The Seen and Unseen Protectionism in the U.S. State of the Union
Gabriella Beaumont‐Smith is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, in Washington, D.C. Her research focuses on the economics of U.S. trade policy.
On March 1, 2022, U.S. President Joe Biden gave his first State of the Union (SOTU) speech. The speech is a tradition that fulfills the U.S. Constitutional requirement that the president, “from time to time give to the Congress Information of the State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and expedient”. While trade policy has not been a priority for the Biden Administration, it played a larger than expected role in the speech. The president not only explicitly spoke about trade policy but discussed other priorities less obviously related to trade.
The Seen
The speech had an overall theme of “America first.” In the first mention of trade policy, the president began by emphasizing efforts to expand Buy American laws, which require the U.S. government to purchase American-made materials for the purposes of public construction. The president stated, Buy American “support[s] American jobs.” However, there is little evidence of this. Rather the law reallocates jobs to the sectors that supply the government. It has been estimated “saving” these jobs exceeds USD 250,000 per job. Thus, while some jobs may be “saved,” the rest of the country foots the bill.
The president moved on to support the “Bipartisan Infrastructure Law,” also known as the Infrastructure Investment and Jobs Act (IIJA), which is rife with Buy America (not to be confused with Buy American discussed above) provisions and other local content rules. The difference between Buy American and Buy America mainly lies in whether the purchases are directly made by the federal government. And while these rules are not new, the IIJA strengthened them, for example, by expanding the Buy America list of materials to include items like copper used in electric wiring. These rigid rules simply make federal purchases more expensive, reducing the quality and extent of improvements to infrastructure. For example, in 2017, to meet Buy America provisions, the Washington, D.C. transit authority paid an estimated USD 441 million more than the foreign equivalent for new railcars for the subway. This money could have funded other infrastructure uses, provided tax relief, or been used for numerous other options.
The president followed by recommending passing legislation directly targeting China. Two bills: the Senate’s Innovation and Competition Act, and the House version, the America COMPETES Act, both aim to diminish the United States’ relationship with China. One provision that these bills have in common involves subsidizing American semiconductor production. This idea has been politically popular for quite some time, with rhetoric focusing on preventing China from dominating the semiconductor supply chain. While China subsidizes its semiconductor industry, there is no need for the United States to import China’s economic policy and subsidize U.S. semiconductor production. Such a reaction is especially irresponsible given that some of the concerned policymakers are wrong about the state of the American semiconductor industry. As illustrated in Figure 1, the Semiconductor Industry Association reported that while the U.S. industry uses semiconductor manufacturing facilities around the world, the largest share—43.2%—of production remains in the United States, compared to only 5.5% in China. Even Intel, named in the SOTU for its semiconductor production success, is not interested in government support. Copying China’s behavior will weaken American competitiveness, create larger global economic distortions, and demonstrate that the United States is faltering in its promotion of freer trade.
Figure 1: Percent of American Semiconductor Manufacturers’ Wafer Capacity by Location in 2020
Source: the Semiconductor Industry Association
The Unseen
The “America first” policies are protectionist in nature, but protectionism was also masked in other recommendations the president made to Congress.
The president stressed lowering costs for Americans. As inflation is rising (a result of many factors), emphasizing policies to combat higher prices is essential. One of the president’s plans to combat inflation is to cut energy costs by combating climate change. The president recommended tax credits in an effort to increase renewable energy production. However, President Biden did not mention his extension of safeguard tariffs on imports of solar cells and panels. The extension is counter to both reducing energy costs and reducing greenhouse gas emissions. Some estimates report the tariffs increased the cost of solar installations for the average homeowner, which could discourage Americans from switching to renewable alternatives. These tariffs were imposed to create jobs (some estimated 45,000), but instead resulted in overall industry job loss. The four-year extension will likely be as ineffective as the first round at creating American solar manufacturing jobs, all the while maintaining artificial expense for cleaner energy.
President Biden also called for increased competition. However, the president did not address the extensive trade restrictions imposed by the Trump administration and maintained by the Biden administration that increase costs to entry into the U.S. market. One example is the myriad tariffs that artificially increase the price of imports. While the advent of the World Trade Organization promoted multilateral commitments to unilateral tariff reduction, President Trump reversed some of this good work by imposing tariffs on almost 17% of U.S. imports. The International Monetary Fund estimated that these tariffs reduced global GDP by almost 1% in 2020. Given President Biden’s emphasis on the American worker, reversing these Trump tariffs would be a worthwhile policy recommendation. Tariffs are regressive, meaning they significantly impact the poorest. This demographic benefits the most from freer trade; as trade liberalization made goods more affordable, those in the lowest income brackets can consume twice as much as their 1960 counterparts.
Tariffs can also help incumbent U.S. firms reap larger profits than otherwise as they are insulated from competitive pressures. As imports are more expensive, domestic businesses may respond with price hikes, thereby reducing workers’ purchasing power. This response occurred with the imposition of tariffs on imported washing machines to “safeguard” the U.S. washing machine industry. The tariffs not only increased prices of imported washing machines but also domestically produced washing machines, and dryers—a complementary good to washing machines. Between 108% and 225% of the tariff costs were passed on to consumers through higher prices for these appliances. Moreover, the tariffs were an ineffective safeguard and did not revitalize the American washing machine industry. In fact, Whirlpool (who lobbied for these tariffs) cited sales losses even two years after the tariff imposition.
Hope for Better Recommendations Next Year
The president rightly emphasized the importance of a supportive economy for the American worker. However, the recommendations the president made to Congress will likely not lower costs for workers or increase equality. President Biden should instead question the policies of his predecessors to fully evaluate the impact of current trade policy on advancing the U.S. economy, including promoting worker prosperity. A good first step would be reversing the myriad tariffs levied by former President Trump that imposed immense costs on American workers.
Hopefully, the president will provide a set of recommendations for freer trade at the next SOTU.
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