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Trump’s Protectionist Rube Goldberg Machine

The Trump administration is offering some countries a reprieve from US import tariffs in exchange for self-imposed export quotas, while allowing domestic producers to apply for tariff exemptions. Because this approach will weaken competition and cause delays, the predictable result will be higher costs and reduced quality control.

WASHINGTON, DC – To avoid the Trump administration’s 25% tariff on imported steel, some countries have agreed to accept export quotas on 59 varieties of steel products. At the same time, the administration has declared that US manufacturers that use steel as an input may apply for tariff exemptions from the Department of Commerce if they are unable to source the specialized products they need domestically.

Trump would like to think that forcing quotas on exports and providing exemptions to domestic importers is good for the United States both politically and economically. Nothing could be further from the truth. Politically, the Trump administration has already done serious damage to America’s international standing by justifying tariffs against allies’ exports on the grounds of “national security.”

But the economic fallout of Trump’s tariffs has been no less alarming. US manufacturers that rely on steel inputs are already facing higher costs, and could soon face shortages, with the price of steel in the US having risen 50% above that in China or Europe. In fact, citing higher costs, the iconic motorcycle company Harley-Davidson recently announced that it was moving some of its production out of the US, to avoid the European Union’s retaliatory tariffs.

As US manufacturers’ costs rise above those of their overseas competitors, American consumers will also face higher prices. As a result, they will limit or delay purchases and shift at least some of their consumption to foreign-made products that the tariffs have now made relatively cheaper. The Peterson Institute for International Economics estimates that the levy on steel alone could destroy 195,000 jobs in the auto and auto-parts industry over the next three years.

Beyond the obvious fallout from tariffs, the introduction of export quotas and exemptions will also have an insidious impact. For example, South Korea has agreed to limit its steel exports to the US to 70% of 2015-17 levels, raising the question of how such quotas should even be administered. Either the South Korean government or the US Customs Service will have to monitor and limit each of the 59 categories of steel.

Supposing that the South Koreans take on the task, US customs officials will either have to trust their numbers, or incur the costs of duplicating the monitoring efforts needed to enforce the quota. Either way, higher costs and delays will follow, because each South Korean exporter will have to request approval for each type of steel shipment.

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If this system of export licensing operates on a first-come, first-served basis, then US importers and South Korean exporters will be left with no choice but to rush out their orders early in the year. Alternatively, if the South Korean authorities decide to allocate quotas among firms, they will probably have to benchmark each firm’s allotment to its share of exports in the 2015-2017 period.

But with a fixed-quota arrangement, there would be no competition among South Korean steel exporters in the US market. Based on past experience with quotas around the world, the predictable result would be reduced quality control and longer delivery times, because exporters would have no reason to compete for new customers.

Tariff exemptions, too, can have a similarly damaging effect. By the end of June, the Department of Commerce had already received 21,000 applications for exemptions, and it expects that number to double this year.Processing these applications takes time and introduces further complications, all the more so because companies seeking exemptions must apply separately for each type of steel (with the only difference sometimes being the component’s shape), and because exemptions must be renewed annually.

The Department of Commerce has hired around 30 people to process applications within 90 days. But applications are also made public for 30 days, and if a domestic steel producer indicates that it can produce the steel type in question, the application is denied. As of June 21, 9,000 of the initial 20,000 applications had been posted for review, 42 had won exemptions, and 56 had been rejected.

In practice, this system will allow any domestic producer to block duty-free imports of steel components that it believes it can produce. When this method of administration has been used elsewhere around the world, it has resulted in firms asserting dubious capabilities without regard to quality, price, or the timeliness of deliveries. And in the case of the Trump administration, there is every reason to doubt that those examining these claims will have the necessary qualifications.

In this new age of protectionism, US firms that receive tariff exemptions and South Korean firms that receive quota entitlements will be gaining valuable property rights at little cost. That will give firms all the more reason to lobby and otherwise pressure licensing authorities, further complicating the process, and raising the possibility of corruption. And even if decision-making is handed over to independent bodies to prevent abuse, doing so will make the process even more complicated and time-consuming.

Trump’s “America First” trade policies will result in more misrepresentation on the part of domestic suppliers, reduced quality control, bureaucratic delays, and higher barriers for potential new competitors. Moreover, once tariffs or quotas are imposed, other producers will start demanding equal protectionist attention, which may be why Trump is now threatening additional tariffs on cars. Once this contagion takes hold, there is no telling where it will stop.

The Trump administration has cut taxes and slashed regulations in the hope of boosting productivity growth. But by subjecting US manufacturers and the world to a system of tariffs, quotas, and exemptions, it will achieve the opposite effect: lower competition, higher prices, poorer service, and less innovation.

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