[Senate Hearing 118-596]
[From the U.S. Government Publishing Office]
S. Hrg. 118-596
TRADE WARS AND HIGHER COSTS:
THE CASE AGAINST TRUMP'S TARIFFS
=======================================================================
HEARING
BEFORE THE
JOINT ECONOMIC COMMITTEE
OF THE
CONGRESS OF THE UNITED STATES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
DECEMBER 18, 2024
__________
Printed for the use of the Joint Economic Committee
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
59-619 WASHINGTON : 2025
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
SENATE HOUSE OF REPRESENTATIVES
Martin Heinrich, New Mexico, David Schweikert, Arizona, Vice
Chairman Chairman
Amy Klobuchar, Minnesota Jodey C. Arrington, Texas
Margaret Wood Hassan, New Hampshire Ron Estes, Kansas
Mark Kelly, Arizona A. Drew Ferguson IV, Georgia
Peter Welch, Vermont Lloyd K. Smucker, Pennsylvania
John Fetterman, Pennsylvania Nicole Malliotakis, New York
Mike Lee, Utah Donald S. Beyer Jr., Virginia
Tom Cotton, Arkansas David Trone, Maryland
Eric Schmitt, Missouri Gwen Moore, Wisconsin
J.D. Vance, Ohio Katie Porter, California
Jessica Martinez, Executive Director
Ron Donado, Republican Staff Director
C O N T E N T S
----------
Opening Statements of Members
Page
Representative Donald S. Beyer, Jr., a Representative from
Virginia....................................................... 1
Witnesses
Mr. Ed Gresser, Vice President and Director for Trade and Global
Markets, Progressive Policy Institute, Washington, DC.......... 3
Mr. Brendan Duke, Senior Director for Economic Policy Center for
American Progress, Washington, DC.............................. 5
Mrs. Erica York, Senior Economist and Research Director, Tax
Foundation, Washington, DC..................................... 7
Mr. Jeff Ferry, Chief Economist, Coalition for a Prosperous
America, Alexandria, VA........................................ 9
Submissions for the Record
Prepared statement of Representative Donald S. Beyer, Jr......... 35
Prepared statement Mr. Ed Gresser, Vice President and Director
for Trade and Global Markets, Progressive Policy Institute..... 38
Prepared statement of Mr. Brendan Duke, Senior Director for
Economic Policy, Center for American Progress.................. 46
Prepared statement of Mrs. Erica York, Senior Economist and
Research Director, Tax Foundation.............................. 58
Prepared statement of Mr. Jeff Ferry, Chief Economist, Coalition
for a Prosperous America....................................... 64
Questions for the Record and Response submitted by Senator Amy
Klobuchar to Mr. Gresser....................................... 73
Questions for the Record submitted by Senator Amy Klobuchar to
Mr. Brendan Duke............................................... 77
Articles submitted by Vice Chairman David Schweikert:
https://www.goiam.org/news/iam-union-applauds-biden-
administrations-bold-actions-to-protect-u-s-shipbuilding-
steel-workers-from-chinas-unfair-practices/................ 78
https://aflcio.org/press/releases/steel-and-aluminum-tariffs-
good-working-people........................................ 78
https://aflcio.org/2018/7/24/usw-house-properly-used-tariffs-
protect-working-people..................................... 79
https://teamster.org/2024/03/teamsters-applaud-protecting-
american-autoworkers-from-china-act/....................... 80
https://golden.house.gov/media/press-releases/golden-
introduces-bill-to-restore-american-manufacturing-with-10-
percent-tariff-on-all-imports.............................. 81
https://golden.house.gov/media/press-releases/golden-
introduces-bills-to-protect-america-s-energy-independence-
auto-industry-with-increased-tariffs-on-china.............. 82
https://www.whitehouse.gov/briefing-room/statements-releases/
2024/05/16/what-they-are-saying-labor-business-and-elected-
leaders-praise-president-bidens-actions-to-protect-
american-workers-and-businesses-from-chinas-unfair-trade-
practices/................................................. 83
