Simple tariff reform could boost U.S. manufacturers

The myth of decline dominates the narrative about U.S. manufacturing.

Yet, the preponderance of evidence indicates that U.S. manufacturing, relative to the past and relative to other countries’ manufacturing sectors, excels by the metrics that speak to its current and future prospects. But it could be doing even better if Congress made some simple changes to the outdated U.S. tariff system.

According to WTO and OECD figures, intermediate goods trade may account for as much as 75 percent of all global trade. The proliferation of cross-border investment and transnational supply chains has blurred the distinctions between U.S. and foreign products and has rendered tariffs on imported inputs incompatible with the imperative of wooing, securing and maintaining productive, capital investment in the U.S.

To compete more effectively at home and abroad, manufacturers in the U.S. need access to imported inputs at world market prices.

Yet, under U.S. tariff policy, many imported inputs remain subject to import taxes.

These taxes chase manufacturers to foreign shores, where those crucial ingredients are less expensive, and they deter others from setting up manufacturing operations stateside.

Not only does current U.S. tariff policy elevate the interests of certain producers over others, but it tends to favor the lower-value-added, basic materials producers to the higher-value-added, intellectual property-, capital- and export-intensive industries, which usually contribute more to GDP and create higher-skilled jobs.

In 2013, U.S. Customs collected nearly $41 billion in duties, taxes and fees levied on imports, with approximately $24 billion collected on imported inputs, which amounts to nothing more than a tax on U.S. value creators.

Removing that tax would encourage U.S. and foreign companies to locate or expand in the U.S. and hire more workers.

Establishing a policy of zero tariffs on intermediate goods would go a long way toward bolstering U.S. attractiveness as a destination for both U.S. and foreign direct investment.

Dan Ikenson is director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies. Send comments to awoods@tribtown.com.