Employment in Downstream Industries:
The Case for a “Safe” Tariff
Radosław Michał Nowak
University of Amsterdam Graduate School of Social Sciences
Prof. Sebastian Krapohl
A thesis submitted for the degree of
Master of Science in Political Science: Political Economy June, 2020
Acknowledgements:
I would like to thank Florestan Peters for his tireless efforts to see that the two of us survive our graduate studies while maintaining compassion and sanity. It is thanks to his support, intellect, generosity, incredible cooking, and above all, friendship, that this work has been possible. From the first coffee we shared in front of CREA a week before classes to the midnight champagne, moments after we both submitted our final theses and concluded our studies, Flo has been a constant source of inspiration and comradery.
I would also like to thank professor Sebastian Krapohl for introducing me to the world of international trade and guiding me throughout my graduate journey, as well as my long-time intellectual sparring partner Bobby Trice for his encouragement and
kindness.
Per angusta ad augusta; semper humeris amicorum.
1.0 Introduction 4
2.0 Literature Review 6
3.0 Applicable Theory 8
3.1 New Trade Theory 9
3.2 New New Trade Theory 11
3.3 Rent Seeking 12
3.4 The Precariat 13
3.5 Elasticities 14
3.6 Tariffs and Industry Traits 15
3.7 Deadweight Loss 16
3.8 Trade Diversion and Repatriation 17
3.9 Tariffs and Employment 18
3.10 Currency Effects 19
3.11 Summation 20
3.12 Hypothesis 22
4.0 Context 23
4.1 Legal Basis of Tariffs 23
4.1.1 Section 337 24
4.1.2 Section 201 25
4.1.3 Section 232 26
4.1.4 WTO Security Exception 26
4.2 Political and Economic Context 27
4.2.1 Dumping 28
4.2.2 US Trade Deficit 29
4.2.3 Electoral Motive 30
4.2.3.1 Manufacturing and Results of 2018 Tariffs on Electorate 32
5.0 Methodology 36
5.1 Case Selection 36
5.2 Data Source and Configuration 38
6.0 Analysis 41 6.1 Cases 41 6.1.1 Steel 41 6.1.2 Aluminum 47 6.1.3 Solar 49 6.1.3.1 Solar Manufacturing 54
6.1.4 Residential Washing Machines 55 6.2 Results 59 6.3 Discussion 62 6.3.1 Solar 62 6.3.1.1 Exclusive Firms 63 6.3.1.2 Inclusive Firms 64
6.3.1.3 Projected vs. Actual Growth 64
6.3.2 Residential Washing Machines 66
6.3.3 Steel and Aluminum 68
6.3.4 Affirmation of Hypothesis 69
6.3.5 Infant Industry Growth 71
6.3.6 Confounding Factors 72
6.3.6.1 Decoupling 73
6.3.6.2 Time Limit of Tariff Effects 74
7.0 Conclusion 75
Works Cited 79
1.0 Introduction
The last two years have seen trade disputes between the United States and China develop into a trade war, with the US “impos[ing] tariffs on more than $360bn of
Chinese goods, and China retaliat[ing] with tariffs on more than $110bn of US products” (BBC, 2020). Tariffs are essentially a tax on imported goods, imposed to generate
government revenue, shift trade flows, or both. Though the costs of tariffs are most often considered with respect to rising consumer prices, the impacts of tariffs
reverberate throughout many aspects of local, national, and international economies. According to the Federal Reserve Bank of New York, for instance, the investment impact of the US-China trade war has reduced the market value of US companies by over $1.7 trillion (Amiti, Kong, and Weinstein, 2020: 20). “That’s a vanishing of value equivalent to the national GDPs of Russia, Canada or South Korea” (Brown, 2020). Though there are many ways to quantify the impact of tariffs, this paper will focus specifically on their employment effects, both within a protected industry as well as along its supply chains. This latter range of employment will be referred to throughout the paper as
downstream employment, meaning employment that results from further production and services after the introduction of a tariffed product.
Tariffs have historically had varied effects on both the industry they were
designed to support and broader macroeconomic indicators. Not all tariffs have caused net losses for the importing country. The US steel tariffs of the mid 20th century failed
to save rust belt jobs and led many local economies into ruin. However, the steel and aluminum tariffs of 2018 had an overall positive effect—not only on employment in domestic mills but also on downstream US industries. In another case of 2018 tariffs on photovoltaic panels, the opposite has been true. In this case, the enactment of tariffs cost downstream employment over 8,000 jobs in the first year according to the Solar Energy Industries Association (SEIA), though actual PV panel manufacturing and some types of downstream solar firms have expanded their payrolls (2019). All of these tariffs were designed to accomplish the same goal, yet their effects have varied greatly. It is important to note that it is highly unlikely that all indicators will see an improvement, even in a best case scenario. Thus, it is worth examining tariffs by the indicators they affect rather than make judgements on the whole.
Current literature posits that the non-uniform effects of tariffs are due to industry and supply chain characteristics. In the case of employment, these characteristics
determine the direction and severity of tariff effects on the payrolls of protected and downstream industries. The purpose of this research project is to discern which industry and supply chain characteristics determine the “success” of a tariff and its effects on downstream employment. If a legislative or executive body were to design a tariff scheme aimed at protecting domestic industries while minimizing damage in other areas of domestic employment, what conditions and policy specifics are required? As the literature demonstrates, there is always some tradeoff in strategic trade policy. Under varying scenarios of welfare maximization and electoral opportunity, which tariff schemes are worth the tradeoff?
The structure of an industry, its size and stage of development, product variety, and position along supply chains have been demonstrated to affect industries’ ability to absorb increased costs from the implementation of tariffs. A tariff on apples would be much better absorbed by companies than a tariff on cellular phones because apples are further processed and sold by a wide variety of firms. Agrochemical companies extract ascorbic acid for vitamin supplements and additives, and apple cider is fermented to create hard cider. These production chains generate strings of further industry from the product as well as new jobs, ranging from chemists and brewers to sales representatives. On the other hand, cellular phones are end products with limited support for other industries and jobs.
2.0 Literature Review
Tariffs in general have been reviewed at length in economic and political literature, though the depth of analysis varies considerably depending on the level of consideration and its respective variables. Economists have long argued that tariffs lead to a deterioration in current accounts, overall employment, investment, and wages in some cases, while occasionally improving these measures in others (Wijnbergen, 1987: 1; Douglas, 2007: 582; Alfonso and Holland, 2018: 603). This thesis, however, focuses specifically on the effects of tariffs on employment.
