Alternatives to Tariffs that will Boost US Competition
Note: The following is the testimony of Erica York, Senior Economist and Research Director at TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
Foundation, before the US Joint Economic Committee hearing on December 18, 2024, titled, “Trade Wars & Higher Costs.”
Chairman Heinrich, Vice Chair Schweikert, and members of the committee, thank you for the opportunity to discuss tariffs and better alternatives to boost US competitiveness. My name is Erica York, and I am a Senior Economist and Research Director at the Tax Foundation, a nonprofit think tank dedicated to studying tax policy at all levels of government.
The goals of boosting productivity, opportunities for workers, and US competitiveness on the global stage are all worthy. Tariffs are not a good way to achieve any of these goals for the US Economy. In this testimony, i will focus on three main ideas to illustrate why a tax reform alternative to tariffs is necessary: the negative impact on the US economy of the 2018-2019 Tariffs, the interconnectedness between US manufacturing and the global economy, as well as how moving to a consumption TaxA consumption tax is usually levied directly or indirectly on the purchase of goods and services. It is paid by the consumer either directly or indirectly in the form retail sales taxes or excise taxes or tariffs
base from a income tax basisThe tax base is all the income, property, assets and consumption, transactions or other economic activities that are subject to taxation. A narrow tax base can be inefficient and non-neutral. A broad tax base allows for lower tax rates and reduced administration costs.
can better meet the goals of greater productivity and investment.
The 2018-2019 Trade War Tariffs Did Not Deliver Manufacturing Jobs or Higher Output
Debates about American manufacturing often focus on manufacturing jobs rather than manufacturing output and productivity. It is true that manufacturing employment has declined, but that decline follows broad global and historical trends in which workers shift from agriculture to manufacturing in early stages of development, then from manufacturing to services in later stages of development.
The US has followed this path, primarily driven by growing manufacturing productivity and by increases in consumer spending on services too. As technology improves, fewer workers will be needed to produce the same amount of goods. This leads to a negative correlation between manufacturing productivity and manufacturing jobs. This is why the manufacturing output in the United States continues to grow, even though the number of workers in this sector has decreased. One economist concluded that “it is difficult to imagine any technological or policy changes, other than turning back the clock in U.S. Manufacturing productivity (e.g. smashing all the machines), that can bend this curve in a way that reverses the long-run decline in the U.S. employment share of manufacturing.”
Instead of focusing on employment shares, the most relevant policy question for the manufacturing sector is what can be done to boost productivity.[1]Rather than boosting productivity, tariffs forfeit productivity and output to preserve jobs at firms and in industries that are relatively less productive. According to an Office of the United States Trade Representative review of the economics studies on the 2018-2019 tariffs, the tariffs have had a small adverse effect on US economic welfare, incomes and prices. They also increased the prices of imported goods to the United States because the tariffs were passed on to US importers. This resulted in a decrease in overall manufacturing employment and a depressed investment growth. Tariffs are a way to redistribute and reallocate resources. The domestic producers gain from higher sales and prices, but at the expense of others in the economy. While tariffs create benefits for protected industries, higher input costs and retaliatory tariffs fully offset the benefits of protection, resulting in net losses in production and employment. While tariffs create benefits for protected industries, higher input costs and retaliatory tariffs fully offset the benefits of protection, resulting in net losses in production and employment in the US economy overall.
The United States International Trade Commission (USITC) found a similar outcome in an industry-level analysis of the tariffs on steel and aluminum, estimating an average of $2.8 billion in production increases enabled by the higher prices from the tariffs but a larger $3.4 billion in production decreases in certain downstream industries, like construction and equipment manufacturers, that rely on steel and aluminum as inputs.[2]The decline in the share of workers employed in the manufacturing sector has continued apace with tariffs as well as with new US subsidies for certain manufacturers under the Biden administration.
We should expect a similar reallocative effect from protectionist subsidies as we expect from protectionist tariffs: tax cuts aimed at narrow subcategories mostly shift investment to that sector, instead of driving aggregate investment growth. While it remains too soon to tell how this reallocation of investment will affect overall productivity growth, we have plenty of reasons to be pessimistic that it will prove successful.[3]
Most US Imports Are Intermediate and Capital Goods Purchased by US Producers[4]
Doubling down on broad-based tariffs is particularly problematic given the interconnected nature of US trade relationships today. [5]The United States imports more goods than any other country in the world. From 1997 to 2017, multinational firms accounted for 65 percent of US goods exports and 60 percent of US goods imports, on average. From 1997 through 2017, multinational firms accounted for 65 percent of US goods exports and 60 percent of US goods imports, on average.[6]
In 2022, 33.7 percent of US exports and 46.6 percent of US imports constituted within-firm trade, or trade between a parent firm and an affiliate or related party.
Placing tariffs on imported inputs does not boost global competitiveness, but instead directly increases the cost of operating in the United States and makes it harder for US-based firms to compete. A new study from the New York Fed concludes “extracting gains from imposing tariffs is difficult because global supply chains are complex and foreign countries retaliate.”
Indeed, in the most recent round of tariffs, firms that eventually faced [7]
tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers which increase prices, reduce the amount of goods and services available to US businesses and consumers and place an economic burden on foreign suppliers.
