Charting A Course for American Tariff Strategy

Charting A Course for American Tariff Strategy Political debates about tariffs have become all the rage in the Trump era. Some view them as anathema; others as panacea. While tariffs have served as an effective tool to force counterparties to the negotiating table, the fact cannot be ignored they are also an economic burden on American workers and businesses who have already been crushed by 20% inflation under Joe Biden. Tariffs must be wielded skillfully, like a surgeon’s scalpel – not a sledgehammer. If applied haphazardly, new tariffs could weaken our national security while increasing the cost of goods for hardworking Americans. Blanket tariffs imposed on adversary and ally alike, for instance, would only strengthen our global rivals and punish our own citizens with little to gain. It must never be forgotten that the American people ultimately pay the price of increased tariffs in the form of higher costs. While there is some willingness to accept those costs in the name of national security, policymakers must be aware that aimless tariff policy has a direct negative impact on every American. Lawmakers should also be wary of using tariffs to prop up favored companies or industries. Federal policies designed to pick winners and losers in the market tend to help large industries with the ability to buy an advantage. Applying tariffs to help certain businesses increases the power of well- connected companies and power brokers in the Washington swamp. The United States will be best served by a comprehensive strategic tariff policy rooted in the dual goals of securing the economic liberty of American citizens and protecting national security. Our leaders must set forth policies that enshrine our free-market values and safeguard the country. The future prosperity of the country depends on achieving both objectives.

The Historic Use of Tariffs in the United States The Constitution grants Congress the “Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States” in Article I, Section 8, Clause 1. While tariff strategy has changed significantly in recent years, they have traditionally been used to achieve three policy purposes:

1. Raise federal revenue. 2. Increase the price of foreign goods to protect domestic industries. 3. Penalize foreign adversaries and/or unfair trade practices. None of these rationales are intrinsically improper. However, given how much these policies impact the lives of every American, the United States would be foolish to implement tariffs without a comprehensive policy strategy in place. Members of Congress and Administration officials must understand each justification and its merit given the expansiveness of the modern U.S. federal government.

1. Tariff Revenue Will Not Solve the Deficit From 1776 until 1861, tariffs were the main source of federal revenue comprising over 90% of all government income each year. During the Civil War, the United States federal government greatly expanded its collection of internal revenue to fund increased spending. Revenue from tariffs hovered around 50% of total government receipts until 1916.1 Since the inception of the income tax system and the passage of the 16th Amendment and the Revenue Act of 1916, tariffs have not been a significant source of federal revenue. After the creation of the income tax, tariff revenue dropped significantly. According to the Congressional Research Service, “Over the past 70 years, tariffs have never accounted for much more than 2% of total federal revenue.” Since 1980, for instance, federal receipts from tariffs have averaged 1.4% of all government revenue annually. Even with the increased tariffs on Chinese goods that were implemented by President Trump in 2018 in place, tariff revenue is not projected to be a significant portion of future federal revenue.2

Projected Revenue from Customs Duties - CBO June 2024 in Billions of Dollars

Year Import Duties Revenue Total Federal Revenue Percentage of Revenue

2034 96 7,459 1.29% Simply put, tariff revenue is not a credible solution to America’s deficit crisis. Shifting to tariffs as a significant revenue source or offset will only result in double taxation on the already beleaguered people of this country. Individual income taxes totaled $2.4 trillion in FY 2024 with total imports of

1 Andrew Reamer, “A Centennial History of the United States International Trade Commission,” USITC, 2017, https://www.usitc.gov/publications/other/centennial_book/chapter2.pdf 2 Peter S. Goodman, "Trump's Tariffs Are Just the Start of the Trade War With China," The New York Times, September 17, 2018, https://www.nytimes.com/2018/09/17/us/politics/trump-china-tariffs-trade.html.