https://www.brown.senate.gov/newsroom/press/release/sherrod-
brown-
senators-push-administration-keep-301-tariffs-in-place-
chinese-
imports#::text=Section%20301%20tariffs%20were%20imposed,
detrimental%20to%20the%20United%20States................... 91
https://democrats-waysandmeans.house.gov/media-center/press-
releases/neal-statement-biden-administrations-action-
protect-american-workers................................... 92
https://democrats-waysandmeans.house.gov/media-center/press-
releases/neal-statement-biden-administrations-finalized-
action-protect-workers..................................... 93
https://ustr.gov/about-us/policy-offices/press-office/press-
releases/2024/may/us-trade-representative-katherine-tai-
take-further-action-china-tariffs-after-releasing-statutory 94
https://www.reuters.com/business/ustr-tai-says-us-tariffs-
chinese-goods-are-significant-leverage-2022-06-22/......... 96
TRADE WARS AND HIGHER COSTS:
THE CASE AGAINST TRUMP'S TARIFFS
----------
Wednesday, December 18, 2024
United States Congress,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 2:34 p.m., in Room
210, Cannon House Office Building, Hon. Donald S. Beyer, Jr.
presiding.
Present: Representatives Schweikert, Estes, Beyer, Trone,
and Moore.
Senator Hassan.
Also Present: Representatives DelBene, Schneider, and
Panetta.
Staff Present: Sebi Devlin-Foltz, Jessica Martinez, Hannah
Ceja, Lia Stefanovich, Ron Donado, Jacob Rogers, Douglas Simon,
Garrett Wilbanks, Shauna Burton, Matthew Cernicky, Jeremy
Johnson, and Colleen Healy.
Representative Beyer. Given that the magic hour has
arrived, I am happy to call this hearing to order, and we will
have more people showing up. House votes just finished. Senate
votes are about to begin. But this hearing will come to order.
I would like to welcome everyone to today's hearing. It is
entitled ``Trade Wars and Higher Costs: The Case Against
Trump's Tariffs.''
I want to thank all of our distinguished witnesses for
being here even though this will make the case for Trump's
tariffs.
The Constitution--but let me turn to my opening statement.
The Constitution empowers Congress, not the President, to
determine trade policy for good reason. Misusing the power to
impose tariffs can wreak havoc on our economy.
We are holding this hearing today because the President-
elect has vowed to implement massive tariffs in his second
term, wrongly, I believe, claiming that it will lower costs for
Americans and bring back jobs. The President-elect seems to
have forgotten the outcome the first time he implemented this:
trade wars that raised costs for Americans, it outsourced
American jobs, and resulted in billions of Federal bailouts to
large corporate farms.
This time it can be much worse. His proposed across-the-
board tariffs would apply a 10 or 20 percent tax to all
imported goods--all imported goods--cell phones, auto parts,
coffees, bananas, you name it--regardless of the country of
origin, which greatly expands the type and the quantity of
goods subject to the tariffs.
Experts across the ideological spectrum, both Democratic
and Republican witnesses for today's hearing, have found that
these tariffs drive up costs in the U.S., shrink the economy,
and leave us worse off.
An analysis by our witness, Brendan Duke of the Center for
American Progress, found that a proposed 20 percent tariff on
all imports combined with a 60 percent tariff on Chinese
imports would mean that a typical American household pays up to
$3900 more per year.
I know Ed Gresser from PPI has done similar effects in his
work which shows how tariffs harm the economy. We need only
look back a few weeks to this last election to see how much
Americans dislike inflation and having their costs raised.
Separately, one of the Republican witnesses, Erica York of
the Tax Foundation, found that Trump's proposed tariffs could
shrink GDP by as much as 1.7 percent after factoring in
retaliatory tariffs from other countries.
And just this afternoon, the Congressional Budget Office
released a report showing that a version of Trump's tariff plan
would cut the GDP and raise prices, while failing to raise
enough revenue to pay for things like his proposed tax cuts.
It is always refreshing when rigorous analysis done by
experts across the ideological and political spectrum reach
similar conclusions. I was in New York this past week with
another senior American economist, well known, who said 98 out
of 100 economists who we talk to would agree that tariffs are a
bad thing.
We can all clearly tell China, Mexico, and Canada are not
paying for these tariffs. I was in business for almost 50
years, and I know that when a tariff is imposed, it is the
purchasing business, the American importer, who pays the tax,
who then, to the best of their ability, passes that tax on to
the consumers.
Tariffs of this magnitude also invite carve-outs and
exemptions for well-paid and well-connected and well-lobbied
corporations. In 2021, GAO report found that the Trump
administration officials gave away exemptions to hundreds of
importers and often failed to fully document how they reviewed
and what they decided on in these exemption requests.
Perhaps these exemptions were disproportionately granted to
donors of Republican candidates, which is not my conclusion but
one reached by an analysis of exemption data and political
contributions. They, conversely, also found that companies'
donations to Democrats reduced its odds of being granted an
exemption.
The reality of this reckless economic plan is it won't grow
the middle class, nor will it lower the cost of groceries or
rent. Donald Trump even wants to use these tariffs as a way to
pay for the trillions of dollars in tax cuts for the rich that
are in TCJA, part 2. So higher costs for you, lower taxes for
his wealthiest friends.
And, thankfully, it is not just Democrats calling out his
proposal. There are economists on all sides of the political
spectrum agree that tariffs are bad economic policy that would
shrink the economy by billions.
I know, folks, this is basic economics. Many people are
calling the Trump tariffs tax hikes. In my simple word, they
are inflation aggravators. They are a threat to the economy and
the threat underscores the importance for Congress to reassert
its constitutional authority over trade policy. That is why I
am looking forward to the testimony of the witnesses.
[The statement of Representative Beyer appears in the
Submissions for the Record:]
Representative Beyer. As soon as Vice Chairman Schweikert
gets here, we can do his opening statement. But in the
meantime, let me turn to our witnesses. Let me introduce them
one at a time.
First--Senator, good luck with your vote. Please come back
if it is possible.
Senator Hassan. I will try.
Representative Beyer. Mr. Ed Gresser is the vice president
and director of Trade and Global Markets at the Progressive
Policy Institute. Prior to his current role, he worked at the
Office of the United States Trade Representative. He has served
as the U.S.' trade representative for Trade Policy and
Economics.
He began his career as a Capitol Hill staffer and later as
head of PPI's trade and local markets. He also co-founded and
directed the think tank Progressive Economy.
So, Mr. Gresser, the floor is yours for 5 minutes.
STATEMENT OF MR. ED GRESSER, VICE PRESIDENT AND DIRECTOR FOR
TRADE AND GLOBAL MARKETS, PROGRESSIVE POLICY INSTITUTE,
WASHINGTON, DC
Mr. Gresser. Mr. Chairman, thank you very much. Members of
the committee, thank you for holding this hearing on an across-
the-board increase in U.S. tariffs next year.
My view in brief: This would lower American living
standards, erode our business competitiveness, and harm our
exporters. Depending on the method used, it could also damage
U.S. governance and the separation of powers and raise
corruption risks.
I might start with a definition. Since, like you, I have
heard some puzzling assertions this year that foreigners might
somehow pay tariffs. No. U.S. tariffs are taxes paid by
Americans.
A tariff is a tax on purchases of goods from overseas, paid
to Customs and Border Protection by U.S.-based individuals or
businesses. If the buyer is a retailer, the tariff becomes part
of the store price. If the buyer is a manufacturer or a home
builder or a farmer, it becomes part of production cost.
As an example, imagine a retailer ordering 10,000 men's
cotton shirts at $10 each. These have a 19.7 percent MFN
tariff, so the retailer writes three checks: $100,000 for the
shirts, $19,700 to CBP for the tariff, and $5,000 to the
shipping company. Altogether, she has paid $124,700, $12.47 per
shirt, including $1.97 in tariff payments. This is a landed
cost from which she marks up to cover expenses and earn enough
to profit. At the cash register a week later, the tariff is
embedded in the price. The retailer has written the check, a
shopper has borne the cost. Again, U.S. tariffs are taxes paid
by Americans, not foreigners.
Our tariffs last year averaged 2.4 percent. What if this
were to spike to 10 percent or 20 percent? I suggest three
effects. First, prices would rise for families as we add 10 or
20 percent to today's taxation of shirts, winter vegetables,
cars, energy, OTC medicines, salt, all 11,414 goods in the
tariff schedule.
Mrs. York and Mr. Duke have both done excellent studies of
the impact this would have on families. I would only add that
this impact falls most heavily on lower income Americans since
more of their budgets go to goods. A single-parent family, for
example, spends 39 percent of post tax income buying goods,
twice as much as the 19 percent for the wealthiest households.
Second, economywide, as we impose a tax that hits U.S.
goods using industries--manufacturing, farming, retail, and
construction--economy changes a bit as they shrink relative to
nongoods users, such as, for example, real estate or financial
services. As tariffs raise costs for energy, metals, paint,
fertilizer, and other inputs, U.S. manufacturers and farmers
lose ground to their foreign rivals, both here in the U.S. and
overseas.
As tariffs hike home and consumer goods prices, builders
and retailers lose sales. Meanwhile, the industries which spend
less on goods, more on investment, more on services, are mostly
exempt and they tend to grow. In fact, since the smaller
tariffs in 2018, manufacturing has dropped from 10.9 percent to
10.0 percent of GDP, and manufacturing trade deficits have
nearly doubled.
Third, multiple harms to U.S. exporters. Countries hit with
tariffs, especially in violation of trade agreements, often
retaliate. Exporters are then the cannon fodder of trade wars,
first to be pushed into the front line and first to fall. Who
are they? American farmers earn 20 percent of their income from
exports and are always early targets for retaliation. USDA
believes in 2018 and 2019 they lost $27 billion to foreign
retaliation. In the business world, African American exporters
average 21 workers at payrolls of $75,000 each, compared to 11
workers and $54,400 across the privately held business
community. These are important and successful parts of our
economy, and we shouldn't sacrifice them lightly.
Many of exporters' losses, though, come even without
retaliation, as friendly fire casualties of our own tariffs.
Arizona, New Mexico, and Texas, for example, exported $141
billion worth of goods south to Mexico last year. This included
tens of billions of dollars in auto parts, semiconductors,
specialized components, and other high-value things that
Mexican plants buy to assemble into cars and appliances.
If we put tariffs on Mexico, these plants in Mexico will
contract, they will then buy less from their Phoenix, Rio
Rancho, and Houston suppliers, and then the U.S. and Mexico
both lose output in jobs.
Finally, and apart from the economic consequences, I am
highly concerned to read discussion of potential attempts to
impose tariffs by decree without congressional approval. The
Constitution gives Congress the unambiguous power to set taxes,
duties, imposts, and excises is actually the very first
enumerated power and is there for good reason.
If a President or any single individual can create his or
her own tariff system, not only do impulsive and unsound
decisions become more likely, but all future Presidents would
face standing temptation to use tariffs in corrupt ways to
award supporters and cronies or to punish critics and business
rivals. This risks systemic harm to American governance. I hope
no administration would proceed in such a way.
Thank you.
[The statement of Mr. Gresser appears in the submissions
for the Record:]
Representative Beyer. Mr. Gresser, thank you very much.
I now move on to Mr. Brendan Duke. He is the senior
director for economic policy at the Center for American
Progress. Prior to joining CAP, he worked as a senior policy
analyst on the National Economic Council and served on the
Biden Administration Supply Chain Disruption Task Force. He has
also been a senior adviser to Senator Michael Bennet, worked
for the Senate for Budget and Policy and, most importantly, in
his distinguished background, he was part of the Democratic
staff of the Joint Economic Committee.
So welcome back, Mr. Duke. The floor is yours for 5
minutes.
STATEMENT OF MR. BRENDAN DUKE, SENIOR DIRECTOR FOR ECONOMIC
POLICY, CENTER FOR AMERICAN PROGRESS
Mr. Duke. Thank you, Congressman Beyer. And thank you
members of the committee.
My name is Brendan Duke. I am honored to submit this
testimony about President-elect Donald Trump's tariff
proposals.
Trump has unveiled several proposals to tax imported goods,
too many for me to go through in the allotted time here. But
his most consistent idea is a sweeping 10 to 20 percent tax on
all imported goods, with a special 60 percent tax on imported
goods from China.
Taxes on imported goods can serve two purposes. They can
promote U.S. production of the tariff products or they can
raise revenue. It is impossible for a tax to do both
effectively at the same time.
A tax on imported widgets that successfully completely
reshore production of those widgets wouldn't raise a dollar of
revenue since nothing would be imported. Similarly, a tax that
was maximally successful at raising revenue wouldn't onshore
any U.S. production.
It is clear that the across-the-board tariffs that Trump
has proposed are a revenue-raising device that would fail to do
much to promote U.S. manufacturing. There are three reasons for
this.
First, it would apply to imported goods that the United
States does not produce and does not have any reasonable hope
of producing, such as coffee or bananas. We will simply raise
revenue from taxing those imported goods from abroad instead of
producing them here.
Second, economic theory and evidence shows that tariffs do
not change the size of a country's trade balance since they
also cause the currency to appreciate. This makes imports
cheaper. In fact, Trump's Treasury Secretary nominee has
stated, quote, Historically, 40 to 50 percent of the tariff is
recovered in currency appreciation, end quote.
At the same time, dollar appreciation makes U.S. exporters
less competitive with foreign producers and causes U.S. exports
to fall. So much of whatever increase in U.S. manufacturing we
see from fewer imports would be offset from the reduction in
exports.
Third, U.S. exporters would become less competitive because
the across-the-board tariff would raise the costs of their
inputs for U.S.-based production. Across-the-board tariffs
ignore many of the key rationales U.S. policymakers have for
imposing tariffs, such as protecting or growing a key industry
on national security or economic competitiveness grounds. It,
instead, lets the market decide which imports and exports to
produce, almost certainly leaving those key strategic
rationales completely unfulfilled.
Strategic tariffs in carefully chosen sectors can be a
useful tool as part of a country's larger national security or
industrial strategy. More targeted tariffs recognize the fact
that tariffs cannot change the size of the U.S. trade balance
but can shape its composition to fit our national security or
economic competitiveness needs.
The Biden administration's approach is a good template for
how this can work: focusing on incentivizing important
industries, like electric vehicles, with targeted tariffs and
significant investment. This approach has resulted in a
historic boom in manufacturing construction.
Given that across-the-board tariffs would do so little to
achieve manufacturing goals, we can then move to discussing
them as tax policy. A 20 percent tax on all imported goods and
a 60 percent tax on all imported goods from China would raise
$4.5 trillion over 10 years.
A wide range in researchers across the ideological spectrum
have produced estimates of how much the across-the-board tariff
would cost the typical family. Each of these estimates suggest
that it would more than offset the $1,000 tax cut a typical
family would receive from extending the expiring portions of
the 2017 tax law. In other words, they get a net tax increase.
The combination of the first Trump tax cuts, renewing the
expiring provisions, and a 20 percent across-the-board tariff
would be a tax cut for the top 1 percent and a tax increase for
everyone else.
Several think tanks and Wall Street banks have estimated
that the tariffs would produce a one-time increase in the
inflation rate of 1 to 2.5 percent. Inflation would eventually
move back down, but families would pay those costs as long as
the tariff is in place.
A common argument is that inflation was low during Trump's
first term so tariffs could not have been inflationary. But
they did not show up in the headline inflation rate because
they were relatively a small fraction of the U.S. consumption
basket. The tariffs Trump has proposed are about 4 to 10 times
larger than his first term, so we should expect effects
something like 4 to 10 times larger than his first term's
tariffs.
Finally, it is likely that Trump would rely on existing
executive authority to enact these tariffs instead of receiving
new legislation from Congress. The executive branch has
significant unilateral power to impose tariffs because these
provisions were designed to be trade enforcement tools, not
revenue raising tools.
The 20 percent across-the-board tariff would raise about as
much revenue as extending the Trump tax cuts would lose. This
would present a significant shift in power over Federal budget
authority from Congress to the executive branch, allowing the
President with the stroke of a pen to raise as much revenue as
the tax bill at the center of next year's fiscal policy debate.
Using existing tariff authority as a revenue tool is an
especially flawed idea because it would introduce executive
branch discretion into revenue collection that is unprecedented
in modern America. This opens the door to using that discretion
to favor politically aligned firms, giving them a leg up over
their competitors. It is easy to imagine a major corporation
with access to the Trump administration petitioning for tariff
exclusions that its competitors do not receive.
That is the sum of my thinking on the across-the-board
tariffs Trump has proposed: unlikely to boost American
manufacturing, major cost for families, and opening the door to
pay-for-play.
Thank you.
[The statement of Mr. Duke appears in the submissions for
the Record:]
Representative Beyer. Mr. Duke, thank you very much.
Let me now yield to my friend from Kansas, Mr. Estes.
Representative Estes. Thank you, Mr. Beyer.
I would like to introduce our two distinguished witnesses.
First, I would like to welcome my fellow Kansan, Mrs. Erica
York. And she currently serves as a senior economist and
research director at the Tax Foundation where her research
primarily focuses on macroeconomic implications of Federal tax
policy, including corporate income tax, individual tax credits,
and tariffs.
She is currently an adjunct professor at Sterling College
in Kansas, where she earned her undergraduate degree in
business administration and economics. She received her
master's degree in economics at Wichita State University, which
is in the center of my district at home.
Also, I would like to introduce Mr. Jeff Ferry, who serves
as the chief economist at the Coalition for--of a Prosperous
America. Mr. Ferry holds economics degrees from Harvard and the
London School of Economics. A former technology executive in
the private sector, his work now focuses on the economics of
trade, globalization, and tariffs. Thank you for joining us
today.
And I yield back.
Representative Beyer. Mrs. York, the floor is yours for the
next 5 minutes.
STATEMENT OF MRS. ERICA YORK, SENIOR ECONOMIST AND RESEARCH
DIRECTOR, TAX FOUNDATION
Mrs. York. Representative Beyer and members of the
committee, thank you for the opportunity to join you today.
I want to begin by saying the goals of boosting U.S.
competitiveness, increasing manufacturing productivity, and
growing opportunities for American workers are worthy. In my
area of expertise--tax policy--these goals are best achieved by
reforms that enhance the simplicity and neutrality of the tax
system, not by policy changes that introduce new distortions,
no matter how well-intentioned.
For our conversation, I want to focus on the U.S.' recent
attempt to use tariffs to achieve these goals, why they fell
flat, and how better tax policy, particularly moving to a
consumption tax base away from an income tax base, can foster
greater investment, productivity, and competitiveness.
Debates about American manufacturing often focus on jobs
rather than on output and productivity. While it is true that
manufacturing employment has declined, that decline follows
broad global and historical development trends where workers
first shift from agriculture to manufacturing in early stages
and from manufacturing to services in later stages.
The most relevant policy question for the manufacturing
sector is what can be done to boost productivity for the
benefit of American workers, because without long-run
productivity growth, we cannot get long-run wage growth.