Fender and Yip (1989: 806) warned that open economies with flexible exchange rates will likely see an overall contractionary effect of tariffs on their employment
figures. While this allows for exceptions such as developing countries using tariffs while they build up production capacity and investments in innovation, as suggested by Friedrich List and Melitz, developed nations like the United States are left to the advice of Krugman and others not to rely on tariffs lest they wish to see employment fall (1841: 32; 2005: 177). However, as is the case with strategic trade policy in general, there are beneficiaries and victims in each decision, often within the same geopolitical bounds. The differentiated effects of tariffs on protected versus downstream industries is not new. In a recent analysis of Pennsylvania’s steel product manufacturing
employment following George W. Bush’ 2002 steel tariffs, Gustav Matsson and William Lind found that while steel production itself experienced growth as well as expanded payrolls, the overall rising costs of steel due to tariffs decreased employment in Pennsylvania’s downstream steel product manufacturing industries (2020: 31). As a repeated strategy by the US executive branch, steel tariffs are a particularly interesting case in this thesis.
This leaves the question of what conditions augment the effects of tariffs on employment. Tariffs do not all have the same effects, and those with similar effects vary in their degree of impact. This variability will be demonstrated through analysis of the four cases included in this thesis. Imbs and Mejean write that the effect of tariffs on employment is mediated by the trade elasticities of a tariffed product (816).
Furthermore, “[t]he response of aggregate imports and exports to changes in relative
prices depends on consumers’ willingness to substitute domestic and foreign goods” (806). Industry and product characteristics that determine price fluctuations and demand elasticities are therefore at the core of how a protected industry’s downstream partners handle price hikes like tariffs. These characteristics include substitutability on a product level, but on a firm level they may also include things like markup wedges or the ability of a firm to reduce prices at the cost of its profit margins for the sake of maintaining demand where demand is elastic (Feenstra 2008: 26). The effects of
industry traits on trade elasticity are what the four criteria of the hypothesis are derived from.
The literature has thus far explored many theoretical and empirical aspects of tariffs’ “successes” and “failures.” These two terms should always be regarded as subjective in the context of tariffs as they are not only politically defined but also vary based on the involved parties and their respective interests, as pointed out by Kyle Bagwell and Robert W. Staiger (2002: 3). The successes and failures have been evaluated with regards to a wide range of variables, including stage of national development, labor market configuration, and industry development; however, few authors have thus far endeavored to create an industrial profile or set of criteria for a low cost tariff in terms of downstream employment. This is the essential gap in the political-economic literature this study seeks to fill.
3.0 Applicable Theory
Over the last few decades, China has emerged as the “factory of the world,” replacing previous industrial giants like the US, UK, and Japan as the primary exporter of the world economy. As a result, its trade relationship with other countries has
reversed, particularly with the United States, meaning it now exports more to the US than it imports (US Census Bureau). New Trade Theory is a framework that can help explain the various reasons for this trade relationship reversal and China’s current position in the world trade structure.
3.1 New Trade Theory
New Trade Theory (NTT) emerged in the 1970s with the work of Paul Krugman in his text Increasing Returns, Monopolistic Competition, and International Trade
(1979). New Trade Theory builds off traditional trade theory’s claims of industry
comparative advantage, whereby countries trade with one another based on opportunity cost advantages they hold to produce products. China has low labor costs and a large workforce, so labor intensive manufacturing is much easier to achieve there than Canada. On the other hand, Canada has invested heavily in its workforce’s human capital, meaning it holds many well-educated professionals specializing in computer
engineering or molecular biology, allowing Canada to become a suitable hub for biotech firms.
NTT brings in more structuralist dimensions such as politics, consumer trends, fashion, and geography. It addresses the observation that even countries with similar manufacturing capabilities and costs still trade the same goods with one another. This is true primarily for intra-industry trade with intermediate and final stage products. Brazil and Argentina, for instance, both specialize in beef production, though there is little need for them to trade the same good with one another. Meanwhile, Italy and Germany both have well developed car industries but do trade these products with one another. The specifics of the products, in conjunction with consumer tastes, make this trade occur. Italy has specialized in the production of luxury vehicles such as Ferrari and Maserati, creating a specific global clientele that has an interest in exclusively Italian made cars. Germany, on the other hand, has specialized in the mass production of mid range vehicles such as Volkswagen, Opel, and Audi, allowing for demand from a wide global consumer base including Italians.
Because of varying income levels, status symbolism, and branding, there is demand in both Italy and Germany for their partner’s products despite the similarity of capabilities and capital. Intra-industry specialization is a large part of monopolistic competition. Because a firm can specialize in more than one aspect of a product, many companies offer similar products on the same market. Companies that develop new versions through technological innovation or who enter markets earlier can take advantage of economies of scale and scope. This phenomenon is key to New Trade
Theory and to understanding the context behind the United States’ trade disputes with China. Firms that are first to enter a market, develop mass production capacity, achieve low costs of production per unit, or develop more advanced technologies can utilize economies of scale to acquire dominance in a market. In the case of photovoltaic panels, this is exactly what China has achieved. The political and legal dimension of trade
disputes in this case becomes particularly salient when state intervention is the reason behind economies of scale.
3.2 New New Trade Theory
There has also been a recent development upon NTT with New New Trade Theory (NNTT), which brings in variation in business operation and product needs to explain trade differences within two companies of the same industry. Not all firms that create the same product are exporters. According to Helpman, Melitz and Yipple (2004: 301) and Melitz and Redding (2014: 3), only highly productive firms with a great deal of capital (largely through FDI) can export and produce locally overseas. This produces a greater variety of possibilities and dynamics when considering the reasons for trade relationships and variations between countries. When considering the case of tariffs between the United States and China, NTT is the most appropriate theoretical angle. Its political dimensions provide space for augmentation through targeted trade policy such as discriminatory tariffs. However, the focus in this thesis is almost exclusively on
exporting firms, providing little need to consider the contributions of NNTT, particularly as it is a new and still developing theory.
NTT has been a beneficial element of trade theory development from the traditional Ricardian model of comparative advantage as it provides theoretical space for rent seeking in trade relationships between countries. Targeted trade policy such as discriminatory and uniform policies alike is often initiated by firms rather than
governments themselves.
In the case of the United States tariffs against China, this has occurred most often through Section 337 of the US Tariff Act of 1930 and Section 201 of the US Trade Act of 1974. These laws and their implications on the US-China trade war will be discussed further in a later section. It is first necessary to establish the motivations and dynamics of corporate rent seeking upon government and intergovernmental institutions.
3.3 Rent Seeking
Gordon Tullock developed the idea of rent seeking and its cost in his 1967 article The Welfare Costs of Tariffs, Monopolies, and Theft. He describes the welfare cost of resource expenditure for gaining favorable rules to achieve a monopoly. Anne Krueger develops rent seeking further in detailing the processes by which companies compete to bribe or otherwise provide some incentive for legislators and high ranking bureaucrats to provide favorable regulatory conditions that are often targeted to exclude other rival
firms (1974: 292). These conditions can come in many forms, from licensing schemes to targeted taxation. In the case of the US-China trade war tariffs, there is targeted taxation through the use of discriminatory and ultimately uniform tariffs on imports to the
United States. The political element of the trade dispute allowed rent seeking firms to use non-financial means to incentivise government agents. As will be expanded on later, some avenues for import relief do not require economic justification, such as Section 201 complaints, and are largely followed through per the discretion of the US executive branch, allowing for a high degree of rent seeking.
