Changing the Conversation

Last week the International Trade Commission published a report titled Economic Impact of Section 232 and 301 Tariffs on U.S. Industries. This report, requested by the House and Senate Appropriations Committees, does exactly what the title says—it analyzes the economic impact of the Trump tariffs. Its overall conclusions will not surprise any economists: imports were down, domestic production was up, and prices were up. That was entirely predictable and, in fact, was already widely predicted. The report also refuted the former president’s claim that China would pay the tariffs. In fact, importers paid them—something that was also widely predicted.

The more interesting twist in the report is not the direction of import, production, and price movements, but their amount, particularly price. For steel and aluminum, the tariffs reduced imports by 24 percent and 31 percent respectively, and increased domestic production by 1.9 percent and 3.6 percent respectively. On prices, however, while the price paid by importers reflected the full amount of the tariff, average price increases paid by consumers in the marketplace were much smaller—2.4 percent for steel and 1.6 percent for aluminum. That suggests importers “ate” the tariffs and only passed on part of the cost increase to consumers, and domestic producers did not take full advantage of the price increase opportunities the tariffs provided.

The same trend occurred in downstream industries—those that make things out of steel and aluminum. The Section 232 tariffs increased prices downstream 0.2 percent on average and decreased downstream production 0.6 percent on average. Again, this was a smaller impact than some economists expected.

Looking at the Section 301 tariffs reveals the same trends. Overall, imports were down by 13 percent; production was up 0.4 percent; and prices increased 0.2 percent. Once again, a smaller price effect than anticipated. The range of products covered by these tariffs, however, was quite broad, and the aggregate data does not reflect some sectors where the changes were more significant. To cite one example very much in the public eye right now, the tariffs reduced imports of semiconductors from China by 72.3 percent, increased the price of chips in the U.S. by 4.1 percent, and increased the value of U.S. production by 6.4 percent.

So, what does all this mean? I can’t resist suggesting that it means the economists by and large got it right and everybody else got it wrong, striking a blow for a much-maligned profession. They were right in saying that the tariffs would decrease imports, increase domestic production, and raise prices. Some of them missed the boat on how much change would occur, but directionally they were on target.

The advocates, however, didn’t fare quite so well. Members of the business community, who have long argued the tariffs were inflationary, should have some egg on their faces. Prices did go up, but in most cases not significantly. That conclusion, by the way, tracks studies done last year that showed removing the tariffs would have only a small impact on inflation.

On the other side, those who supported tariffs also do not have a lot to show for it. In the steel industry, for example, while production went up modestly, capacity utilization continues to hover around 74 percent, significantly below the 80 percent Trump was aiming for. While the tariffs certainly had a positive impact on the industry, it is hard to argue they “saved” it or put it in a much better position competitively if the tariffs eventually are removed.

Finally, it is worth noting the limitations of the study. Commissioner Jason Kearns, in his additional views on the report, observed that the report “does not estimate the longer-term effect of the actions on increasing investments in clean energy technologies, building supply chain resiliency, or creating jobs in underserved communities.” To give the commission due credit, it was not asked to study those effects, and it did not.

Even so, issues like those deserve to be studied, particularly at a time when the administration has led the way in changing the debate about trade and supply chains from the traditional emphasis on price, quality, and market access to a conversation about sustainability, equity, resiliency, and, increasingly, national security. These are not traditional economic variables, and factoring them into company production and supply chain planning inevitably leads to outcomes that are suboptimal economically, although justifiable from other perspectives. The commission’s report reflects traditional analytical approaches and provides some useful conclusions that put the tariffs in perspective (and show how much Trump got wrong). The Biden administration, however, is busy changing the conversation, and it would also be useful to take a look at the tariffs from that broader perspective, as Commissioner Kearns suggested.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.