By Jill Hurley
The vast number of businesses that rely on the import of intermediate industrial goods would be wise to keep their eye on the political landscape in the lead up to the 2024 presidential election. The specter of past protectionist policies looms large. Former U.S. President and 2024 presidential hopeful Donald Trump’s recent proposal for a universal 10% tariff on all goods coming into the U.S. has sparked significant debate and raised concerns for business decision-makers.
The bigger picture:
The purpose of the proposed tariff is to discourage U.S. importers from sourcing materials abroad and encouraging them to source domestically. This has been a consistent mantra of the Trump and Biden administrations – both of which are seeking to reduce America’s dependency on foreign labor and materials in hopes of boosting domestic labor and protecting against foreign control over the country’s economy.
If implemented, a universal minimum tariff could have far-reaching implications for the U.S. economy, which is heavily dependent on international trade. The tariffs would affect critical industries, including fuel, critical components such as semiconductors, travel, and transport. With approximately 1.3 billion barrels of duty-free Canadian crude oil imported annually to the U.S. for refining into fuel, the imposition of a 10% tariff on such feedstock imports could significantly impact fuel prices, potentially resulting in annual duties of $8.71 billion passed on to consumers. It remains unclear whether businesses with integrated supply chains in countries with which the U.S. has liberalized trade, including close partners like Canada and Mexico (under the USMCA), could face significant challenges.
U.S. imported goods totaled $3.2 trillion in 2022. A universal minimum tariff could potentially result in an annual tax increase of $300 billion for the domestic market. Moreover, the possibility of retaliatory tariffs on U.S. exports, currently valued at $2.8 trillion as per November 2023 YTD estimates, could further threaten as many as 505,000 full-time jobs, which would be enough to shrink the economy by 1.1%.
Consumer impact and global competitiveness:
In addition to economic considerations, the proposed tariff could impact American retail prices. Businesses facing the prospect of increased costs due to these tariffs will be forced to consider two options – absorb the cost and narrow their margins, or pass them on to consumers by raising prices, eventually escalating inflation. Research by the CATO institute shows the Section 301 tariffs applied to goods originating in China amounted to an increase of $166 billion in additional cost to consumers.
In addition to straining relations between the U.S. and its allies and economic rivals, the proposed tariffs would place the U.S. in violation of several Free Trade Agreement (FTA) policies, including the USMCA—a pact endorsed by Trump. Moreover, in lieu of an international arbiter (the World Trade Organization remains impotent), retaliatory tariffs from America’s trade partners are quite likely.
The ensuing trade disputes, both in legal and economic terms, could compound the complexities of existing trade quotas and tariffs, such as those governing the trade of softwood lumber with Canada.
Will it work?
Despite the policy’s goal of bringing back production to the United States, historical instances of tariff usage in the U.S., such as the Smoot-Hawley Act, resulted in adverse outcomes such as deepening the Great Depression and inviting retaliatory actions from trade partners. More recently, tariffs such as the Section 232 tariffs on imports of steel and aluminum from select countries and the aforementioned Section 301 tariffs have produced mixed results. While targeted trade remedies may assist specific industries, widespread tariff increases for all imports have failed to enhance domestic production and have, instead, significantly diminished U.S. export volumes due to retaliatory measures. A report by the U.S. International Trade Commission (ITC) shows that while Section 232 tariffs had the desired effect of reducing imports of steel and aluminum – and generated a corresponding increase to domestic production and domestic producers’ revenues – they also resulted in a negative downstream impact on steel and aluminum-consuming industries such as construction and automotive manufacturing. They also resulted in a sharper inflationary curve in the U.S. relative to the rest of the world.
The U.S. consistently outsources more goods and services than it produces. Additionally, the nation’s savings fall short of fully seizing investment opportunities. In this economic equation, international trade acts as a crucial link, facilitating the U.S. procurement from global markets while attracting investments worldwide into U.S. bonds and businesses.
The Trump administration of 2016-2020 imposed tariffs on more than $300 billion in imports (primarily, though, not exclusively, from China) that have resulted in businesses doling out nearly $80 billion on a range of imports, including steel, aluminum, solar panels, washing machines, semiconductors, and various products from China. When President Biden took office in 2021, he chose to keep the tariffs in place. The consequences were twofold – the manufacturing sector felt the pinch as businesses increased import spending. Secondly, the agricultural sector faced heightened expenses in acquiring farming machinery, predominantly assembled using imported raw materials.
The road ahead:
As the global economy remains intricately connected through trade, businesses must carefully consider the implications of tariff policies – even those that are still conceptual in nature. They should actively explore strategic sourcing options, such as leveraging free trade agreements to reduce the impact of any new tariffs that may emerge. Ensuring that goods qualify for preferential treatment under these arrangements can present valuable opportunities for cost savings and help them enhance their competitive edge.
Many importers and exporters have already begun consulting with trade experts to identify strategic sourcing and tariff-impact reduction opportunities, as well as to obtain analysis on regulatory changes and trends, duty rates, and trade data, which is crucial especially during tariff rate increases.
These businesses are already establishing contingency plans for “what if” scenarios with the goal of reducing their risk of operational and financial disruption. As the saying goes, a goal without a plan is just a hope.
Jill Hurley is the Director of Global Trade Consulting at Livingston. As the practice leader, she spearheads U.S. import and export projects, offering comprehensive reviews of clients’ business models for risk assessment, crafting, and implementing import/export compliance programs, conducting audits, navigating export licensing requirements, and providing support in U.S. trade remedy matters.