3.4 The Precariat
Political anthropologist Gregory Morton describes the rhetoric of US president Donald Trump as one that fits perfectly with the interests of manufacturing firms threatened by Chinese imports (2018). The core of Donald Trump’s election platform has been to prioritize American workers, particularly those who suffered from the outsourcing of manufacturing over the last forty years. This is heavily reflected in
Trump’s political rhetoric. These new members of the precariat class “have interpreted a vote for Trump as an act of labor nostalgia, a gesture of yearning for an industrial past. Such commentary describes Trump voters by describing the jobs that many of them once did—manufacturing jobs” (Ibid: 1; Guy Standing, 2011: 13). By the sole
membership profile of manufacturing firms, these companies are able to achieve a great
deal of favorability from government entities simply being aligned with political rhetoric. Sections 201 and 337 provided an apt avenue for this process, which will be expanded on in the legal section. Due to the political element of trade and strategic trade policy, tariffs are often not implemented for industries where they would be most
beneficial. On the contrary, they can be implemented on products and industries where they may have considerable negative consequences on overall welfare, wages, and employment.
3.5 Elasticities
As mentioned before, some criteria are included in the hypothesis particularly due to their relationship with trade elasticity. Substitutability and variety in downstream production impact this measure through demand elasticity, or the responsive
adjustment of demand based on changes in prices. This is a separate and more narrow measure. “The price elasticity of imports summarizes the competition between domestic and foreign producers in the face of an adjustment in demand” (Imbs and Mejean, 2010: 1). Price elasticity allows us to consider the demand elasticities of domestic and foreign products separately, and also to examine the responsiveness of domestic markets
through the aforementioned criteria. “International prices differ, for instance because of tariffs or transport costs, and rms decide accordingly to enter or exit export markets. The aggregate response of trade to such relative price shocks is a trade elasticity” (Ibid).
The case and result sections will demonstrate how domestic prices adjust when met with increasing prices of imported goods, particularly due to import relief measures such as tariffs.
3.6 Tariffs and Industry Traits
Current literature proposes a number of criteria for relatively "safe" tariffs. The hypotheses of this paper rely on these criteria in the application of historical findings on the 2018 tariff round. If an industry and its downstream production and services are well established, these firms will be better equipped in terms of supply chains, capital, and consumer base to absorb the costs of tariffs in a way that minimizes the need to reduce payrolls. According to Fender and Yip, “a temporary tariff unambiguously
reduces employment under both nominal and real wage rigidities where the country just produces exportables.” However, “with the introduction of domestic production of importables, a tariff is less likely to have an unfavourable effect on employment” (816). Just as NNTT differentiates between firms that can and cannot absorb the cost of expansion and export to become particularly able and successful in entering international trade, there is a similar dynamic in surviving tariffs. Large firms in established sectors are able to cover the added costs of international trade because of their access to public capital through international stock exchanges, low transaction rates, higher profit margins, and low production costs due to the diminishing nature of
marginal costs of production whereby the 100th product costs less to make than the first as a result of economies of scale.
Substitutability also plays a considerable role (Ibid). A tariff on lemons, for instance, is unlikely to harm downstream industries like beverages or Tex-Mex food stands for a number of reasons. A) There are virtually no industries where lemons are the sole or primary input product, which also tends to mean that B) the price of lemons has little impact on firms’ profit margins as there is a diverse product portfolio; C) There’s a wide range of downstream industries that create intermediate and end-stage products from lemons, and D) one can always replace lemons with limes. This makes lemons very elastic in terms of demand and thus trade. An example for
non-substitutability would be cotton. This product is imported almost exclusively for textiles and clothing firms do not have a diverse enough product portfolio to spread costs by relying more heavily on the sale of non-cotton products. The price of cotton would therefore dramatically affect clothing production costs and thus would have to result in a sacrifice of either company profit margins, consumers’ wallets, or both. The logic should follow that small firms that have low return margins due to the infancy stages of production, technology, and firm development would experience this even more drastically.
3.7 Deadweight Loss
Per the Ricardian theory of comparative advantage, tariffs cause not just deadweight loss in terms of consumer prices and demand. Tariffs mean expending a great deal of financial resources by the state and market mechanisms toward propping up noncompetitive industries. These resources could be much more efficiently allocated into domestic specialization and trade creation in areas that the US has a comparative advantage in, such as technology, finance, energy, and others (Golub and Hsieh, 2000: 225). Beyond the neoclassical arguments, preemptive and adaptive shifts in trade strategy can have lasting losses from trade disputes, particularly intensifying tit-for-tat style retaliations as the US currently has with China.
3.8 Trade Diversion and Repatriation
China has recently been shifting its import strategies to reduce reliance on the US market, looking instead to the European Union, ASEAN countries, and Russia to
substitute many of the products China has historically imported from the US. The longer trade wars last and the greater the uncertainty of further trade disputes, the greater the incentive for countries like China to diversify and shift imports to markets with more favorable and stable trade relations.
However, when countries represent large enough markets, they can use uniform tariffs, meaning tariffs equally applied on all trading partners, to sway the behaviors of firms. One common goal of tariffs is not only to prop up existing domestic production but also to “repatriate” production that’s been outsourced. This is a prime example of strategic trade theory, or the frequent intervention of governments “on behalf of
domestic firms [to] play a major role in shaping the nature of international competition” (Reimer and Stiegert, 2007: 1). When a country imposes uniform tariffs, the payout structure for foreign firms changes depending on the location of production. The following is a simple theoretical model of consumer prices for an exporting firm
responding to an importing country’s tariffs (Flaeen, Hortaçsu, and Tintelnot, 2019: 7):
In the above model, superscript C represents a foreign country as a source of
production, while V represents the importing country. If an exporting firm encounters a tariff barrier to an importing country, the price of its good rises to PC + . If PC + > PV and the importing country has a large enough market, like the United States or the
European Union, exporters will see their payoff structure shift in favor of relocation to the importing country. This is why the 2018 tariffs saw a number of manufacturers move production to the United States.
3.9 Tariffs and Employment
Trade diversion, deadweight loss, industry traits, rent seeking, and shifts in demand can all have varied consequences on employment, both within a protected industry and outside of it. In economics, there is a general “consensus that the microeconomic impact of protection is likely to be adverse,” meaning aggregate employment is generally believed to suffer even though employment within the protected industry may be strengthened (Fender and Yip 816; Hortaçsu: 421). This consensus is held for countries with a free exchange rate regime like the United States Dollar or the Euro, partly because of the effects mentioned previously. “The loss (gain) in employment, as reflected in the loss (gain) of net national output, is exactly equal to the gain (loss) in redistributed tariff revenue” (Chan, 1978: 415). According to Fender and Yip, protectionist measures like tariffs also have” a 'crowding-out' effect, reducing the output of the non-protected sector.” (816) This translates to a reduction in
employment, particularly in downstream manufacturing of intermediate and final stage goods.
