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Tariffs Don’t Help Industry or Consumers

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Tariffs Don’t Help Industry or Consumers

January 24, 2018

This week U.S. Trade Representative Robert Lighthizer announced that President Trump approved new tariffs on solar imports and washing machines, in response to findings by the U.S. International Trade Commission (USITC) that higher levels of imports are a “substantial cause of serious injury to domestic manufacturers.”

Solar cells and modules will face a 30 percent tariff in the first year, with the rate dropping 5 percent each year until reaching 15 percent in the fourth and final year. The first 2.5 gigawatts of imported solar cells will be exempt from the tariff each year.

Washing machines will also face levies. The first 1.2 million units of finished washers face a 20 percent rate, with the rate eventually falling to 16 percent in the third and final year. Covered parts and imports of finished washers above established thresholds are subject to higher tariffs, as much as 50 percent in the first year.

The investigation by the USITC, and ultimately the tariffs agreed to by the administration, were prompted by complaints from companies in competition with foreign manufacturers. Whirlpool filed a petition as far back as 2011, and two U.S.-based but foreign-owned solar manufacturers Suniva and SolarWorld Americas filed their petition in 2017.  The solar companies petitioned under Section 201 of the Trade Act of 1974, and a Section 201 finding requires no evidence of dumping or unfair trade practices, only that higher imports caused substantial harm.

In the case of the washing machines, previous petitions from Whirlpool did result in antidumping and countervailing duty orders, but their effects illustrate the limitations of protective efforts. According to a USITC report, U.S. imports from Mexico and Korea, the countries in question, did decline from 2012 to 2013 after the orders were issued in February 2013. The specific amounts are redacted in the report. However, U.S. imports from China quadrupled during the period, prompting another petition and an investigation that eventually led to more countervailing orders against washers from that country. Over the 2012-2016 period, U.S. imports of the washing machines increased relative to U.S. production.

These three companies are undoubtedly welcoming the news that their petitions have resulted in concrete actions, and they will likely benefit from the tariffs being put in place. However, when taking a wider view of American companies across industries and in different links of the supply chain, these new trade duties could quite plausibly harm the U.S. economy.

Even within the narrow scope of solar panels, it is not clear that the new measures will increase employment. Manufacturing of solar panels is only one component of the solar industry, which employs between 260,000 and 374,000 workers.  Out of this group, only 38,000 work in manufacturing. Even this oversells the number of people whose work would be insulated from competition from imports, as Solar Energy Industries Association estimates that only 2,000 of these solar manufacturing workers make the products covered by the tariffs.  Significantly more people work in installation. Their jobs would be at risk from higher solar panel prices that would reduce demand for installations, with one estimate that the tariffs would cost 23,000 U.S. jobs in the first year.

Producers are only one side of the equation. American consumers pay for these new tariffs in the form of higher prices or fewer choices. Keeping a focus on these costs, more diffuse, harder to quantify, and likely less salient, is important when attempting to analyze tariff proposals. Goldman Sachs estimates that Americans could see an 8 to 20 percent increase in the price of new washing machines next year. Solar system prices are expected to rise 10 percent for utilities and large purchasers, and 3 percent for consumers.

In another 2017 report, the USITC estimated that “the net change in total U.S. economic welfare from removing significant import restraints would be a positive one,” leading to an average annual increase of about $3.3 billion from 2015 to 2020.  Only in government does the agency that is recommending the tariffs also estimate that in aggregate Americans would be better off without import restrictions.

These higher prices and lost jobs could be just the tip of the iceberg. Companies in other industries could be more likely to file complaints against foreign competitors, seeing the success businesses were able to achieve in limiting sources of competition.

In addition, other countries will likely respond to U.S. tariffs by imposing new or higher restrictions of their own. For example, when the United States imposed new duties on Chinese solar panels in 2011 China introduced corresponding measures. The country is the biggest buyer of U.S. soybeans, and could consider steps to reduce imports.

Some argue that tariffs are justified because foreign producers are dumping products subsidized by their governments in the United States. Even in cases where the investigation does find some evidence of dumping or anticompetitive trade practices by other countries, the countervailing orders put in place do not appear to have an effective track record. Furthermore, the countervailing duties and tariffs also create room for unintended or unforeseen consequences that could create new problems.

However, even if this were to be true, America should welcome these inexpensive products.  Consumers benefit from access to a variety of affordable options, as do U.S. companies that rely on imports. Paying less for some products leaves them more funds to buy others.

The new tariffs are not an effective way to raise GDP, and could cost jobs due to losses in other areas. In addition, these levies will increase costs to American consumers. At this point, we can estimate the effects of the newly announced measures, but cannot anticipate what other American companies will seek similar treatment, or how other countries will respond. Fostering an environment that encourages companies to expand and entrepreneurs to innovate is a better way to support American economic activity. 

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes

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