Tariffs 101 and What They Mean for the Industry

Making Sense of the Headlines:
Courtesy of the Food Marketing Institute
It is hard to turn on today’s news without hearing about the Trump administration’s decision to impose tariffs on a host of imports.  These tariffs are often presented as black and white – either a necessary adjustment or taxes that will sink the economy.

As taxes placed on imports from other countries, tariffs are not paid by the exporting country, but by the importer of record in the United States.  Tariffs don’t directly cost foreign exporters money, but make their goods more expensive to U.S. consumers, who often find these tax costs passed along as higher prices.

The maximum tariffs the U.S. can place on imports is set by a host of multilateral and regional trade agreements.  That said, there are times when the US can move beyond these limits as a means of addressing trade disputes.  The Trump administration’s recent tariff announcements are part of two such disputes – one deals with issues of national security and the other with the misappropriation of intellectual property.

Steel and Aluminum Tariffs – Section 232
Section 232 of the Trade Expansion Act of 1962 allows the President to order an investigation of the impact of imports on national security.  President Trump used this authority to focus on steel and aluminum imports.  The Commerce Department’s investigation found that these imports did raise national security concerns and the President ordered imports of steel to face a 25% tariff and aluminum a 10% tariff.

A handful of countries impacted by this decision have negotiated with the US to avoid the tariffs.  Most others – including Canada, the EU, China, India, Japan, and Russia – have not.

Several impacted countries argue that the U.S. tariffs violate our commitments under a variety of trade agreements and have asserted their right to impose retaliatory tariffs.  When you hear talk of a “trade war” in the press, it is this back-and-forth process raising concerns that the situation could get out of hand.

China Tariffs – Section 301
A second trade dispute involves concerns that China is misappropriating U.S. intellectual property and proprietary technology. The Trump administration invoked Section 301 of the Trade Act of 1974, which allows the President to impose sanctions to halt these types of policies.  Following an investigation confirming violations, he announced a first slice of tariffs aimed at $34 billion in Chinese goods, followed by another set valued at around $16 billion.

The Chinese government was extremely upset over the imposition of the tariffs and the targeting of industries central to the country’s industrial plans.  After China declared it would take retaliatory action, President Trump responded by announcing an additional $200 billion in tariffs, covering virtually all food exports from China – fish and seafood, produce, etc.  This set of tariffs went into effect on September 24th at a 10% rate; on January 1st, the rate increases to 25%.

What Do the Tariffs Mean for Our Industry?
Calculating the impact of tariffs is tricky.

For instance, tariffs on steel and aluminum imports will increase the price of the industrial foil we use in our kitchens and some products, as well as make shelving and construction more expensive.  These costs will have to be made up somewhere in the supply chain.  In addition, several food manufacturers dependent on aluminum cans or foil packaging announced they will raise prices on consumers.

There is a flip side to these costs.  The retaliatory tariffs imposed by our trading partners are strongly focused on U.S. agricultural products like soybeans, beef and pork; making these products more expensive for foreign consumers, in some cases prohibitively so.  The economic fallout from this is already being felt in farm country.  As these foreign markets accept less product, the domestic U.S. market becomes the buyer of last resort, driving prices down. U.S. consumers could soon see pork prices fall simply because tariffs are limiting the ability to sell overseas.

Whether these lower prices balance out the increased costs created by U.S. tariffs remains to be seen. In the China 301 case – where Chinese exports to the U.S., like shrimp, strike directly at consumer’s pocketbooks – it is unlikely that domestic supply increases will balance out the tariff impact.

Regardless of where they come down on the rationale behind these trade disputes, virtually everyone agrees that the best possible result is a negotiated solution that achieves our broader goals and eliminates these tariffs as soon as possible.  So far, progress on both the steel and aluminum case and China 301 has been limited.  Let’s hope this changes before economic damage starts to be done.

We will work to keep you updated on progress, but do not hesitate to send any questions our way.  Additionally, FMI led a group of farm-to-fork associations in the creation of a website, “Feeding the Economy” to showcase our collective impact on the U.S. economy, but also exports by Congressional districts.  Feel free to utilize this information if it is helpful to you.

Andy Harig serves as Senior Director, Tax, Trade and Sustainability and prior to his position at FMI served on the Trade Staff of the U.S. Senate Committee on Finance.

(Editor’s Note: This article is current until November 30, 2018)