$2.69 trillion.3;4 Fully replacing income tax revenue with tariff revenue would require an additional tariff of more than 100%, more than doubling the price that consumers already struggle to pay. Consider a two-income, married couple with two children earning $100,000 per year. Federal income tax on this couple in 2024 is $4,032.5 Given that imports account for 11% of consumer spending, if this middle-class family spends $80,000 annually on consumer goods (roughly the national average), a 100% tariff on the $8,800 of imports would be a $8,800 tax – dwarfing the current $4,032 federal income tax paid.6 Furthermore, any attempt to substitute tariff revenue for income taxes is unrealistic and dangerous until such a time as the 16th Amendment is repealed. As Advancing American Freedom has already described, our country faces a spending-driven debt spiral that is driving inflation.7 Our government cannot solve our sovereign debt crisis through higher taxes on the backs of American workers or consumers. It is a simple mathematical fact that tariffs will never solve our nation’s deficit disaster. 2. Increasing Prices to Protect Industries Is an Economic Race to the Bottom Another key argument for higher tariffs is to protect or bolster domestic industries from international competition. As Secretary of the Treasury nominee Scott Bessent recently stated, tariffs have a history of being used as “a way of protecting strategically important industries”.8 While tariffs have indeed been used to shape industrial policy, there are far better and less costly policy methods that would help spur domestic economic growth. There are already policies in place to protect strategically significant industries. The Committee on Foreign Investment in the United States (CFIUS) reviews investments in American companies.9 The Defense Production Act of 1950 (DPA) gives the President the power to “create, maintain, protect, expand, or restore domestic industrial base capabilities that are critical to the Department and the

3 U.S. Department of the Treasury, "Federal Revenue Trends Over Time," FiscalData, accessed December 12, 2024, https://fiscaldata.treasury.gov/americas-finance-guide/government-revenue/#federal-revenue- trends-over-time. 4 U.S. Census Bureau, "U.S. Trade in Goods and Services," Foreign Trade, accessed December 12, 2024, https://www.census.gov/foreign-trade/balance/c0004.html. 5 "2024 Tax Calculator," Calculator.net, accessed December 12, 2024, http://bit.ly/3ZOGNGx. 6 Federal Reserve Bank of San Francisco, “How Much Do We Spend on Imports,” January 7, 2019, https://www.frbsf.org/research-and-insights/publications/economic-letter/2019/01/how-much-do-we- spend-on-imports/ 7 "Protecting American Taxpayers: The Conservative Blueprint to Preserve Tax Relief and Prevent the Biden Tax Increases," Advancing American Freedom, accessed December 12, 2024, /memos/protecting-american-taxpayers-the-conservative-blueprint-to-preserve-tax-relief-and-prevent-the-biden-tax-increases preserve-tax-relief-and-prevent-the-biden-tax-increases/ 8 Scott Bessent, "Talk Tariffs: It’s Time to Revitalize Alexander Hamilton’s Favorite Tool," Fox News, August 1, 2024, https://www.foxnews.com/opinion/scott-bessent-talk-tariffs-its-time-revitalize-alexander-hamiltons- favorite-tool 9 U.S. Department of the Treasury, "The Committee on Foreign Investment in the United States (CFIUS)," accessed December 12, 2024, https://home.treasury.gov/policy-issues/international/the-committee-on- foreign-investment-in-the-united-states-cfius

American Warfighter”.10 Bills like the CHIPS Act and the Inflation Reduction Act have poured billions of taxpayer dollars into efforts to benefit favored industries.11;12 Congress has already established laws to protect our defense industrial base. There is also no shortage of federal intervention in the marketplace to direct taxpayer benefits to preferred companies with connections in Washington. Adding tariffs to the industrial policy mix serves to further muddle the strategy and increases the government’s power to pick winners and losers. Job creators and consumers know that they will have to pay the ultimate price for tariffs. Lawmakers know that fact as well. Even the Trump Administration acknowledged that some industries would face higher costs than others because of his tariffs. The U.S. International Trade Commission (USITC) assessed tariffs that have already been enacted and determined the hardest hit industries in America, including:

