The Hollow Order
Rebuilding an International System That Works
Congressional trade debates since 2000 have revolved around a series of individual free trade agreements (FTAs), and the presidential campaign is shaping up the same way. The agreements are worth arguing over, but a debate centered on FTAs has a drawback. These agreements cover less actual trade than most people realize, and they tend to steer argument away from a fundamental question: is our basic trade regime worth keeping?
In fact, most imports arrive not under FTAs but through the permanent tariff system, which receives far less attention in Congress. Rather than raising money and protecting jobs, permanent tariffs tend to increase clothing and shoe prices at home while creating especially high trade barriers that deter goods from approximately twenty poor countries across Asia and the Muslim world from entering the U.S. market.
About $1.94 trillion worth of goods flowed into the United States last year: Nine million cars, 30 million tons of steel, 1.5 billion roses, 2.4 billion T-shirts, $27 billion worth of semiconductor chips, $350 billion worth of oil and natural gas, and more. About $400 billion worth of goods arrived under free trade agreements, and another $50 billion through special duty-free programs for poorer regions made possible by legislation such as the African Growth and Opportunity Act. The remaining $1.5 trillion--80 percent of all imports--arrived under the permanent tariff system.
The tariff system is the smallest of the government's six major taxes, which also include income, payroll, corporate, excise, and estate taxes. It imposes an average 1.3 percent tax on imports, raising an average of $26 billion each year. This is the result of nine postwar tariff agreements, from the first General Agreement on Tariffs and Trade (GATT) in 1947 to the World Trade Organization's (WTO) Information Technology Agreement in 1997. Tariffs have vanished on high-technology products such as semiconductor chips, as well as on resource products such as natural gas. In sectors such as the automotive industry, most tariffs are now low.
But the low average of 1.3 percent conceals astronomically high tariffs on certain goods. The tariff system traces its roots to the 1930 Smoot-Hawley Act. The administration of Herbert Hoover imposed the highest tariffs rates on older, labor-intensive industries--especially clothing, textiles, and shoes. Industry lobbying campaigns have preserved many of these tariffs--almost unchanged--since the 1950s. Today, clothes and shoes, together with household textiles, luggage, silverware, watches, plates, and drinking glasses, account for about five percent of imports. These goods retain tariffs averaging about 14 percent--twenty times the average for the other 95 percent of imports--and spiking to 32 percent for polyester T-shirts and 48 percent for cheap sneakers.
It is only a slight exaggeration to argue that the tariff system has essentially evolved into a tax on clothes and shoes, which generate most of the government's revenue from tariffs. In 2007, clothes alone accounted for $9.5 billion of the $26 billion in U.S. tariff revenue, shoes added $1.9 billion, luggage and handbags another billion. The cost to the public, magnified by retail markups and sales taxes, is likely about $40 billion a year. It is a burden that disproportionately affects poor and working-class Americans.
Though the tariff system is smaller than other taxes, it is far more regressive. This is because poor people spend a greater share of their income on clothes and shoes than do wealthy or middle-class people. The cheap and simple goods made in poor countries and bought by low-income Americans are subject to far higher tariffs than luxury goods. An acrylic sweater attracts a 32 percent tariff, while a cashmere sweater gets only 4 percent; a polyester bra is tagged with a 17 percent tariff, while one made of silk gets less than three percent; and a cheap stainless steel fork is hit with a 19 percent tariff, while a silver-plated spoon has none at all.
Abroad the system operates in the same way, sidestepping industrial rivals to put its toughest barriers before the poor. In the late 1920s and early 1930s, President Hoover and his congressional lieutenants envisioned the tariff system mainly as a barrier to imports from Europe, and secondarily from China and Japan. But nearly 80 years have passed, and today the tariff system's targets are primarily the low-income nations of Asia and the Muslim world. To choose an illustrative example, the wealthy, post-industrial United Kingdom sells airplane parts, medicines, oil, and whiskey. The United Kingdom's $57 billion in exports to the United States suffer only a $412 million tariff penalty -- a tax of less than one percent. By contrast, Cambodia's 400 garment factories produce cheap clothes, and the government in Phnom Penh faces a $419 million penalty on only $2.4 billion in exports -- a punishing tax of 17.5 percent. Likewise, Pakistan has a competitive linen industry that provides pillow-cases and towels to American retailers. It faces a $365 million penalty (10 percent) for $3.6 billion in sales. The same goes for Afghanistan, Bangladesh, Mongolia, Nepal, and Sri Lanka.
Two decades ago, one might have defended this system as a tough but arguably effective way to protect U.S. industries. But today it is neither keeping jobs at home nor helping working-class Americans. If anything, it is punishing them for buying cheap imported goods at Wal-Mart and Costco. As China's economy booms, the Internet transforms the service sector, businesses develop more elaborate multinational supply chains, and the container-shipping and air-cargo industries slash transport costs, the tariff system's effects on employment are disappearing. In 1998, high-tariff industries -- such as shoes and textiles -- employed about 930,000 people in the United States. By 2002, the number had declined to 650,000. Now, with tariff rates unchanged, the figure has dipped to 400,000 U.S. workers. And the highest tariffs are often the least effective. The 48 percent sneaker tariff, for example, falls on a product that has not been made in the United States since the early 1970s. The United States today now finds itself clinging to an antiquated system that hits poor people hardest and protects few if any jobs while stunting growth and discouraging exports from some of the world's poorest and most vulnerable countries.
The perversity of the tariff system, of course, is not the only trade question the presidential candidates should be debating. Senators McCain and Obama should be asking how the United States can remain competitive as Asia rises? How will the U.S. food-safety and consumer-safety systems, set up for the 1970s, adapt to the multinational supply chain? Which industries and countries should our trade negotiators target as the main export opportunities? How should trade policy relate to foreign policy and strategy? And what is the best way to help workers adjust to competition and communities deal with mass layoffs? These are all reasonable and strategically crucial questions to ask. Unfortunately, the correct responses are far from obvious. By contrast, a closer look at our tariff system would raise a question which is much easier to answer: should we really be taxing cheap shoes and clothes?