3.10 Currency Effects
The neoclassical macroeconomic argument on the long term effect of tariffs also holds that its import suppression effects are short lived. As tariffs rise and suppress imports while supporting domestic industries and exports, the trade effects on exchange rates strengthen the domestic currency. A stronger domestic currency relative to the currencies of trade partners ultimately makes imports cheaper, thus increasing them and canceling out many of the purported positive tariff effects while leaving deadweight loss uncorrected. Furceri et al. support this process in their empirical research, claiming that they “do not find an improvement in the trade balance after tariffs rise, plausibly reflecting our finding that the real exchange rate tends to appreciate as a result of higher tariffs.” (2018: 4).
The cancelling-out effect of free exchange rates is why Donald Trump has been dissatisfied with the Federal Reserve, as for the export and domestic production
promoting effects of tariffs to actually hold, the currency needs to weaken. The Federal Reserve, however, has been reluctant to allow the depreciation of the US dollar by lowering interest rates up until the start of the COVID-19 crisis; though these measures were necessitated by the need for mass stimulus and have virtually no relation to trade disputes (Smith and Greeley, 2019).
3.11 Summation
Modern economics has trended toward liberalization of the world trade system, prioritizing the elimination of tariffs and non-tariff trade barriers. A pivotal
establishment liberalization as the mainstream movement in trade economics was the proliferation of the Washington Consensus from the late 1980s and the founding of the World Trade Organization (WTO) in 1995. The WTO, as the world arbiter of
international trade, is designed to promote “[t]he opening of national markets to international trade [in order to] encourage and contribute to sustainable development, raise people's welfare, reduce poverty, and foster peace and stability.” (WTOa). As such, tariffs are generally regarded as a strategic tool at best, and a threat to the national economies and global trade at worst. “Tariffs encourage the deflection of trade to inefficient producers in order to avoid tariffs,... reduc[ing] welfare. Further, consumers lose more from a tariff than producers gain, so there is ‘deadweight loss.’ Broad-based protectionism can also provoke retaliation which adds further costs in other markets. All these losses to output are exacerbated if inputs are protected, since this adds to
production costs” (Furceri et al. : 1).
When governments seek to impose trade restrictions through targeted trade policy, the motivation is less about corporate profit and more explicitly about the employment of threatened industries’ workers; though, of course, the two go hand in hand. However, the effects of tariffs are now understood as complex and varied.
Standard tariff theory claims that an imposed tariff raises the price of an imported good, allowing domestic production a relative market advantage as it is not subject to the tax. This line of thinking is designed to support the protection and even promotion of employment within a protected industry. As theories on tariffs and their effects have become more developed, this picture has become much more complex with added conditions and variables. This complexity is particularly true when expanding the scope of analysis for employment from the protected industry to also include downstream employment. The effects of trade liberalization and restriction through targeted trade policy has heterogeneous effects on downstream firms, particularly when tariffs are placed on input products which feed into many supply chains (Chevassus-Lozza, Gaigné, and Le Mener, 2013: 392). It is therefore important to discern the characteristics of a tariff, the industry it is protecting, and this industry’s general trade and employment context.
The characteristics of these variables determine the severity and direction of a tariff’s overall effects. The size of a firm and its market dominance, for instance, are two noted determining factors of whether the firm can maintain employment levels in light of trade policy shifts (Larochelle-Côté, 2007: 845). Other potential factors include the stage of intermediacy of a tariffed product, economies of scale, markup wedges of domestic and foreign firms, and volumes. All of these factors ultimately contribute to trade elasticity, the catch-all variable which is a strong indicator for the severity of a tariff’s effects. The goal of this thesis project is to determine which factors hold direct
relationships with downstream employment effects of tariffs, an expansion on current literature which has not fully examined the effects of these factors along supply chains.
3.12 Hypothesis
Based on historical data and theory surrounding tariffs and employment, this paper seeks to create a profile of a “safe” tariff, in relative terms. I hypothesize that contrary to the general attitude on tariffs in mainstream economics, there do indeed exist tariffs that are safe for the labor market. Their net positive labor market effects stem from the following criteria:
- Early stage of production (ideally input products) - High variety of downstream production
- Developed industries - Low substitutability
These factors determine trade elasticity, or “[t]he response of traded quantities to exogenous shifts in relative prices” (Imbs and Mejean, 2010: 806). Trade elasticity here plays the catch-all variable that indicates the strength of a tariff’s effect. This
relationship will be further explained in the review of applicable theory. Ultimately, the research in this paper seeks to determine the necessity of the hypothesized conditions on mitigating the downward pressure tariffs impose on downstream employment.
4.0 Context
The 2018 tariff round has a number of economic, political, and legal contexts that allowed the Trump administration to establish tariffs of varied rates on fairly unrelated industries and using different justifications. The following sections parse out these contexts and how they correspond with one another.
4.1 Legal Basis of Tariffs
When a US- based firm, industry, or the US government itself wish to protect an industry through the implementation of uniform tariffs, they are subject to a number of restrictions per US law, WTO law, and international trade agreements. However, there are a few avenues in US and international trade law for the implementation of these trade restrictions. These include Section 337 of the US Trade Act of 1930, Section 201 of the US Trade Act of 1974, and Section 232 of the Trade Expansion Act of 1962. In
addition, there are exceptions in WTO law that allow for the implementation of high tariffs under Section 232.
4.1.1 Section 337
Section 337 of the US Tariff Act of 1930 deals with investigations of unfair practices in import trade. Of the many avenues domestic firms have to petition the US
government for intervention in trade flows, Section 337 requires the highest degree of substantiation as it mandates a finding of unfair trade practices. These may include discriminatory regulation, subsidies (dumping), trade restrictions, and others. According to the US International Trade Commission (USITC),
Section 337 declares the infringement of a U.S. patent, copyright, registered trademark, or mask work to be an unlawful practice in import trade. Section 337 also declares unlawful other unfair methods of competition and unfair acts in the importation and subsequent sale of products in the United States, the threat or effect of which is to destroy or substantially injure a domestic industry, prevent the establishment of such an industry, or restrain or monopolize trade and commerce in the United States. (CRS, 2020)
Companies can therefore file section 337 claims with the USITC to launch an
investigation for possible corrective measures. These measures may include civil fines, import bans, and more.
4.1.2 Section 201
The second avenue US firms can use is Section 201 of the US Trade Act of 1974 is the second avenue US firms can use, which is designed specifically for “import relief” for domestic industries.
Under section 201, domestic industries seriously injured or threatened with serious injury by increased imports may petition the USITC for import relief. The USITC determines whether an article is being imported in such increased quantities that it is a substantial cause of serious injury, or threat thereof, to the U.S. industry producing an article like or directly competitive with the imported article...Section 201 does not require a finding of an unfair trade practice, as do the antidumping and countervailing duty laws and section 337 of the Tariff Act of 1930. (CRS, 2020)
In particular, tariffs initiated under Section 201 initiated tariffs in particular have played a key role in the US-China trade war. The Trump administration’s policies fall squarely in line with strategic trade theory, whereby countries enact trade policies to shift profits from foreign to domestic industries as a way of protecting national economic interests (Milner and Yoffie, 1989: 240). Antidumping duties and Section 201 tariffs are designed to shift profits from foreign to domestic industries do exactly this, regardless of whether they are enacted to correct unfair trade practice or not.
4.1.3 Section 232
A third avenue, and one rarely used, is Section 232 of the Trade Expansion Act of 1962. For context, prior to 2018, the last time the United States last used Section 232 to impose uniform tariffs on was 1986 for machine tools in 1986 (CRS: 2). This section of the Trade Expansion Act of 1962 allows for the implementation of uniform tariffs in order to safeguard the United States from “national security” threats. It grants the President the authority “to impose restrictions on certain imports based on an affirmative determination by the Department of Commerce... that [a] product under investigation ‘is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security” (Ibid).
4.1.4 WTO Security Exception
Typically, WTO law has tariff “bounds” for products by which all member states must abide by. This means that if the WTO sets a bound rate of 10% for imported beer, member states can only implement tariffs less than or equal to the bound rate. There is, however, an exception to this law which the Trump administration has utilized.
The U.S. administration is leaning on a security exception in Article XXI, pertaining to national defense: “Nothing in this Agreement shall be construed ... to prevent any contracting party from taking any action which it considers necessary for the
protection of its essential security interests.” Each country has full autonomy in judging whether there is a threat to its national security. Moreover, under this exemption, there is no set expiration date for the tariffs; a government can remove them at a time of its choosing.” (Sposi Virdi, 2018: 2; WTO, 1948: 599)
This exception in WTO law allows the United States to disregard tariff bounds if a Section 232 investigation concludes with positive findings of a national security threat, followed by the subsequent enactment of tariffs by the president. In the cases examined in this research paper, the steel and aluminum tariffs utilized these legal avenues to enstate 25% and 10% tariffs, respectively.
4.2 Political and Economic Context
It’s important to note that the Trump tariffs did not arise without significant reason. Manufacturing workers have felt the impacts of outsourcing and economic decline since the mid to late twentieth century. American steel has gone through
iterations of tariff and non-tariff trade barriers over the last few decades. Photovoltaic panels and washing machine tariffs followed a number of strategic trade policies by previous US administrations to curb dumping practices by foreign exporting firms, particularly out of China and Southeast Asia for nearly two decades. The US has
ultimately turned to uniform tariffs because the effectiveness of anti-dumping duties is often short lived. Solar panels provide a prime example of the US trade policy response to repeat dumping cases.
4.2.1 Dumping
PV manufacturers in the US have long accused their Chinese counterparts of illegal dumping and subsidization under World Trade Organization (WTO) law. The WTO defines dumping as goods being exported “at a price less than their normal value, generally meaning they are exported for less than they are sold in the domestic market or third-country markets, or at less than production cost” (c). Per the Uruguay Round agreements and resulting article VI of GATT 1994, this action is illegal under
international trade law. In 2012, the US Department of Commerce’s International Trade Administration (USITA) concluded a series of investigations on PV panels being
exported to the US from Chinese firms, determining that “Chinese producers/exporters have sold solar cells in the United States at dumping margins ranging from 18.32 to 249.96 percent. Commerce also determined that Chinese producers/exporters have received countervailable subsidies of 14.78 to 15.97 percent.” As a result, the United
States implemented anti-dumping tariffs directed strictly at Chinese exports. Typically, tariffs cannot be directed at specific countries, but anti-dumping measures like these are permitted under certain conditions by the WTO. Still, China filed a complaint with the WTO against the US and a dispute settlement panel was ultimately created. In 2019, the WTO panel ruled that China did indeed use state owned enterprises to subsidize PV panels.
While the WTO ordeal was occurring, China engaged in a series of trade diversion tactics to get around US trade barriers. Chinese firms moved late stage production to Taiwan to get around US rules of origin; meaning that while most of the manufacturing occurred in the PRC and was funded by Chinese firms, because some production and ultimate product completion occurred in Taiwan, the PV panels technically counted as Taiwanese products and were not subject to anti-dumping measures aimed at China (Irfan, 2018; Hughes and Meckling, 2017: 258). Quickly, the US caught up, and by 2013 expanded its anti-dumping measures to Taiwan as well (Hughes, 2014). China
continued shifting its late stage production to other Asian countries and even Europe for a few more years, engaging in a whack-a-mole type chase until the late 2010s.
Uniform tariffs solve the issue of constantly chasing end stage production of exporters who engage in dumping practices. By imposing tariffs on virtually all countries (often excluding Canada and Mexico due to the US-Mexico-Canada
Agreement [previously known as the North American Free Trade Agreement] due to their membership in a free trade area), the United States no longer had to impose new duties. The downside of this uniform tariff strategy is that other foreign exporters who
did not engage in dumping practices are also subject to the high tariff, per the WTO’s most favored nation principle, whereby a tariff must be applied to all countries at the same rate.
4.2.2 US Trade Deficit
Beyond unfair trade practices, the Trump administration has expressed great dissatisfaction with the US trade deficit, wherein the US is a net importer of goods in the global economy. Trump argues that having a trade deficit harms the US economy and domestic jobs, and that a trade surplus would therefore signal strong productivity and manufacturing (Soergel, 2020). “It is China’s huge trade surplus with the United States that has attracted most of the Trump administration’s ire. China ran a record $375.2 billion trade surplus with the United States in 2017 as the overall U.S. trade deficit surged 12 percent to $566 billion” (Chance, 2018). Therefore, tariffs are a way of reducing or even reversing this phenomenon. With increased costs of imports and increased domestic production, the goal is to make sure that individual countries and the global market generally purchase more from the United States than the US does from the rest of the world and, in this case, particularly China.
4.2.3 Electoral Motive
The implementation of tariffs is not entirely a matter of economic imperative and is inherently political. In some cases, political motives are obvious. In May of 2019, Trump invoked the International Emergency Economic Powers Act to impose tariffs on Mexican products as a leveraging tool to pressure the Mexican government to curb unauthorized immigration into the United States through the US-Mexican border, a key tenant of the Republican Party platform (Republican National Committee, 2016). In most cases, however, the Trump administration has provided some economic
justification for implementing trade barriers.
In general, trade policy is a balance between political and economic motives. This should be understood as a balance between economic welfare, rent seeking, and electoral opportunism, a balance that generates the according sets of beneficiaries and victims. The US gave up competitiveness in many industries for the sake of trade liberalization. For instance, the North American Free Trade Agreement (NAFTA)
decimated the US textile industry in southeastern states and brought in cheaper textiles from Mexico. This concession was the price for the US gaining greater, levy free access to Mexico and Canada in other markets such as agriculture—a key trade goal for the US as agriculture makes up 10.91% of US exports and is heavily subsidized to be
competitive with international prices (UN Comtrade). It may be a fair assumption that 1
1 As a combined sum of UN Comtrade product classifications: vegetable products, animal products,
foodstuffs, and animal and vegetable by-products.
countries assume strategic trade priorities to focus resources and favorable conditions to specialize and thus maximize comparative advantage, However, as the historical results of tariffs and those examined in this paper suggest, this is seldom the case. The
downstream cost of tariffs often outweighs the job gains in manufacturing and processing sectors.
This position holds even when considering possible advances in manufacturing technology and production capacity. The 2019 SEIA study on the US PV panel tariff calculates a job loss of 31 downstream positions for every manufacturing position created per the tariff’s profit shifting effect (11). The decision to protect some industries and not others, therefore, often falls on political motivations, rent seeking, corruption, and other factors. Targeting manufacturing, coupled with politically charged rhetoric towards major trade partners such as China, demonstrates the political nature of many trade policy strategies, particularly in the Trump administration.
4.2.3.1 Manufacturing and Results of 2018 Tariffs on Electorate
While the notion of politically driven rhetoric and intent for tariffs makes sense, the results do not follow the same trajectory. Sposi and Virdi, two economists of the Federal Reserve who wrote for the National Bureau of Economic Research, observed that “states that are tied heavily with China in services trade, such as New York, [would] experience larger GDP declines” from tariffs, as downstream jobs are most concentrated there. “The states that are the least adversely affected are concentrated around the rust
belt—Ohio, Indiana and Michigan—since they absorb manufacturing production in place of lower imports of manufactures” (4). Therefore, these electorally essential manufacturing states in the rust belt should avoid negative labor market impacts and even benefit from the 2018 tariffs, while damages in employment would instead be concentrated in states that are not strategic for the Trump campaign or the Republican Party.
While we see that manufacturing did increase when tariffs were announced and manufacturing industries maintained a higher hiring rate through the start of 2020, this trend is not unique to manufacturing. In fact, this growth is in line with overall
employment growth in the United States, as demonstrated by the Federal Reserve Bank of St. Louis using BLS data below.
Still, the growth rate itself continues to underperform relative to the rest of the economy. While providing a temporary bump, manufacturing is not seeing a grand revival compared to the growth it would have seen without tariffs.
When comparing politically strategic regions of the country, manufacturing states—particularly those in the rust belt—did not see themselves shift to the forefront of the country’s economic growth. These are mostly states that connect to the Great Lakes on the Canadian border and which would be the political focus of Donald Trump in terms of electoral prospects. Key states such as Iowa, Wisconsin, Ohio, and
Pennsylvania have actually been lagging behind most of the country in employment growth.
Source: Leering and Knightley, 2019
If the strategic goal has been to significantly revitalize manufacturing and economic prosperity in targeted states like those in the rust belt, then Trump’s tariff strategy has failed. Nevada, a key swing state in the 2020 election has seen the highest employment growth since 2018. The Silver State has enjoyed strong manufacturing growth. However, according to the state’s Department of Employment, Training, and Rehabilitation, the
primary drivers of Nevada’s employment boom have been professional and business services, followed by construction (2020). Ultimately, the employment results of
Trump’s 2018 tariffs, if considered through a perspective of electoral opportunism, have not provided as significant an advantage as one may have assumed. This should be coupled with a geographic analysis of employment losses due to the tariffs as well. In the case of solar employment, the Solar Foundation’s annual jobs census does provide us with state level detail of changes in industry employment post-tariff, which includes both protected industry and downstream employment, displayed below.
Source: The Solar Foundation, 2020: 17
In this case, the downstream employment losses outweigh manufacturing gains in politically strategic states, including rust belt and swing states. Wisconsin, Michigan, and North Carolina are key in securing the 2020 presidency, yet overall solar sector employment has declined in these states between 2018 and 2019, following the Trump administration’s tariffs on photovoltaic panels. This employment data points to a political failure of Trump’s strategy. At best, the tariffs and Trump's promise of an employment revival in manufacturing states is a strategy with mixed results. At worst, it is empty rhetoric only.
5.0 Methodology
5.1 Case Selection
Though there have been many trade barriers implemented over the last two years between the United States and China, this paper focuses specifically on four: steel, aluminum, residential washing machines, and photovoltaic (solar) panels. These cases are chosen for a number of reasons. According to the World Trade Organization, the average non-agricultural tariff in the United States is around 3.2%, a modestly low levy in line with most developed countries (WTOb). The tariffs being considered here stand at much higher levels, with aluminum at the lowest levy at (10%) and solar panels at the highest at (30%). Washing machines do reach up to 50% though this is after a fairly high
threshold of imported units. Indeed, “the magnitude of these tariff changes is
extraordinary for an advanced country integrated with the global economy” (Flaaen et al., 2019: 2). A tariff schedule for the four cases is displayed below.
US Tariff Schedule
Using tariff cases with high levies allows for more discernible changes in employment figures when looking at ex ante and ex post data. These tariffs are also unique in that the Trump administration utilizes exceptions to WTO law to enstate them. The WTO and US federal law allows high tariffs in cases of “national security,” which the Trump
administration has used as justification for these four tariffs, especially regarding China. Another justification for this case selection is the placement of the tariffed
products on the supply chain. Steel and aluminum are both input products with a great deal of downstream product variety. The two metals are essential in the production of everything from beer cans to automobiles and construction. As a result, they have not only a larger amount of firms that can strategically deal with and share the cost of tariffs but also a greater variety of employment, including further manufacturing. Solar panels
and washing machines, on the other hand, lie on the opposing end of the chain as end products. There is no further manufacturing, meaning all downstream employment from these products is service related. As end products, there are also very few firms that deal with the supply chain following the intervention point of tariffs. These contrasts make it relatively easy to identify the causes and effects of tariffs on downstream employment per industry and labor factors.
5.2 Data Source and Configuration
The Bureau of Labor Statistics (BLS) approaches sector specific employment data in a number of ways, with this paper using two dataset types. The first comes from the National Occupational Employment and Wage Estimates (National OES), which
measures the occupations of all active workers in the United States annually, producing nominal data on current active occupations per sector, trade, and position. Thus, this data set provides individual occupations from tariffed supply chains, such as sheet metal or construction workers for steel, or photovoltaic installers for PV panels. The BLS’ second dataset type is industry specific. North American Industry Classification System (NAICS) provides an aggregated list of all occupations within specifically designated firms. The aluminum production and processing NAICS, for instance, shows all occupations beyond the actual manufacturing jobs of aluminum production and processing, such as purchasing managers, logisticians, environmental engineers, security guards, and more. This provides a more comprehensive, industry-wide view of
downstream employment. The NAICS categories for the tariff cases examined in this paper are as follows:
● Steel: NAICS 331200 - Steel Product Manufacturing from Purchased Steel
● Aluminum: NAICS 331300 - Alumina and Aluminum Production and Processing ● Washing machines: NAICS 335200 - Household Appliance
● Solar panels: NAICS 221114 - Solar Electric Power Generation
While BLS data is the most direct and credible source as it comes from the federal government’s quarterly labor assessment, it sometimes takes multiple datasets as well as data from industries themselves to paint an accurate picture of employment changes year-on-year.
In the case of solar panel installation, for instance, secondary sources are used, such as industry employment reports to filter BLS data. This is due to the way the BLS classifies many technical and administrative jobs in the solar market, particularly as it remains an infant industry and firms that deal with solar installation are often arms of electrical, fossil fuel, construction, appliance, and overall energy hardware firms. Royal Dutch Shell, for instance, is an oil firm operating in dozens of countries across the world, and yet it also owns Silicon Ranch, a Nashville based solar energy producer for the United States. This firm is responsible for many financing, project management, and technical jobs for the solar market, though these jobs are not included in the NAICS Solar Electric Power Generation dataset. Instead, they are included in datasets like
Fossil Fuel Electric Power Generation. In addition, self employed and individual
contractor laborers are not counted in BLS statistics, leaving out virtually all part time, seasonal, and single owner-employer company workers. Because of this, when looking at occupational employment statistics, “Solar Photovoltaic Installers” (at 9,000 workers in 2017) are woefully underreported as a singular category in the BLS, as most belong to the “Electricians” (631,080), “Helpers--Electricians” (72,580), “Electrical and
Electronics Engineering Technicians” (128,320), “Electro-Mechanical Technicians” (13,050), and other occupational designations. The annual National Solar Jobs Census, however, uses the same methodology as the BLS but specifically for the solar industry, allowing cross referencing of datasets and employment reports to pull out the necessary figures for solar industry employment in the United States. Overlapping industry
specific reports with BLS datasets also allows for a two level analysis of employment effects: one on tariffed industry specific firms, and one on tariffed industry inclusive firms. Because an established cause of tariff effect variation depends on the diversity of production within a firm and sector, this can provide substantial insight into the
dynamics of this variable.
Another inconsistency in BLS data is that classification categories among the NAICS differ year on year, with new job categories being added or related categories being consolidated. This makes following trends for specific downstream occupations particularly challenging. As a result, occupational classifications are kept consistent for all three observed years using 2019’s classification system. While some jobs are left out,
they remain included in the NAICS total industry employment count, and major occupation categories remain present throughout all three years.
Overall, the analysis of tariff effects follows a mixed methods approach of using case studies and conducting basic statistical analyses on large datasets. Cases are qualitatively analyzed along established variables, using quantitative measures and analyses on employment data as a relationship indicator.
6.0 Analysis
6.1 Cases
The following section describes the cases and their historical contexts of
employment, competitiveness, and industry growth in the decades and years leading up to the 2018 tariff round. These contexts are necessary to establish before listing the empirical results of this study and their corresponding analyses.
6.1.1 Steel
American steelworkers have long been symbols of industry and pride in the United States since the WWI economy. The industry was central in the war effort as well as the labor movements that followed, giving rise to unionism and the dominance of
American industrialism in the world. Over the following decades, however, as other countries developed their industries and Europe weaned off US exports, US steel and overall manufacturing industries began to lose their advantage and reduce in size. “In 1950, the United States produced almost half of the world’s steel output; by 1984, its share was less than 12 percent of this output” (Tarr, 1988: 175). Rust belt states like Indiana, Ohio, Michigan, and Pennsylvania boomed at the height of the US Steel industry; though as markets shifted in favor of foreign steel, these states suffered mass layoffs, poverty, and urban decay—a state one can still find in pockets of the rust belt today. As a result of the market shift, the U.S. became a net importer of steel in 1959 and ultimately imported “over 20 percent of its steel throughout most of the 1980s” (Ibid).
Seeing increasing competition from emerging economies and the decline of the US rust belt, the United States decided to engage in a number of non-tariff trade
barriers such as voluntary (export) restraint agreements (VRA) with foreign competitors and trigger price mechanisms (TPM) which were essentially price floors for imports. Although using different processes than tariffs, the effects of non-tariff trade barriers in this case are the same. Limiting supply and enstating price floors raises the prices of imported goods much like an ad valorem tax such as a tariff would. The key difference is where the difference in price ends up. In a tariff situation, the importing government collects the difference between the standard and tariffed import price. In a price floor situation, however, it is the exporting producers who collect this difference as “quota rents” (185).
According to the National Bureau of Economic Research (NBER), there were a number of reasons for the decline of the American steel industry. New entrants in the international steel market such as Japan, Brazil, Korea, and now China were a key driver. This occurred in conjunction with the introduction of new technology such as the basic oxygen furnace (BOF). The BOF was invented in Austria following WWII and used oxygen rather than mixed air to remove carbon from cast iron. This dramatically
accelerated up the production of steel. “A heat of steel could be processed in less than an hour compared to six or eight hours for open hearth furnaces. Importantly, BOFs
accomplished this with fewer workers and produced a superior product.
New plants built in Europe and Japan to replace those destroyed in the war implemented new BOFs.” (Simcoe, 2016). The United States was slow to adopt the new technology, causing productivity and innovation in US mills to fall behind their foreign counterparts. “The U.S. produced only 17% of its steel using BOFs in 1965, while Japan produced 55%. As late as 1970, this ratio was 48% for the U.S. and 79% for Japan.” (Ibid). As a result, the 1980s protectionist measures for steel “included the requirement that continuation of the trade relief in any year is contingent on the major steel
producers' reinvesting substantially all of their net cash flow from steel operations into modernization of their steel operations” (Tarr: 186).
A second major reason American steel fell out of favor in international markets is weak productivity compared to wages and payrolls. MDue to management overpay, inflexible wages resulting from unionization, and misallocation of strategic funds led to far higher costs of production compared to foreign competitors. “During the 1960s and
early 1970s hourly labor costs had been less than 50 percent above the average for U.S. manufacturing workers. During the late 1970s, however, they soared to the point where, by 1982, U.S. steelworkers were earning 93 percent more than the U.S. average.” (Tarr: 181). Productivity failed to keep up with wages as outputs were burdened by outdated technology, creating a dual problem that proved to be the industry’s undoing.
