The Heritage Foundation

Issue Brief #4553 on Trade

April 28, 2016

April 28, 2016 | Issue Brief on Trade

A Trade Policy that Puts Americans First

Congress should eliminate all tariffs on inputs used by U.S. manufacturers to compete in the global economy.

In 2015, 45 percent of all U.S. imports were “intermediate goods” ranging from aircraft parts to oil to zinc. U.S. manufacturers rely on these imports to create American jobs and compete in the global marketplace. Another 20 percent of imports were capital goods like machinery and manufacturing equipment. Americans imported three times as many intermediate and capital goods as they did consumer goods like T-shirts and cell phones.

U.S. tariffs on intermediate goods drive up the cost of manufacturing. The government should permanently eliminate all of these self-destructive tariffs.

History

Cutting tariffs on inputs is not a new idea. In 1887, President Grover Cleveland observed: “The radical reduction of the duties imposed upon raw material used in manufactures, or its free importation, is of course an important factor in any effort to reduce the price of these necessaries.”[1] Although the U.S. never took President Cleveland’s advice to eliminate tariffs on inputs, other countries have done so.

For example, China does not impose tariffs on intermediate goods used to produce products for export markets. In 2015, Canada eliminated all remaining tariffs on machinery and inputs for industrial manufacturers. According the president of the Canada Manufacturers and Exporters, “The elimination of all tariffs on imported goods and equipment, along with other tax measures, is providing Canadian manufacturers with a significant competitive advantage. Manufacturers across the country are using these tax savings to invest in innovation, growth and jobs.”[2]

On April 22, Canada’s Department of Finance announced plans to pursue additional tariff cuts to boost agricultural producers:

Manufacturers need a wide range of inputs to produce their products. Some of these inputs are imported and may face tariffs when entering Canada. Such tariffs are a non-recoverable charge that increases the production costs for Canadian manufacturers, affecting their competitiveness at home and abroad. Eliminating tariffs on imported food manufacturing inputs will support both investment and job creation in Canada’s agri-food processing sector—the country’s largest manufacturing employer and an important contributor to the economy. It will also make the sector more competitive in domestic and foreign markets.[3]

What the Experts Say

Many studies have documented the potential benefits of removing tariffs on inputs.

According to a report from the Organisation for Economic Co-operation and Development, “Import barriers can deny firms access to the goods and services they need to compete internationally. Rather than protecting domestic jobs, trade restrictive policies can produce plant closures and job losses. On the other hand, more liberal trade policies allow firms to fully benefit from international production networks.”[4]

An American Economic Review study of Indonesia by Mary Amiti and Jozef Konings concluded that “a 10 percentage point fall in input tariffs leads to a productivity gain of 12 percent for firms that import their inputs.”

Shimelse Ali and Uri Dadush at VoxEU observed: “Because imports increasingly feed into exports, an import tariff on parts and raw materials has a big impact on exports. Tariffs on intermediates may also discourage inward bound foreign direct investment and encourage outward bound instead.”[5]

Pierre-Louis Vézina explained the importance of cutting tariffs on inputs in order to attract foreign direct investment (FDI): “[T]he two decades of unilateral tariff cutting in Asia’s emerging economies may indeed have been driven, at least in part, by a competition for FDI. Racing governments were cutting tariffs on inputs to obtain marginal locational advantages in attracting multinationals that relied on imports of parts and components for local processing.”[6]

Current Efforts to Cut Tariffs on Inputs

Congress is considering the American Manufacturing Competitiveness Act, which would allow for small temporary tariff cuts of up to $500,000 per year for three years on imported inputs that are not produced in the U.S. This legislation has received broad support.

“Amid rising costs and a tough global economy, manufacturers are paying and will continue to pay a heavy price if Congress does not move on this legislation,” the National Association of Manufacturers argues. “These distortions are particularly severe for those manufacturers that must pay tariffs on necessary inputs not produced domestically, while the competing foreign finished product comes in duty-free.”[7]

According to Kevin Brady (R–TX), Chairman of the House Ways and Means Committee:

[O]ur bill will create an effective process for the House to consider manufacturing tax cuts that will help our job creators compete in the global market. Under the new process, our manufacturers will regain their competitive edge over manufacturers from other countries. Soon, it will be easier for our manufacturers to lower costs, create new jobs, increase U.S. production, reduce prices, and help grow our economy.[8]

