Fearful that building material prices would escalate in the wake of Hurricane Katrina, the Bush Administration stated this week that it would consider reducing tariffs on lumber from Canada and cement from Mexico. Costly tariffs on lumber, cement, and steel are the result of penalties imposed under U.S. anti-dumping laws. Because of these tariffs, the cost of rebuilding in the Gulf Coast will be higher than necessary. Rather than wait for the inevitable price hikes that will come once rebuilding gets underway, the Administration should be proactive and exercise its emergency authority to significantly reduce these and other tariffs.
Most Americans hope that Gulf Coast businesses will be able to return to the area quickly and provide jobs for displaced workers. With lower reconstruction costs from reduced tariffs, companies in the region will face greater incentives to rebuild and Katrina's impact on the U.S. economy and the federal budget would be blunted. Moreover, breaking down tariffs could increase regional investment and employment prospects, improving both the business climate and the chance that local government finances will stabilize soon. Perhaps most importantly, with lower tariffs, the region's residents-now displaced from their homes, facing unemployment, and receiving limited compensation from insurance policies-would have less to fear about the cost and time required to rebuild their lives.
Penalty tariffs on lumber imports from Canada average 27 percent. This adds an additional $1,000 to the price of a new home, on average. Cement imports from Mexico face average penalty tariffs of almost 55 percent, a markup that will make the price of rebuilding home foundations, office buildings, highways, bridges, ports, and other infrastructure far more costly. Eliminating these tariffs would reduce the amount of federal assistance that is required as well as reduce the burden of rebuilding on U.S. taxpayers. Likewise, steel and specialty steel products will be essential to rebuild the Gulf Coast, but their supply is tight due to protectionist policies favoring a few U.S. producers. Unless these policies are changed, steel prices will climb when rebuilding begins.
Other tariff reductions could also help. As firms impacted by the storm struggle to maintain operations and cope with the loss local customers, tariff reductions across the range of goods that they use would cut costs and help them remain profitable. Even those businesses not directly harmed by the storm are experiencing increased business costs as supply chains disruptions affect their ability to buy needed inputs and deliver their products to market. Tariff relief would assist businesses across America by reducing these costs and mitigating inflationary pressure resulting from spikes in demand and demolished transportation infrastructure.
By eliminating or significantly reducing tariffs, the Administration can head off price spikes on critical commodities. As well, the burden of reconstruction on American taxpayers would be reduced and business would face greater incentives to return to New Orleans, Biloxi, and other parts of the storm-ravaged region. More business means more jobs and more tax revenue flowing to the local governments that will soon be struggling to restore education, public health, and other government services. The lower the tariffs, the greater the chance that homes will be rebuilt, communities reestablished, and workers reemployed. Lower tariffs will help the region return to normalcy, grow, and reduce its reliance on federal assistance.
Understanding that government policies can make reconstruction more expensive, the Administration has already waived Davis-Bacon to reduce the cost of construction labor. The Administration should go a step further and reduce tariffs on commodities critical to the rebuilding effort and on other imports essential to people and businesses trying to cope with the economic disruption of Hurricane Katrina. Reducing these tariffs will not only lower the cost of Katrina overall, but will also promote a faster recovery.
Daniella Markheim is a Senior Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation.