After two years of anti-trade rhetoric, Donald Trump has taken a concrete step by imposing tariffs on imported solar panels and washing machines. This raises a number of interesting questions.
One reader query concerns division of powers. “How can Trump raise tariffs? Aren’t they taxes and don’t all tax bills have to originate in the House of Representatives?”
Yes, the origination clause of the U.S. Constitution does require that. But, in a long series of trade acts, most recently in 1974, Congress established the basic structure of import restrictions. It also delegated to the president the right to adjust tariff rates on specific products. So Trump does have basic constitutional and statutory authority for this.
It is more complicated however. As a member of the General Agreement on Tariffs and Trade, set up after World War II, and as a key nation that pushed for its successor World Trade Organization, the United States has signed international treaties. In them we renounce unilateral trade actions and agree to change tariff rates only through multilateral negotiations. We also agree that if we have a problem with another member nation’s trade practices, we will use agreed-on dispute resolution procedures. Trump’s action flouts these commitments.
But GATT and WTO treaties have “escape clauses” that allow nations to take temporary actions in emergency situations where imports threaten some vital sector. This loophole was necessary to get many nations to join the pact. And many nations do use it. So the new tariffs are not unprecedented.
Moreover, in 1974, Congress passed amendments, including “Sections 201 and 301” designed to force presidents to restrict trade in certain situations. This was a Democratic-majority Congress forcing Republican president Richard Nixon to take actions that he would not have taken voluntarily under his and Henry Kissinger’s globalist foreign policy. It was an imposition of congressional power on a president’s constitutional task of managing international affairs.
In the United States, treaties negotiated by a president and ratified by Congress are supposed to have the full force of law. While true in theory, it is often violated in practice. The 1974 provisions stretch the letter and spirit of treaty escape clauses. But we have weight to throw around in international relations, so there is little other nations can do. The tariff on washers hits South Korea particularly hard, but having a coherent policy of support for an important ally at a time of smoldering military crisis apparently is not a high priority to the administration.
Will the tariffs hurt consumers?
A USA Today headline says “Trump tariffs on solar panels, washing machines could raise prices.” Doh! That is like saying “sun could rise in east” or “water may run downhill.” Of course this will make washing machines and solar panels more expensive to consumers. That is the whole point! But how much prices will rise is still up in the air.
Econ teachers particularly love the washer restriction because it is an example of a “tariff-rate quota,” one with a tariff of 20 percent on the first 1.2 million machines imported and 50 percent on all those above that threshold. Prices to consumers won’t go up by that proportion because competition from U.S. manufacturing and that in nations not covered by Trump’s action will force Korean and Chinese makers to eat some of the tariff. But there will be a hike in washer retail prices.
Is this a U.S. versus foreign nation issue?
The reader with that query knew this is loaded with ironies. Two companies manufacturing solar panels here initiated the action leading to the higher tariff. One of these is a German-owned company and the other is based in Hong Kong. One major U.S. producer has most of the work done overseas, but with a technology that is exempt from the tariff.
In washers, Korea’s Samsung just opened a plant in South Carolina and LG is building a large one in Tennessee. The tariff will make these more profitable. GE Appliances, which stands to benefit, has belonged to Chinese giant Qingdao Haier since 2016. Midea, that firm’s largest rival, has manufacturing plants in Brazil and India. Since Section 201 tariffs are keyed to supposed unfair practices of specific countries, these two nations are exempt and production there could be ramped up to replace tariffed output from China itself.
Many U.S. “domestic” manufacturers use components manufactured in Asia. These are not covered by the tariffs. Asian manufacturers may play games shipping subassemblies for final assembly here with little value added. This is an old ploy.
Decades ago, Subaru Brat mini-4WDs arrived without rear seats to come in as cheaper “trucks” rather than autos. The seats came in containers and were bolted in after clearing customs. Don’t be surprised by similar dodges with washers.
How will overall employment be affected?
Historically, “emergency” tariffs like these often lower total employment. How this works in steel is a good example. U.S. steel companies, many of which are now foreign owned, together with steel unions, are a fine-tuned whining machine that periodically secures “emergency” tariffs. Employment in steel mills rises. But employment in steel-using industries falls, especially those that export. A GE locomotive has 250 tons of steel in it, a Cat D-10 dozer 90 tons and a John Deer 9620 4WD tractor 18 tons. Domestic and export sales of these fall. With higher relative prices for structural steel, some buildings and bridges are made of reinforced concrete instead. Farmers make chisel plows last a little longer because new ones cost more. There are myriad variations on such adjustments and all lower employment in steel-using industries.
Washers don’t have the export consideration that heavy machinery has. Direct appliance employment may rise, especially as foreign companies open assembly plants here. Solar is complicated in that the panels themselves are capital intensive to manufacture, but don’t use a lot of labor, The rest of the process of getting to an operating solar array including fabricating the racks to hold them, switchgear and controls. These and installation are more labor intensive than actual manufacturing.
The whole solar sector employs some 260,000 workers, about four times as many as the coal industry, although the criteria for who gets included in each sector are debated. The U.S. solar industry group asserts the 30 percent tariff on panels will lower overall new installations by 20 percent. Such association estimates are always overblown. But more objective studies argue that a 10 to 12 percent reduction is credible. If so, a decline of jobs in the rest of the sector well may offset any employment increases in panel manufacturing itself. Expecting the general pattern of a tariff lowering overall employment is reasonable, although the degree may not be as great as for steel.
How about overall efficiency?
That question probably comes from someone who had an econ course. The problem with trade restrictions is that they don’t just involve how the pie is sliced. They also affect the size of the pie. Tariffs take money from consumers and give it to companies and employees in the sector that is “protected.” But the losses by the losers are always greater than the gains by the winners. The difference is a “dead-weight loss” to the economy as a whole. It is a decline in the amount of human needs and wants that get satisfied from a given use of economic resources. The amount of loss varies with the product. And the loss may be to rich people while poor benefit or the reverse. But this is not just theory. History and empirical studies show that the efficiency losses are real.
Whether this action is a flash in the pan or the first shot in a world trade war remains to be seen. Perhaps much more will need explanation in coming months and years. Hope that it does not.
(By way of disclosure, my family has a share in a 10 MW wind project in Murray County. Or “in southwest Minnesota.” Three years ago, our LLC bid on, but was not chosen for, siting of a large solar project. We may bid on future projects because of our existing access to the grid.)