Impact of Tariffs on U.S Trade and Economy

 Trade tariff is one form of trade protectionism that is employed by nations creating a barrier to trade.  There are a range of reasons including encouraging local product that prompts governments to impose trade barriers including trade tariffs.  This paper evaluates existing trade tariffs in the United States (U.S.) and their impact on the country’s trade and economy.  It utilizes practical examples of the application of the concept of trade tariffs and economic impacts.
Trade barriers are imposed for several reasons. Some of the reasons are: protecting local jobs, protecting newer industries, encouraging local production, reducing reliance on foreign suppliers, reducing payment problems, and promoting exporting (Collinson, Narula, & Rugman, 2016).  There are a range of trade barriers including: price-based barriers, quotas, and tariffs. Each of these trade barriers is applied relative to efficacy in meeting intended consequences.  There are other measures such as: international pricing (cartels like OPEC), non-tariff barriers via rules and regulations, foreign investment controls, and exchange controls (Collinson, Narula, & Rugman, 2016, 2012).  A tariff is a tax on goods that are shipped internationally (Collinson, Narula, & Rugman, 2016, 2012, p.177). It is a commonly utilized trade barrier.  It serves the purpose of anti-dumping and protecting specific industries.

Tariffs that can be imposed include: import tariff, export tariff (least used), transit tariff, specific tariff, ad valorem tariff, and compound (combines specific and ad valorem tariffs) tariffs (Collinson, Narula, & Rugman, 2016, 2012).  Ad valorem and specific tariffs are the most commonly used trade tariffs.  The intention is largely to regulate import volumes.  Trade flows are impacted by: inflation, national income, government policies, and exchange rates (Madura, 2011).

Ad valorem tariffs are based on the percentage of imported goods value with specific tax based on number of shipped items (Collinson, Narula, & Rugman, 2016, 2012).  Industrial goods imported into the United States include: machinery, chemicals, autos, clothing and textile, leather and footwear, and petroleum among others (USTR, 2018).  A significant proportion of the goods are imported due to trade agreements.  There are multiple bilateral and multilateral agreements.

The country has multiple bilateral trade agreements with countries like Korea, Peru, and Singapore.  It has multilateral trade agreements including Central America/Dominican Republic FTA (CAFTA/DR) and NAFTA.  They are designed to expand opportunities for United States workers/businesses globally and reduce tariff and non-tariff barriers.  The country is able to impose limited specific tariffs with the advantage being greater access to export markets.

  According to World Bank (2018), the value of United States exports was $1.45 trillion and total value of imports was $2.25 billion in 2016.  The country exported 4,563 products to 223 countries and imported 4,558 products from 220 countries (World Bank, 2018).  Consumer goods were the largest imports followed by capital goods, intermediate goods, and raw materials. The bulk of the country’s (96%) were industrial goods (USTR, 2018).  The country’s top five export markets are: Canada, Mexico, China, Japan, and United Kingdom (World Bank, 2018). 
NAFTA eliminated most non-tariff barriers and gradually reduced import and export tariffs between the three countries (Komar, Uniiat, & Lutsiv, 2016).  By 2008, all trade tariffs existing between the three NAFTA members were eliminated.  In addition, agricultural exports that attracted 12% customs rate became duty free (Komar, Uniiat, & Lutsiv, 2016).  It led to massive increase in trade between the nations and boosted inter-country relationships.  There is obligation on each member to maintain the principles of the agreement with few exceptions that would allow for imposition of tariffs (Komar, Uniiat, & Lutsiv, 2016).  Canada and Mexico have since become among the three largest trading partners for United States.  China is the largest trading partner of the United States (Romei, 2018).  The size of trade relates to the $506 billion in exports to the United States (Ip, 2018).

The bulk of Chinese imports including: cellular/wireless phones, portable computing equipment, and communication products that are imported duty free.  The recent move to impose tariffs on Chinese imports does not affect the top five imports (Romei, 2018).  United States imposed varying tariffs on 1,333 goods from China with China retaliating by imposing 25% specific tariffs on 106 American-made products (Romei, 2018).  In 2017, the value of Chinese exports to United States totaled $506 billion or 4% of GDP while United States exported goods worth $130 billion to China representing 0.7% of GDP (Ip, 2018).  The American tariffs on the 1,333 imports goods was about 25% for total goods valued at $50 billion are pending trade negotiation (Davis, Zumbrun, & Wei, 2018).  
However, the current American administration has also threatened to impose tariffs on a range of European imports (Bershidsky, 2018).  The goods that United States has threatened to impose a 25% import tariff on are: steel, cars, and aluminum (Bershidsky, 2018).  European Union threatening counter-tariffs with ad valorem tariffs at 25% on cosmetics, Harley Davidson motorcycles, bourbon, and jeans (Bershidsky, 2018).  The United States has refrained from imposing import tariffs until recently. The current moves have been politically motivated, presumably to address trade imbalance.