• Large-Scale Manufacturing • Apparel Production and Textiles • Motor Vehicle Parts • Computer Parts and Semiconductors • Electronic Equipment • General Purpose Machinery13 In many of these cases, the industry's most negatively impacted are being subsidized by the government through other policies. This creates a duplicative, inconsistent, and counterproductive federal strategy. As Advancing American Freedom has noted in the case of U.S. Steel, protectionist policies that limit free trade can reduce American jobs and punish allies.14;’ The best way to help U.S. industries compete and dominate the world is to reduce the immense regulatory burden imposed by Washington. American industrial policies are changing significantly, but using the power of the federal government to decide which industries thrive is an inefficient economic policy out of a Marxist playbook. Becoming a protectionist, mercantilist economy will only hurt America. 3. Tariffs Should Be Targeted at Our Adversaries

10 U.S. Department of Defense, "The Defense Production Act (DPA) Title III Program," accessed December 12, 2024, https://www.businessdefense.gov/ibr/mceip/dpai/dpat3/index.html. 11 Congressional Research Service, Report R47523, accessed December 12, 2024, https://crsreports.congress.gov/product/pdf/R/R47523 12 The White House, "Fact Sheet: One Year In, President Biden’s Inflation Reduction Act Is Driving Historic Climate Action and Investing in America to Create Good-Paying Jobs and Reduce Costs," August 16, 2023, accessed December 12, 2024, https://bit.ly/41sKSSh 13 U.S. International Trade Commission, Publication 5405, accessed December 12, 2024, https://bit.ly/3ZQcakh 14 National Review, "Mike Pence Argues Nippon Steel’s Purchase of U.S. Steel Is Necessary for Competing Against China," accessed December 12, 2024, https://www.nationalreview.com/news/mike-pence-argues- nippon-steels-purchase-of-u-s-steel-is-necessary-for-competing-against-china/

The Secretary of Commerce has identified foreign adversaries who have “engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the United States or security and safety of United States persons.”15 Those adversaries currently defined by the U.S. government include the following:

1. The People’s Republic of China 2. Republic of Cuba 3. Islamic Republic of Iran 4. Democratic People’s Republic of Korea 5. Russian Federation 6. Venezuela (specifically while under the political leadership of Nicolás Maduro) Tariffs can be legitimately used to curtail the malign actions of these foreign adversaries. Even in the case of these countries, the application of tariffs must be undertaken with clearly defined objectives and measurable goals. Without transparent national security goals, American consumers could face undue economic hardship with no foreign policy benefit. Countries who are not our adversaries should not be treated the same as these clearly identified countries. While the U.S. has several collective defense agreements in the Pacific with countries critical to denying China’s bid for regional hegemony (Taiwan, Japan, the Philippines), it lacks comprehensive free trade agreements with all of them. The United States would apply more pressure to our rival China by formalizing trade agreements with these countries rather than threatening them with higher tariffs. As the U.S. continues to deliberate over the appropriate level of armaments to send to Taiwan and coordinates with Japan and the Philippines on preventing further acts of Chinese imperialism, the U.S. should also reduce the tariffs imposed on imports from all three countries. Strategic tariffs against foreign adversaries can be broad in scope to impact entire countries. Strategic tariffs may also be more narrowly tailored depending on the national security or intellectual property theft concerns at play. The use of tariff policy to penalize foreign adversaries and induce negations does have merit. Policymakers should candidly warn the public that even tariffs on foreign adversaries entail economic hardships if they pursue this course of action. As history demonstrates, tariffs to punish our economic rivals do not come without a cost. That cost is higher prices for Americans.

Every American Bears the Cost of Tariffs There is a very simple reason why tariffs should be used rarely and thoughtfully: tariffs empirically result in higher prices for all American families. In 2023, the U.S. imported $3.83 trillion worth of goods. A 10% tariff would increase taxes by $383 billion, ultimately leading to American families

15 Code of Federal Regulations, ”§ 791.4 Determination of foreign adversaries,” accessed December 12, 2024, https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-E/part-791/subpart- A/section-791.4

paying higher prices. We must ensure that U.S. tariff policy does not unnecessarily hurt American workers and industries. Tariff revenues are measured by the federal government as customs duties.16 Primarily as a result of new tariffs implemented under the first Trump Administration and continued under President Biden, tariff revenue has vastly exceeded projections over the last five years. Compared to CBO’s 2018 baseline, nominal tariff revenue was $176 billion higher than estimated.