In economics, this is regarded as aggregate decoupling of real median wage growth from labour productivity growth, and it can go in two directions. The first is when median wage growth falters behind productivity growth, an issue most developed countries in Europe and North America are facing. This means that firms are able to produce more of a product unit at a lower labor cost (OECD, 2018: 2). This is naturally most beneficial for firms rather than laborers. The other direction of decoupling is when median wage growth outpaces productivity growth, making a product unit more costly in terms of labor hours and wages. While this is hugely beneficial for laborers in the short term as they are paid more and there are more hires, it does hurt the profit margins of firms, sometimes leading them toward insolvency. This was the case with steel companies in the US throughout the late twentieth century. Union agreements and trade labor shortages kept wages downward-rigid, meaning companies could not lower them while they needed to hire more workers to keep output growth, making it difficult to correct wages back to a coupled scenario where wages rise in line with productivity.
Though the US steel industry’s fall leveled out by the turn of the century, its situation has not greatly improved since then. Foreign competition and lower cost of production overseas has continued to make American steel companies uncompetitive,
creating the political and economic context for the industry’s newest round of protectionist measures through Trump’s 2018 tariffs. Particularly in terms of wage growth decoupling, this is an issue that persists to this day and has worsened in the years leading up to the latest tariff round. This makes the implementation of tariffs a curious move, as it fails to address a key driving factor. Implementing tariffs on an industry with already inflated wages and employment will not keep American steel firms steer clear of insolvency in the long run. Modernization and lowering labor costs would be the most prudent solution to keep US steel firms competitive on the international market.
Nonetheless, on March 8th, 2018, president Donald J. Trump signed the Presidential Proclamation on Adjusting Imports of Steel into the United States, establishing tariffs at a rate of 25% for all foreign imports of steel with the exception of Canada and Mexico. “The set of steel products that... face the levy is fairly broad and covers finished products—carbon and alloy sheets, pipes, strips and plates, seamless or welded tubes, and stainless steel. Also included are semi finished products—solid forms of unfinished steel to be further forged, rolled or shaped into final steel products.” (Sposi and Virdi: 1). As mentioned before, in the case of steel and aluminum, the US utilized the justification of national security to strategically enstate such a high levy. According to president Trump’s proclamation, the
closures of domestic steel production facilities [has led to] the “‘shrinking [of our] ability to meet national security production requirements in a national emergency.’ Because of these risks and the risk that the United States may be unable to ‘meet [steel] demands for national defense and critical industries in a national emergency,’ and taking into account the close relation of the economic welfare of the Nation to our national security, see 19 U.S.C. 1862(d), the Secretary concluded that the present quantities and circumstances of
steel articles imports threaten to impair the national security as defined in section 232 of the Trade Expansion Act of 1962.
Per this justification, the United States was able to utilize the WTO national security exception to bound tariff rates, though some countries such as China have still filed complaints with the WTO alleging the US’ actions violate international law.
Nonetheless, the 2018 steel tariffs remain in effect, impacting a number of different economic indicators, from intermediate and consumer product prices to employment. Without the downward pressure of import prices, domestic steel manufacturers were able to raise their prices in the months following the tariff’s enactment. This is demonstrated by the following graph:
Source: Leering and Knightley, 2019
Intermediate products in particular saw price increases in line with the levy on foreign imports.
6.1.2 Aluminum
The state of the aluminum production industry in the United States has deteriorated significantly over the last few decades. In the seven years preceding the 2018 tariffs, 18 of 23 domestic alumina smelters were shut down, causing about 13,000 US jobs to be lost. Just prior to the tariff, there remained only one refinery left in the US supplying these smelters (Scott, 2018). In 2017, Robert E. Scott, the senior economist of the Economic Policy Institute, testified before Congress on the current state of the US aluminum industry and imports. He described a dire situation of a dying manufacturing industry, threatened by rising reliance on imports. The following is an excerpt of his testimony:
The threat is driven by the growth of excess capacity and overproduction in China. Chinese primary aluminum production capacity has increased nearly 1500 percent since 2000, and China is responsible for 82 percent of the total increase in global aluminum production capacity between 2000 and 2017. This growth has been fueled by massive government subsidies and other market distorting practices...Collapsing prices have decimated U.S. primary aluminum production, capacity, and employment. The...market price of aluminum fell 39 percent between 2007 and 2016. In an industry with high fixed costs, most domestic producers have not survived this prolonged, steady price collapse.
It is a fairly consistent narrative that has become a fairly consistent theme in the Trump administration and its justifications for not only the 2018 tariffs but subsequent rounds
as well. Indeed, China is the second most covered exporter by the aluminum tariffs at $72 million per 2017 import figures, second to Taiwan at $138 million (Brown, 2020).
As stated earlier, Trump’s complaints against China cannot justify a country specific tariff per international trade law, and the one form in which this is possible, antidumping duties, is ineffective due to trade diversion tactics. Uniform tariffs were therefore made possible through the “national security” exemption in US and WTO trade law, just as they were in the case of steel. Some countries, however, are not
affected by the tariff. The USMCA exemptsallows Canada and Mexico to be exempt from uniform tariffs by the United States. In the case of aluminum, this alleviated much of the harm of aluminum tariffs on downstream aluminum employment. The US imports 42% of its foreign aluminum from Canada, leaving only about half of US aluminum imports subject to the levy (Sposi and Virdi: 2)
The 2018 tariff had immediate effects on the price of aluminum for further processing and manufacturing to intermediate and end-stage products. “In the case of aluminum, a third-party company, Platts, sets the North American aluminum
transaction price, also known as the Midwest Premium.” The Midwest Premium
“reflects not only out-loading and delivery costs to consuming plants, but also the state of supply and demand in North America...Tariffs are also factored into the Midwest Premium, which means that it will rise if there is a tariff. As of January 2018, the Midwest Premium was 10.78-cents per pound, meaning that the margin was about 12 percent… As of March 2, 2018, and on rumors of tariffs, the Midwest Premium was up to 17.5-cents per pound.” The imposition of the aluminum tariff has further increased this
premium (Dunham, 2018: 10). The aluminum tariff has also been modified recently, with an expansion of covered aluminum products to aluminum “derivative,” or meaning intermediate stage, products (Brown, 2020). Though 2020 data is not included in this research due to the extreme distortion of the COVID-19 crisis, following the logic presented throughout this paper, imposing a levy further down the supply chain on intermediate products rather than input materials alone may have a more pronounced negative impact on downstream employment figures.
6.1.3 Solar
The photovoltaic panel industry has been the fastest growing industry in the United States, now employing over twice as many Americans as the once dominant coal industry at over 240,000 jobs (Eckhouse, 2018). Therefore, solar is a perfect example of an infant industry, meaning it is a recently developed industry that has yet to establish itself in the global market. Alexander Hamilton and Friedrich List were two early economic theorists who stated the importance of protecting infant industries to
“encourage” the development of new technologies and products domestically. Hamilton believed that the protection of infant industries was, in many cases, essential because infant “manufacturers not only had to contend with the ‘natural disadvantages of a new undertaking,’ but also ‘the gratuities and remunerations which other governments bestow’ on their own producers.” (Irwin, 2003: 5). As an advocate of limited government intervention for the promotion of commerce and industry, Hamilton