Now, tariffs are often presented as a tool to do such, but
they have consistently failed. If we look at the experience of
the 2018-2019 trade war tariffs, we see that they resulted in a
smaller U.S. economy on net with higher prices for consumers
and businesses as tariffs passed through to U.S. import prices;
less manufacturing employment, both due to higher input costs
and due to foreign retaliation; and depressed investment
growth.
The firms that faced tariff increases in 2018 and 2019
represented about 65 percent of manufacturing employment, and
one study estimated that tariffs cost firms about $900 per
worker, creating pressure to reduce wages or reduce employment
in that sector. And, similarly, the U.S. International Trade
Commission found that while steel and aluminum tariffs boosted
metals production at targeted firms, downstream industries like
construction and equipment manufacturers experienced larger
production declines.
Today's interconnected economy further complicates the
story of tariffs. Our exporters are also our importers, relying
on a complex web of global value chains to source the parts and
materials that they use to create jobs and produce here in the
United States. Rather than boosting competitiveness, tariffs on
inputs increase the cost of operating in the United States.
The ultimate story that plays out with tariffs is one of
redistribution and reallocation. Tariffs take income from
unprotected sectors of the economy and redistribute it to
targeted firms, and tariffs reallocate resources from where
they are employed productively and reallocate them to
inefficient producers.
Instead of turning toward tariffs, we should address the
biases in the tax system that disincentivize investment in
production in the United States. Despite progress made by the
2017 Tax Cuts and Jobs Act, the U.S. still maintains a tax
system that places a higher tax burden on investment and saving
than on income that is consumed immediately. The effect of this
is that it depresses the levels of investment, capital
accumulation, worker productivity and wages and saving compared
to a consumption tax system.
The tax system is also still plagued by complexity.
Defining income, dealing with cross-border transactions, and
limiting profit shifting require complex provisions, many of
which were introduced in the 2017 TCJA.
An alternative to tariffs that follows consumption tax
principles and would be simpler and remove barriers to locating
production and investment in the United States would be an
earlier draft version of the 2017 tax law, the destination-
based cash flow tax. A DBCFT would entail three primary reforms
to our current tax system.
First, it would permit businesses to immediately deduct
costs for capital and R&D investments rather than depreciate
and amortize them over time.
Second, it would eliminate net interest deductions
providing more even tax treatment for debt and equity financing
at the firm level.
And, third, it would replace international tax provisions
with a border adjustment. The cost of goods purchased from
foreign sellers, imports, would not be deductible, while
revenues from sales to customers abroad, exports, would not be
taxable. The resulting tax base would be trade neutral,
eliminate opportunities for profit shifting, and invite
investment into the United States.
Transforming the current U.S. corporate tax system into a
cash flow tax would finish the job that the TCJA started, and
it would achieve the goals of higher investment, higher
productivity, and a more competitive Tax Code for U.S.
businesses that tariffs cannot.
Thank you for your consideration of these issues, and I
would be honored to take your questions.
[The statement of Mrs. York appears in the submissions for
the Record:]
Representative Beyer. Mrs. York, thank you very much.
And, finally, we will hear from Mr. Ferry.
STATEMENT OF MR. JEFF FERRY, CHIEF ECONOMIST, COALITION FOR A
PROSPEROUS AMERICA
Mr. Ferry. Thank you.
Good afternoon. I am Jeff Ferry, chief economist of the
Coalition for----
Representative Moore. Your mike is not working, sir.
Mr. Ferry. Hello? Testing. Now? Okay. Could you start the
timer again, please?
Good afternoon. I am Jeff Ferry, chief economist of the
Coalition for a Prosperous America. CPA is a bipartisan
coalition focused on rebuilding U.S. manufacturing. I have
economics degrees from Harvard and the London School of
Economics, and I have worked as an economist in the U.K and the
U.S.