Federal Revenue from Customs Duties - CBO 2018 Projections vs. Actual

(in Billions of Dollars) Year 2017 2018 2019 2020 2021 2022 2023 Total

2017 - 2023 Projected 35 38 41 43 46 47 49 299

2017 - 2023 Actual 34.6 41.3 70.8 68.6 80.0 99.9 80.3 475.4 While not a significant amount of total federal revenue, tariff increases represent real taxes on the American people. Washington cannot impose more taxes on consumers via tariffs without tangible goals and achievable metrics in place. A trade and tariff policy conducted at the whims of powerful politicians with no clear objectives will hurt every American without producing lasting benefits. The High Cost of Tariffs There are reams of documentation showing that the cost of tariffs is directly paid for by U.S. consumers and job creators. The following is just a sampling of the real-life examples and studies which demonstrate the high cost of tariffs on the American people.

• Following U.S. tariffs, China retaliated to the wave of 2018-2019 tariffs with even higher tariffs on U.S. exports, specifically harming domestic agriculture.17 The Department of Agriculture estimated that China’s retaliation resulted in a $27 billion loss for agricultural exports from mid-2018 to the end of 2019.18 • The export losses from retaliatory tariffs were especially felt by soybean farmers ($9.4 billion in annualized losses), sorghum farmers ($854 million in annualized losses), and pork producers ($646 million in annualized losses).19 • Midwest states felt the brunt of retaliatory tariffs, with Iowa seeing $1.46 billion in annualized losses, Illinois seeing $1.41 billion in annualized losses, and Kansas seeing $955 million in annualized losses.20 • Violating existing trade agreements like the USMCA that President Trump negotiated would have lasting negative impacts on domestic growth.

16 U.S. Customs and Border Protection, ”Customs Duty Information,” accessed December 12, 2024, https://www.cbp.gov/travel/international-visitors/know-before-you-visit/customs-duty-information 17 Tax Foundation, ”How Tariffs and the Trade War Hurt U.S. Agriculture,” accessed December 12, 2024, https://taxfoundation.org/blog/tariffs-trade-war-agriculture-food-prices/ 18 Olivia Bridges, ”Trump’s tariffs seen delivering a repeat blow to US farm exports,” Roll Call, November 14, 2024, https://rollcall.com/2024/11/14/trumps-tariffs-seen-delivering-a-repeat-blow-to-us-farm-exports/ 19 Stephen Morgan, Shawn Arita, Jayson Beckman, et al, ”The Economic Impacts of Retaliatory Tariffs on U.S. Agriculture,” USDA Economic Research Service, January 2022, https://bit.ly/3ZwQwAg 20 Ibid.

• President Trump acknowledged in December 2024 that his tariffs will increase costs for American consumers.21 • The washing machine tariffs of 2018 yielded just $82 million in tariffs but a jump in consumer prices of 12% on these items (at a cost of $1.5 billion). Although 1,800 jobs were “created” at favored businesses, the cost per job was $817,000.22 • Section 232 tariffs on steel and aluminum destroyed as many as 75,000 jobs as downstream businesses suffered. Section 201 tariffs were likely even more devastating, costing as many as 197,000 manufacturing jobs.23 • One study warns that Trump’s new tariff proposals could cost an average of $2,600 per household in new taxes in a single year.24 Over ten years, that tax increase would double the tax savings provided by the Tax Cuts and Jobs Act. • Trump Tariffs 2.0 could cost Americans in the bottom half of the income distribution 3.5 percent of their after-tax income and could increase taxes on middle-income households by $1,700 per year.25 • Trump’s tariff proposals could result in GDP being nearly a full percentage point lower than baseline by 2026 and an additional 1.3 percentage point rise in inflation above baseline in 2025.26 • Americans are already facing new car prices averaging nearly $49,000; one estimate shows that even for cars made in the United States, tariffs could raise the price by an average of $2,100.27;28

