Impact of Tariffs on U.S Trade and Economy

Abstract
This paper analyzes current trade tariffs in the United States and their impact on trade and the overall economy.  It notes that the United States has, over the past three decades, engaged in more open approach to trading with trading agreements like NAFTA.  Although such agreements have had negative effects in jobs losses in certain economic sectors, it has been beneficial in growing trade among the signatories of the agreement.  The paper also notes that the United States has some of the lowest tariffs overall with trade-weighted import tariff at 2% for industrial goods which constitutes 90% of all imports.  The consequences of the liberal trade approach have been the continued increase in American trade deficit that topped $811 billion in 2017.  In spite of the growing trade deficit, the United States has remained has the largest economy and has grown robustly over the decades with the exception of considerable slowdown after the financial crisis. There are ongoing concerns as noted in regard to the trade spat with China that could lead to the imposition of tariffs and counter-tariffs potentially leading to full-scale trade war which would negatively affect the economies of both nations. Existing uncertainty also impacts investment in sectors that are geared towards exports and could lead to lower than projected economic performance.  

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Impact of Import and Export Tariffs on U.S. Trade and Economy
A 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 impact.
Current Trade Tariffs on U. S. Imports and Exports
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).   According
to United States Trade Representative [USTR] (2018), approximately 96% of all
imports are industrial goods which are non-agricultural.  The country has a trade-weighted import tariff
of 2% on all industrial goods (USTR, 2018).  It mostly employs either specific or ad
valorem tariffs; more than 50% of all industrial goods imports enter the
country duty free (USTR, 2018).  The United
States has largely maintained open markets to international trade.
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).  The top five import markets are: China,
Mexico, Canada, Japan, and Germany (World Bank, 2018).  Canada and Mexico are members of NAFTA along
with the United States.  The economic syndicate
was established with the intention of reducing trade barriers between the three
nations and is currently being reviewed by of the United States.
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).  They come on top of previous 25%
tariffs on Chinese steel imports and 10% tariffs on aluminum (Davis, Zumbrun,
& Wei, 2018). United States has signaled the intention to levy further
tariffs.  The administration has
threatened to impose an additional $60 billion worth of tariffs (Davis, 2018).
In addition, it also intends to
tighten restrictions on technology transfers and acquisitions (Davis, 2018).  These measures are geared towards reducing the
$375 billion trade deficit by at least $100 billion (Davis, Zumbrun, & Wei,
2018).  The United States has
preferential trade arrangements with the European Union with Germany and United
Kingdom being its largest trading partners in the economic alliance.  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.
Impact of the Trade Tariffs on U. S. Trade and Economy
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).  According to Romei
(2018), the United States had a trade deficit of $811 billion in 2017 and was
up $59 billion year-on-year.  China
accounted for $376 billion or 46.4% of the trade deficit (Romei, 2018).  Pierce & Schott (2016) noted that reducing
of trade tariffs between United States and China after the latter’s ascension
to WTO led to significant reduction in manufacturing employment.   The implication is that China has greater
access to the American market.
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.  They noted that
counterfactual agreements promoted exports of intermediate goods especially
when applied at later stages of production.  In the case of trade with Bangladesh, there
was the strengthening of production capabilities of the country.  China has had significant advantage in the
size and cost of labor impacting manufacturing in the United States.
Trade barriers like tariffs and
quotas are additive and increase the median price by up to 14% according to
Irarrazabal, Moxnes, & Opromolla (2015).  They noted that “an additive import tariffs
reduces welfare and trade by more than an equal-yield multiplicative tariff”
(Irarrazabal, Moxnes, & Opromolla, 2015).  Tariff changes impacts how industries
operates. American firms took advantage of cheaper production costs in China to
increase imports at lower costs.  In
China, the reduction in import tariffs following its entry to the WTO changed
the structure and organization of ordinary exports and processing trade (Brandt
& Morrow, 2017).  It has been a
contributing factor in the ballooning trade deficit between United States and
China.  Cut in input tariffs increased
Chinese content in exports (Brandt & Morrow, 2017).  There was the realization that the country
could not only produce intermediate goods but finished goods as well.
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 Coşar, 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.  It has created political concerns about trade
fairness and potential negative economic impact.  Mexico is a cheaper production alternative to
American automakers which has been the bone of contention in the renegotiation
of NAFTA.  The current standoff between
United States and China is likely to persist.  China has indicated that it will only make the
tariffs effective in circumstances where the United States does the same
(Romei, 2018).  Therefore, the measured
approach to the trade now could simmer for some time prior to any settlement
negotiations.  China is waiting for the
signal from United States prior to actualizing the tariffs creating
uncertainty.  There are existing
discrepancies in the trade deficit with the European Union due to skewed
bilateral agreements (Bershidsky, 2018).  The reality is that the trade deficit could
slow down due to imposition of tariffs. There could beneficial negotiations
that eliminate the tariffs.     
Conclusion
The United States has accumulated
significant trade deficits with its largest trading partners.  The deficit has been increasing but has not
negatively impacted economic growth.  The
threat of trade tariffs could upend relationships, creating uncertainty and
impacting global value chains.  In the
end, the United States remains as the most important consumer markets.  The purposed tariffs by the U.S. and from the
U.S will have a huge effect on the economy of the United States and China but
also the rest of the globe.
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