PING golf equipment’s parent company has noted the urgency of “fixing the tariffs that penalize U.S. manufacturing, limit our ability to make products and provide jobs here while competing on the global playing field.”[9] U.S. tariffs on golf club parts are actually higher than tariffs on full golf clubs, which discourages the production of golf clubs in the United States: “PING is required to pay a higher tariff rate for importing component parts of golf clubs—and providing jobs to U.S. workers assembling golf clubs at PING—than the tariff rate we would pay to import a golf club wholly manufactured overseas. Why does our federal government penalize us in this way?”[10]

“To me,” says House Speaker Paul Ryan (R–WI), “this is just common sense. This bill would eliminate duties on hundreds of products that we don’t even make in this country—and that our manufacturers need to make their own products.”[11]

Think Big

If small temporary cuts on tariffs applied to inputs are beneficial, surely large, permanent cuts would be even better. Manufacturers should not have to worry about whether their temporary tariff cuts might be suspended in future years. Eliminating tariffs on big-ticket imported inputs like auto parts would encourage more jobs in the car manufacturing industry. To help companies like PING, in addition to a small temporary cut in tariffs on golf club parts containing titanium, the government should eliminate the 14.8 percent ($37.9 million) tariff on imported titanium.

Permanently eliminating all tariffs on inputs is a trade policy that would be guaranteed to encourage more job-creating investment in the U.S.

—Bryan Riley is Jay Van Andel Senior Analyst in Trade Policy in the Center for Trade and Economics, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.

About the Author

Bryan Riley Jay Van Andel Senior Policy Analyst in Trade Policy
Center for Trade and Economics (CTE)

Show references in this report

[1] Grover Cleveland, “Third Annual Message,” December 6, 1887, http://www.presidency.ucsb.edu/ws/?pid=29528 (accessed April 26, 2016).

[2] Manufacturing Automation, “Canada Eliminates All Tariffs on Machinery, Equipment and Inputs Used in Industrial MFG,” April 20, 2016, http://www.automationmag.com/industry-news/news/5148-canada-eliminates-all-tariffs-on-machinery-equipment-and-inputs-used-in-industrial-mfg (accessed April 26, 2016).

[3] News release, “Government of Canada Consults on Eliminating Tariffs in Vital Agri-Food Processing Sector,” Department of Finance, Canada, April 22, 2016, http://news.gc.ca/web/article-en.do?nid=1056099 (accessed April 26, 2016).

[4] Organisation for Economic Co-operation and Development, “How Imports Improve Productivity and Competitiveness,” May 2010, http://www.oecd.org/trade/45293596.pdf (accessed April 26, 2016).

[5] Shimelse Al and Uri Dadush, “Trade in Intermediates and Economic Policy,” VoxEU, February 9, 2011, http://voxeu.org/article/rise-trade-intermediates-policy-implications (accessed April 26, 2016).

[6] Pierre-Louis Vézina, “Race-to-the-Bottom Tariff Cutting,” Review of International Economics, Vol. 2, Issue 3 (August 2014), pp. 444–458, http://pierrelouisvezina.weebly.com/uploads/2/3/4/2/2342194/rtb.pdf (accessed April 26, 2016).

[7] News release, “House and Senate Movement on MTB Invites Wave of Opportunity for Manufacturers,” National Association of Manufacturers, April 13, 2016, http://www.nam.org/Newsroom/Press-Releases/2016/04/House-and-Senate-Movement-on-MTB-Invites-Wave-of-Opportunity-for-Manufacturers/ (accessed April 26, 2016).

[8] Kevin Brady, “Opening Statement at Markup of the American Manufacturing Competitiveness Act,” Committee on Ways and Means, U.S. House of Representatives, April 20, 2016, http://waysandmeans.house.gov/chairman-brady-opening-statement-at-markup-of-trade-legislation/ (accessed April 26, 2016).

[9] Dawn Grove, testimony before Committee on Ways and Means, U.S. House of Representatives, April 16, 2016, http://waysandmeans.house.gov/wp-content/uploads/2016/04/Dawn-Grove-041416TR-.pdf (accessed April 26, 2016).

[10] Ibid.

[11] Paul Ryan, “The Rule of Law and the Global Economy,” remarks delivered at Washington International Trade Association, February 5, 2015, http://paulryan.house.gov/news/documentsingle.aspx?DocumentID=398210 (accessed April 26, 2016).