The implied cost for all affected firms was $900 per worker in new duties, or the equivalent of placing a tariff on US exports of 2 percent for the typical firm and 4 percent for products with higher exposure to tariffs. For all affected firms, the implied cost was $900 per worker in new duties, or the equivalent of placing a tariff on US exports of 2 percent for the typical firm and 4 percent for products with higher exposure to tariffs.[8]Imports and exports are highly interconnected. Import tariffs can hurt exporters by raising production costs, reallocating resources away from export industries, causing currency appreciation, or inviting foreign retaliation.[9]
The United States is currently the second largest goods exporter in the world overall; for instance, the US leads the world in aerospace exports and is the second largest auto exporter.[10]
US manufacturing value-added is the second largest in the world, larger than the manufacturing value-added of the next three nations–Japan, Germany, and India–combined. And value-added per worker far outpaces any other nation, revealing the global dominance of US manufacturing productivity.US dominance, however, is not guaranteed to continue if the US does not continue to reinvest and grow. A tax reform strategy that prioritizes incentives for investment and growth, rather than a tariff strategy that reallocates investment and reduces productivity, is needed.[11]
Removing the Tax System’s Bias Against Production Supports All Businesses, Including Manufacturing[12]
Many members of Congress may be concerned about the way our trading partners tax goods and services that cross the border. The United States does not have a value-added (VAT) tax at the national level. All other countries in the Organisation for Economic Co-operation and Development levy a VAT. A border adjustment allows producers to lower the prices they charge abroad. A border-adjusted tax is levied equally on goods consumed within a country, whether the goods were produced domestically or imported; exports are exempt because they are not consumed within a country. Ultimately, a border-adjusted tax falls equally on goods consumed within a country, whether the goods were produced domestically or imported; exports are exempt because they are not consumed within a country.[13]The economic and administrative case for moving to a consumption tax base does not rest on an argument about boosting exports but instead is based on boosting investment and capital accumulation by removing income tax biases and simplifying the complexities of the current income tax system.[14]Income taxes apply when taxpayers earn money and when they see changes in their net worth, such as from returns from saving and investment. Net worth changes, however, are usually consumed later. Income is either consumed as soon as it is earned, or, if saving is done, income is consumed later after it has been saved. Income taxes penalize saving and investment and reduce capital accumulation, productivity and output. Taxing income requires complex determinations about how to define income. This increases the complexity of tax code, and results in billions and billions of lost hours of productivity every year. A consumption tax base eliminates the tax penalty created by income taxes on saving and investing. The removal of the tax penalty encourages people to save and invest, which leads to higher capital accumulation, productivity and output. That is why a long academic literature has found consumption taxes to be maximally economically efficient and simpler to administer.[15]
The four primary approaches to taxing consumption are the retail
sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt items like groceries. Broadening the base, by including groceries, would allow rates to be lower. A sales tax should exclude business-to-business transfers that, when taxed cause tax pyramiding.
is the value-added or Hall-Rabushka tax [16]
flat. An income tax is called a “flat” tax when it is applied to all taxable income, regardless of the income level and assets.
All four approaches achieve a neutral tax treatment between saving and consumption, despite the differences in each design. While each design is different, all four approaches achieve neutral tax treatment between saving and consumption.[17]An alternative to tariffs that follows consumption tax principles and would succeed in boosting productivity, opportunities for workers, and US competitiveness would be an earlier version of the 2017 tax law prior to its passage–the destination-based cash flow tax (DBCFT). Despite the significant improvements brought about by the 2017 Tax Cuts and Jobs Act (TCJA), the US still maintains an origin based income tax system which places a disproportionate burden of saving, investing and producing in the United States. The The
[18].
While similar to a VAT, a DBCFT differs in one major respect by allowing firms to deduct payroll expenses, giving it a different tax base. A A A A As The The Full
of capital investment would encourage capital formation and is one of the most cost-effective tax reforms available to boost investment,
and eliminating interest deductibility would place firm financing decisions on equal ground.
Removing the income tax biases against investment by adopting a DBCFT would lead to higher capital accumulation, productivity, and output.[19]
ConclusionIn conclusion, while tariffs are often presented as tools to enhance US competitiveness, a long history of evidence and recent experience shows they lead to increased costs for consumers and unprotected producers and harmful retaliation, which outweighs the benefits afforded to protected industries. Reform By addressing remaining tax biases against investment and production, and creating a neutral framework for trade, a DBCFT would foster broad economic growth.Thank you for having me, and I look forward to your questions.Stay informed on the tax policies impacting you.Subscribe to get insights from our trusted experts delivered straight to your inbox.[20]
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U U.S. International Trade in Goods,” accessed Dec. 10, 2024, White House, “Economic Report of the President,” March 2024, Ibid.
Mary Amiti, Matthieu Gomez, Sang Hoon Kong, and David E. Weinstein, “Do Import Tariffs Protect U.S. Firms?,” Liberty Street Economics, Dec. 5, 2024,
Kyle Handley, Fariha Kamal, and Ryan Monarch, “Rising Imports Tariffs, Falling Export Growth: When Modern Supply Chains Meet Old-Style Protectionism,” International Finance Discussion Papers 1270, February 2020,
Erica York and Nicolo Pastrone, “How Do Import Tariffs Affect Exports?,” Tax Foundation, Aug. 28, 2024,
Statista, “Leading countries with the highest aerospace exports in 2023,” International Organization of Motor Vehicle Manufacturers, “2021 Production Statistics,” [21] World Bank, “Manufacturing, value added (current US$),” World Bank national accounts data, and OECD National Accounts data files,
Colin Grabow, “The Reality of American “Deindustrialization,” Cato Institute, Oct. 24, 2023, [22] Daniel Bunn, Cristina Enache, and Ulrik Boesen, “Consumption Tax Policies in OECD Countries,” Tax Foundation, Jan. 26, 2021,
Alan D. Viard, “Border Tax Adjustments Won’t Stimulate Exports,” American Enterprise Institute, Mar. Tax 30
