PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

The Big Problem with Hikes on Tariffs: American Consumers and Small Businesses Feel the Pain

By at 16 May, 2024, 8:30 am

by Raymond J. Keating –

When talking about trade, economists correctly highlight the benefits for consumers from free trade (that is, policies reducing governmental imposed costs on trade), including expanded choice and access to various products, increased competition, and lower prices. Those lower prices also mean that consumers have more dollars to save, invest, and/or spend elsewhere.

From there, it pays to dig just a bit to get at who supplies products to consumers. It then becomes obvious that when government resorts to protectionism – as President Biden has just done with announced extensions of and increases in tariffs (i.e., taxes on imports) on assorted goods from China – those hit with the costs include consumers, along with American small businesses, and of course, local and state economies, and the national economy.

To sum up the benefits of trade for American businesses, exports capture activity and opportunities for U.S. entrepreneurs, businesses (the vast majority being smaller businesses), investors and workers (who earn more on average in jobs linked to trade) in the international marketplace. Meanwhile, nearly all imports are inputs to domestic businesses – from retailers to manufacturers – and therefore increased imports are tied to, again, expanding activity and opportunities for domestic businesses and for workers at such businesses, with benefits accruing, once more, across local and state economies, and the overall U.S. economy.

Trade’s Impact on the Economy

Indeed, it must be noted that a dramatic slowdown in the growth of trade has contributed to the drastic decline in U.S. economic growth since 2007.

For example, real U.S. exports grew at an average annual rate of 2.8 percent from 2007 to 2023, which was less than half the real annual average growth rate of 5.9 percent from 1950 to 2006. And real imports grew at an annual average rate of 2.6 percent from 2007 to 2023, versus an average rate of 6.8 percent from 1950 to 2006. In turn, this dramatic slowdown in trade contributed to the fact that the real average U.S. economic growth rate registered 1.8 percent from 2007 to 2023, which was half the 3.6 percent average rate prevailing from 1950 to 2006.

And now President Biden wants to take trade policy, which has been pointed in the wrong direction to varying degrees since 2009, and make it even more costly and anti-growth. (See the White House “Fact Sheet” and the U.S. Trade Representative’s release.)

In the USTR release, it was noted that “Ambassador Tai has recommended that products from the PRC [i.e., China] currently subject to Section 301 tariffs should remain. Additionally, in light of the increased burden on U.S. commerce, President Biden is directing Ambassador Tai to take action to add or increase tariffs for certain products.” Those actions are summed up in the following chart from the USTR:

It was declared in the White House “Fact Sheet” that this announcement “reflects President Biden’s commitment to always have the back of American workers.”

Who will feel the pain?

In reality, American workers, and the U.S. small businesses for whom they work, will be hurt due to increased costs that will make them less competitive, and due to even fewer opportunities in the international marketplace. After all, China is not about to sit idly by in the face of these tariff measures (see reports here and here, for example).

Make no mistake, increasing tariffs means increasing the tax burden on American importers, and their customers, namely, other U.S. businesses and consumers. Consider that the U.S. International Trade Commission looked at the impact of higher tariffs from 2018 to 2021, and concluded: “U.S. importers bore nearly the full cost of these tariffs because import prices increased at the same rate as the tariffs.”

And yes, these tax increases are about small business no matter how you look at them. For example, based on data (2020) from the latest full report from the U.S. Census Bureau, we see that among all identified U.S. exporting firms, 76.1 percent have fewer than 20 employees, 86.1 percent fewer than 50 employees, 91.3 percent fewer than 100 employees, and 97.3 percent fewer than 500 employees.

As for imports, among all identified U.S. importing firms, 77.2 percent have fewer than 20 employees, 86.5 percent fewer than 50 employees, 91.4 percent fewer than 100 employees, and 97.3 percent fewer than 500 employees.

Also, when considering that imports are inputs to domestic businesses, one sector where this clearly is the case is retail. And based on the latest Census Bureau data (2021):

● 80.7 percent of retail trade employer firms have fewer than 10 employees

● 91.2 percent fewer than 20 employees

● 98.5 percent fewer than 100 workers

● 99.7 percent fewer than 500 employees

In terms of manufacturing where imports serve as inputs (as capital goods), again based on the latest Census Bureau data (2021):

● 60.3 percent of manufacturing employer firms have fewer than 10 employees

● 75.2 percent fewer than 20 employees

● 93.4 percent fewer than 100 workers

● 98.4 percent fewer than 500 employees

The U.S. economy overwhelmingly is a small business economy, and when policymakers impose increased costs – such as via tariffs – there’s no way to get around the fact that small businesses will be harmed.

These tax increases aren’t about national security, as the president, in part, asserts. If serious about national security, then the Biden administration would, for example, be working to expand our trade ties with Pacific Rim nations, bolster the U.S. Navy and our presence in the region, and strengthen the U.S. economy.

Instead, these tariff measures are more examples of politics and pandering supplanting serious policymaking, and only adding to the anti-growth measures – such as other tax increases and increasing regulatory burdens – that are undermining U.S. growth and competitiveness.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.

 

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