• One study indicates that Trump Tariffs 2.0 could result in soybean exports falling by up to 52 percent and corn exports dropping by 84 percent.29

21 ABC 7 Chicago, ”Trump says he can't guarantee tariffs won't raise US prices, promises swift immigration action,” accessed December 12, 2024, https://bit.ly/4g8qx9h 22 Aaron Flaaen, Ali Hortaçsu, and Felix Tintelnot, ”The Production, Relocation, and Price Effects of US Trade Policy: The Case of Washing Machines,” Becker Friedman Institute for Economics at the University of Chicago, April 18, 2019, https://bfi.uchicago.edu/working-paper/the-production-relocation-and-price- effects-of-us-trade-policy-the-case-of-washing-machines/ 23 Alex Durante, ”How the Section 232 Tariffs on Steel and Aluminum Harmed the Economy,” Tax Foundation, May 23, 2024, https://taxfoundation.org/research/all/federal/section-232-tariffs-steel-aluminum-2024/ 24 Bryan Riley, ”Trump Promises “Massive” Tax Increase if Returned to Office,” National Taxpayers Union, August 29, 2023, https://www.ntu.org/publications/detail/trump-promises-massive-tax-increase-if- returned-to-office 25 Kimberly Clausing, Mary E. Lovely, ”Why Trump's tariff proposals would harm working Americans,” Peterson Institute for International Economics, May 2024, https://www.piie.com/publications/policy- briefs/2024/why-trumps-tariff-proposals-would-harm-working-americans 26 Warwick J. McKibbin, Megan Hogan, and Marcus Noland, ”How much would Trump's plans for deportations, tariffs, and the Fed damage the US economy?” Peterson Institute for International Economics, September 26, 2024, https://www.piie.com/blogs/realtime-economics/2024/how-much-would-trumps- plans-deportations-tariffs-and-fed-damage-us 27 Renee Valdes, ”When Will New Car Prices Drop?” Kelley Blue Book, November 14, 2024, https://www.kbb.com/car-advice/when-will-car-prices-drop/ 28 Noah Sheidlower, ”Trump's tariffs could make your next car more expensive,” Business Insider, November 29, 2024, https://www.businessinsider.com/trump-tariffs-new-car-expensive-gm-volvo-jaguar-mexico- canada-2024-11 29 Krista Swanson, Scott Gerlt, Jacquie Holland, ”Trade Study: How Potential New Tariffs Could Impact U.S. Soybeans and Corn,” National Corn Growers Association, October 15, 2024, https://ncga.com/stay- informed/media/the-corn-economy/article/2024/10/trade-study-how-potential-new-tariffs-could-impact-u- s-soybeans-and-corn

• In 2020, President Trump called the USMCA “the fairest, most balanced, and beneficial trade agreement we have ever signed into law.” Violating the USMCA could jeopardize 176,000 jobs based on the Trump Administration’s own figures. 30;31

Americans have suffered tremendously because of inflation under President Biden. Tariffs imposed haphazardly on our allies would further increase the cost of consumer goods and destroy jobs.

Congressional Abdication of Authority The Founders of this country envisioned Congress as the branch of government that would debate and initiate tariffs. Article I of the Constitution established the Legislative Branch and clearly states:

“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” Since 1930, Congress has rapidly ceded significant tariff authority to the Executive Branch. The President is now authorized to unilaterally impose tariffs under a myriad of laws passed by Congress. Those authorities now include:

• Antidumping and Countervailing Duty Orders under the Tariff Act of 1930. • Section 232 National Security Duties under the Trade Expansion Act of 1962. • Section 201 to protect domestic industries from serious injury due to product imports. • Section 301 undue burden restrictions under the Trade Act of 1974. • Section 337 intellectual property violation duties under the Tariff Act of 1930. • Section 122 balance of payment duties to sustain currency values under the Trade Act of 1974. • Section 406 to address market disruptions from a communist country under the Trade Act of 1974. • The Defense Production Act to secure the domestic national security production industry. The legislative branch should work to reclaim its role as the body that implements and oversees tariffs. Under the current legal regime, each president can determine a new course for international trade policy without any say from Congress. This is not the system our founders intended, and it does nothing to establish the coherent tariff policy our nation needs.