It has an effective trade-weighted import tariff of 20% with 50% of imported goods entering the country duty free (USTR, 2018).  United States has leveraged on bilateral and multilateral trade agreements largely to enable its firms and people access more markets.  The recent administration has upended previous trade policies and in addition to imposing tariffs on selected products from China in particular, and is currently renegotiating NAFTA.  The progress of the renegotiation will be evident in the next few months and potential application of tariffs

Free trade has led to significant trade deficits with most of the largest trading partners. The more noticeable trend is the widening deficit that the United States has experienced in trading with China.  Since 1998 with the exception of 2010, the trade deficit has continued to widen to reach $375 billion in 2017 (Davis, Zumbrun, & Wei, 2018).  The United States only have a trade surplus with Africa and South and Central America with low trading volumes between them (Romei, 2018). 

Industries exposed to changes following the elimination of tariffs shifted towards more Chinese imports with gradual shift towards less labor-intensive production (Pierce & Schott, 2016).  There was accelerated mechanization and automation of production.  A similar pattern was not experienced with policy stability with the European Union.  Thus, proliferation of free trade agreements has had varying effects on depending on particular trading relationships.  Cherkashin et al., (2015) noted that trade preferences including reduction of tariffs offered by one country had positive spillover effects to others in reference to trade between the United States and Bangladesh.
Some firms produce intermediate products in certain markets and then re-export them for finishing (Manova & Yu, 2016; Bai, Krishna, & Ma, 2017; Jäkel & Smolka, 2017).  Increasing importance of factors of production influenced international trade.  Factor abundance from free trade policies and factor prices change via policies such as trade tariffs influence trade structure in different countries (Jäkel & Smolka, 2017). Thus, the impact varies from country to country.  Economic policies have significant economic impact, such as fast growth of South Korea through reduction in trade tariffs and bilateral FTA with the United States (Connolly & Yi, 2015).  Trade policy uncertainty impacts investment even in low tariffs trade regimes (Handley, Kyle, & Limão, 2015).  Posturing among countries during negotiation creates such uncertainties. The current trade squabble between the United States and China is one such example.

The posturing between United States and China as well as other trading partners threatens to reduce investment in the economy.   Handley, Kyle, & Limão (2015) noted that the level of export investment during periods of uncertainty was lower. Free trade agreements have had positive impact from an overall perspective in promoting trade (Cooper, 2014).  The influence of having bilateral and multilateral FTAs is that it creates certainty that promotes investment.  In the United States, there has been concern about the impact of FTAs on employment. According to Co?ar, Guner & Tybout (2016)  the trade-off in regard to open economies is higher national income and higher unemployment.  Higher unemployment is countered by labor market reforms reducing aggregate job turnover (Guner & Tybout, 2016).  Despite losing jobs in certain industries, the United States has gained in overall employment boost.

In analyzing the Brazilian economy, Dix-Carneiro & Kovak (2017) noted that regions that had significant cuts in trade tariffs experienced declines in formal employment and lower earnings.  Liberalization is generally positive from a national perspective but adversely affects certain areas relying specific commodities.  It informs the need for countries to have the ability to impose specific tariffs.  The United States has applied such tariffs to protect the steel industry.  Therefore, there are counter-effects that are specific to different regions depending on the structure of trade relationship.  Trade liberalization has also been positive for enhancing corporate social responsibility (Flammer, 2014).  

The United States having liberalized its economy with few import tariffs has experienced significant increase in trading deficits with major trading partners. Even with the ballooning trade deficit with China, it has greater leverage (Ip, 2018).  The driving factor with the increased trade deficit that United States has experienced with China is driven by American consumers.  However, the comparative size of the imports relative to each country’s GDP favors United States at 0.7% compared to China’s 4% (Ip, 2018).  In the event of imposition of widespread trade tariffs, China is likely to be impacted more.  The current situation creates uncertainty for both countries in the industries that have been targeted. There are worries notably in the automotive industry about NAFTA renegotiation and trade issues with China.

The negative impact of trade tariffs is that they increase the cost of goods which directly impacts the consumers.  The level of trade imbalance that has been created by liberalization of trade has been significant in the context of the trade between United States and China.  The country has trade deficits with close trading partners in NAFTA due to factors of production.
References
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Bershidsky, L. (2018). The Effects of Tariffs and Counter-Tariffs would be smaller than the Bilateral Discrepancies in EU – U.S. Trade Statistics. Retrieved 24 April 2018 from https://www.bloomberg.com/view/articles/2018-03-06/trump-s-trade-war-ignores-basic-eu-us-trade-statistics

Brandt, L., & Morrow, P. M. (2017). Tariffs and the Organization of Trade in China. Journal of International Economics, 104, pp. 85 – 103.

Cherkashin, I., Demidova, S., Kee, H. L., & Krishna, K. (2015). Firm Heterogeneity and Costly Trade: A New Estimation Strategy and Policy Experiments. Journal of International Economics, 96 (1), pp. 18 – 36.

Collinson, S., Narula, R., & Rugman, A. M. (2016). International Business (7th Ed.). Harlow, UK: Pearson Education Limited.

Connolly, M., & Yi, K-M. (2015). How Much of South Korea’s Growth Miracle Can Be Explained by Trade Policy? American Economic Journal: Macroeconomics, 7 (4), pp. 188 – 221.

Cooper, W. H. (2014). Free Trade Agreements: Impact on U.S. Trade and Implications for U.S. Trade Policy. Current Politics and Economics of the United States, 16 (3), pp. 425 – 445.