 55 percent higher than it was 40 years ago. While it would be nice if compensation had increased even more, a 55 percent pay bump is not evidence of wage “stagnation.”
Tai added, “the wealth gap – particularly between Black and white workers – has widened significantly.”
The “wealth gap” conversation is a distraction from a more important public policy goal: how to help poorer people become richer. As former British Prime Minister Margaret Thatcher explained with respect to Labour Party policies: “So long as the gap is smaller, they’d rather have the poor, poorer. You do not create wealth and opportunity that way.”
Although the United States can certainly do better, the income of lower-income households has been increasing in recent decades. According to the Congressional Budget Office (CBO), “The lowest quintile’s average [real] income after transfers and taxes grew by a cumulative 86 percent between 1979 and 2017.” Those households have also benefited from lower prices on goods ranging from TVs to t-shirts, thanks to international trade.
Tai’s remarks touched on topics ranging from labor and environmental standards to the imposition of a global minimum tax, but dodged any mention of domestic tariffs or protectionism. That’s unfortunate, because Americans continue to suffer the consequences of protectionist U.S. trade policies ranging from taxes on imported materials used by farmers and manufacturing workers to double-digit tariffs on shoes and clothing.
The bad start to trade policy in 2021 continued in the U.S. Senate, which recently passed an expensive Innovation and Competition Act with a 10-year price tag of more than $240 billion. A 2014 Congressional Budget Office review of economic literature estimates that a debt increase of this magnitude would reduce U.S. investment by between $36 and $122 billion. That’s no way to help American workers compete with China or any other nation.
On the bright side, the year is only half over, and things can still get better. In particular, if inflation fears continue to mount, the Biden administration and Congress may reverse course on tariffs in order to improve the operation of supply chains and reduce the pressure for even more price increases in the future. In the meantime, Americans will continue to pay the price for a trade policy designed to protect powerful special interests at the expense of workers and families across the country.
Bryan Riley is the director of the Free Trade Initiative at the National Taxpayers Union, a nonprofit dedicated to tax and fiscal policy research and education at all levels of government.