Principles to Guide Tariff Policy American foreign policy must be rooted in achieving long-term, strategic goals. This applies to international economic and tariff policy as well. In order to ensure stability and effectiveness in the

30 The White House, ”Remarks by President Trump at a USMCA Celebration with American Workers | Warren, MI,” accessed December 12, 2024, https://trumpwhitehouse.archives.gov/briefings-statements/remarks- president-trump-usmca-celebration-american-workers-warren-mi/ 31 U.S. Trade Representative, ”Report on the U.S. Employment Impact of the United States-Mexico-Canada Agreement,” December 11, 2019, https://bit.ly/3OVZq5n

application of tariffs, policymakers should establish a general set of principles to help guide policy development. The United States Must Be the Freest Economy in the World Freedom is our nation’s core principle and biggest strength. America’s historic economic supremacy is based on allowing individuals to freely participate in mutually beneficial exchange. The free market system that America pioneered is superior to any government-managed economic order ever established. It must not be jeopardized. Any government policies that impede individual economic freedom must only be undertaken to protect national security. Tariffs Should Be Focused on International Adversaries Tariffs are a legitimate policy tool to change the behavior of our global adversaries and address free trade violations. In these cases, tariffs should be narrowly targeted to identified adversaries and trade violators, not our international allies. Policymakers must be wary of the potential of tariffs to push critical allies away from America and toward the Chinese Communist Party. American Citizens Must Know the Costs and Consequences of Tariffs The American people have faced inflation not seen in 40 years under the Biden Administration. Families struggling to make ends meet should not bear the cost of trade conflicts, especially with our strategic allies. Any application of tariffs must be accompanied by a clear estimate of costs to consumers and justifications for those costs. Policymakers should be held accountable for the cost of tariffs they impose. Consistent Trade Policy Is Effective Trade Policy Policy makers cannot leverage tariff policy to any strategic advantage if the rules of the road are unknown. Even if the stated goal of a tariff is to induce a particular action from a foreign country, it will be ineffective if the tariff is applied haphazardly. Taxes and Tariffs Should Not Be Used to Pick Winners and Losers. The federal government is too big. The outsized influence of the politicians and bureaucrats must be curtailed at all costs. When the government imposes tariffs with the intent of helping one industry at the cost of another, it further empowers Washington, D.C. and well-connected elites. Allies and Adversaries Cannot Be Tariffed Equally Attacking our historic, strategic, and ideological allies around the world through random economic warfare will deteriorate America’s power in a dangerous world. Countries that align with the vision and goals of the United States should be allowed to freely trade with its citizens. Indiscriminate, blanket tariffs on free nations will weaken our leverage around the world, not enhance it. Tariffs Should Bolster National Defense The U.S. must pursue comprehensive free trade agreements with allies around the world, especially those with whom the U.S. has military treaties (e.g., NATO, Taiwan, Japan, and Latin America). Making economic threats against our key partners is dangerous and counterproductive to American’s foreign policy interests. Conclusion

Failure is an ever-present danger for America’s tariff agenda. To succeed, elected officials must recognize and respect the real limits of tariffs as a tool: they cannot substantially reduce government deficits in the 21st century; they can easily be exploited by the DC swamp to dole out favors to its friends; and the benefits of tariffs cannot be separated from the significant costs to American consumers who remain beleaguered by years of inflation under Joe Biden. It is clear that tariffs will be an integral aspect of foreign policy for years to come. With China and other economic adversaries on the rise, a clear and comprehensive tariff strategy is more necessary than ever. American policymakers must apply consistent principles to properly implement tariffs, or else inflict lasting damage to our economy at home and our international standing abroad.

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