The Worsening of American Trade by Anne O. Krueger
After campaigning as an accomplished internationalist who would overthrow Donald Trump’s myopic nationalist political agenda, Joe Biden maintained the protectionist trade policies of his predecessor. In fact, the overly complex and distorting trade quota regime negotiated with the European Union represents a new low.
WASHINGTON, DC – Among former US President Donald Trump’s many policy mistakes, some of the worst are in the business realm. His administration’s high tariffs on imported steel and aluminum were neither reasonable nor even effective in achieving their stated goals. The “trade war” with China was a spectacular failure: the US trade deficit continued to grow and no new agreements on intellectual property, e-commerce or other crucial issues were ever reached. Under the much-vaunted âPhase Oneâ deal, signed in January 2020, China was forced to step up trade rather than take a more market-oriented approach.
These mistakes were accompanied by the failure of the Trump administration to defend the interests of the United States through multilateral channels such as the World Trade Organization. Leveraging the weight of the United States’ trading partners in the WTO would have been a much more effective way of dealing with China. The WTO is the appropriate venue for further liberalizing trade in services and agriculture, and its dispute settlement mechanism is where formal complaints against other countries are to be filed and adjudicated. Unfortunately, the DSM remained incompetent as the United States refused to allow the appointment of new judges.
Prior to his election in November 2020, President Joe Biden was widely seen as an internationalist who would reverse most of Trump’s blunders. But since taking office, Biden appears to have kept the Trumpian playbook on trading. The United States has not sought to join the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (the successor to the Trans-Pacific Partnership, which Trump has abandoned), nor has it ended the trade war with China. nor reaffirmed US support for the WTO.
Worse yet, although the Biden administration changed the exorbitant tariffs imposed on steel and aluminum imports from the European Union, it replaced them with tariff rate quotas (TRQs). Under an agreement reached with EU leaders this month, steel and aluminum imports into the United States will only be subject to the 25% tariff after they have passed a certain threshold, and the EU will in turn remove some of the retaliatory tariffs it has imposed on the United States. exporters.
But this tariff quota regime is arguably even worse than what it replaces. With a uniform tariff, domestic producers who depend at least on imported inputs can always shop around to find the cheapest foreign source. But under the new system, there will be separate quotas for each of the 54 types of steel from each of the 27 EU member states. This means that there are hundreds of different categories into which imported steel must be classified. When a quota for a type of steel from the cheapest EU producer has been filled, US buyers will either have to pay the tariff or buy the same steel from a country at the higher cost.
Under the new agreement, the quantities that can be imported duty-free are lower than the average import levels for the period 2017-19. Inevitably, European companies will charge more US importers because they will benefit from near-monopoly positions. Once a quota is filled, importers will pay the 25% duty on any additional steel imports.
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Although the quota can be set to limit imports to exactly the same volume that would be imported with the tariff, experience has shown that this is impractical in practice. Demand and supply are constantly changing, and it is almost impossible for trade authorities to understand the restrictiveness of each import quota. As domestic demand increases, the constant quantity quota results in a decline in the share of foreign producers in the domestic market, unless domestic producers increase their competitiveness. This rarely happens, and quotas tend to become more and more restrictive over time as protected domestic producers press to prevent their increase.
But perhaps the most important drawback of the TRQ agreement is its cushioning and distorting effect on competition. European companies will now have quasi-monopoly positions vis-Ã -vis their American buyers. Because they won’t have to sell cheaper to offset what was previously a 25% duty, they can instead increase their prices on exports up to the quota quantity. What was previously tariff revenue for the United States is now becoming additional revenue for European producers.
Moreover, if individual EU steel producers receive the higher US price for their exports, their profits and resources for investment will increase. The incumbent US producers, on the other hand, will have an advantage over all potential entrants to the industry, not because they are more efficient or productive, but because they have received quota import rights. For US steel-using industries, a quota allocation will somehow have to be shared among individual users. How this is to be done has not been specified. Large companies are more likely to be able to afford the red tape and bureaucratic processes associated with securing quota shares.
The complexities of this arrangement will therefore be costly. In addition to rising costs for US producers of steel-using products compared to European competitors, steel producers around the world will face a highly distorted market. Those in Mexico, for example, will be able to export to US buyers duty-free, while South Korean steel producers will have to manage their own TRQ agreements. Until additional TRQ regimes are negotiated for Japan and the UK, steel exporters from those countries will be subject to full Trump tariffs.
There are also questions about the length of the quotas. If they are annual, some importers will ask for large quotas and then import as much as they can at the start of the year. Or, to avoid this, negotiators can agree to a quarterly window, in which case producers of seasonal products using steel (from snow plows to air conditioners) will need to stock up off-season. Large US importers may try to corner supply by asking for the maximum possible volume early.
Finally, there is also a concern that once TRQs are applied to steel, producers of products using steel will seek relief from their higher costs, as has happened with Trump tariff waivers. The resulting reduction in competition and productivity growth will weaken the US economy relative to other major developed trading countries.
Support for research and development, technical training facilities, and improved infrastructure can all make a positive contribution to the health and strength of the U.S. economy. Defensive measures such as a tariff quota regime will do the exact opposite.