We have supported tariffs as an important tool to rebuild
U.S. manufacturing; increase the share of good-paying jobs in
the economy, especially for the lower half of the income
distribution; and restore U.S. national security.
The terms of this hearing focused on tariffs and prices are
too narrow. The primary purpose of tariffs is to stimulate
domestic production. Tariffs should be used wherever they can
stimulate domestic production. The evidence from the tariffs of
2018 and 2019 show many cases where tariffs did exactly that.
In those cases, the increases in production led to more
investment and more U.S. jobs. The benefits clearly outweighed
the price increases, which turned out, in fact, to be very
small.
There are actually five significant reasons to support
tariffs or some degree of protection for the U.S. economy.
First, greater economic growth with less inequality comes
from having high-growth, high-wage industries in this country.
Second, national security requires us to reduce our
dependence on foreign parts and components for all warfighting
equipment and critical technologies.
Third, economic security and resiliency requires the
ability to increase domestic production at short notice for
everything from medical gloves to pharmaceuticals to the copper
and aluminum cables used in our electricity grid.
Fourth, protective policies can and must be used to counter
the biased, unfair, distortive economic policies of other
nations, especially China.
And, finally, tariffs can generate large amounts of Federal
revenue to help reduce the Federal budget deficit, which is too
high by any standard. Our model showed that broad-based tariffs
can generate $628 billion a year in tariff revenue.
Turning to the issue of tariffs and prices. In 2019, after
the China tariffs were imposed, many economists and other so-
called experts said that the cost of tariffs would be entirely
passed on to U.S. consumers. So I began asking every economist
I met, okay, most of the China tariffs were at the rate of 25
percent. Can you name for me one product where you have
recently seen the price rise by 25 percent? Not one economist
could name even one product. Not one.
The facts finally became clear in an important paper
published by the International Trade Commission in 2023 showing
that price increases in the U.S. market were generally on the
order of just 10 to 20 percent of the headline value of a
tariff. So, for example, the steel tariff of 25 percent led to
an average steel price increase in the U.S. of 2.39 percent.
That is 2.39 percent. That is the price increase of steel
tariffs.
On the production side, the steel tariffs led the major
U.S. steel companies to build 15 brand-new steel facilities
across the country. Those facilities employ some 5,000 new
steelworkers at compensation which averages around $100,000 a
year. That is a very good wage for a man or woman without a
college degree.
Using the CPA trade model, we recently modeled a scenario
where the U.S. imposes 20 percent tariffs on all worldwide
goods imported, except for China where we impose 60 percent
tariffs. We assumed in our model that all of our trading
partners impose reciprocal tariffs on U.S. exports matching our
tariff rates.
Our 10-year model found that U.S. GDP would rise by two
percentage points more than in the no-tariff scenario in the
first 4 years and continue to grow by slightly more in the next
6 years, out to 2035. By 2035, an additional 5.97 million jobs
were created, and real household incomes were up by 12 percent,
or $10,000 per household, as compared with the no-tariff
scenario.
What about prices? Prices rose by 0.6 percent above the no-
tariff rate of inflation for the first 4 years and then settled
back to the baseline. In other words, inflation of 2.6 percent
instead of 2 percent. But in exchange for that slight increase
in inflation, we rebuilt the manufacturing sector, we added
thousands of dollars to household income, and we created six
million jobs.
Thank you, Mr. Chairman and Mr. Vice Chairman.
[The statement of Mr. Ferry appears in the Submissions for
the Record:]
Representative Beyer. Mr. Ferry, thank you very much.
I would like to welcome the vice chair, and soon to be the
chair, of the Joint Economic Committee.
Vice Chairman Schweikert. I apologize for my tardiness.
Representative Beyer. Wonderful to have you here.
Let me first recognize the distinguished Congresswoman from
Milwaukee, Ms. Moore, for her 5 minutes of questions.
Representative Moore. Thank you so much.
You know, I was thinking back to my--and, Mr. Ferry, you
will appreciate this. You know, in my obsession with language
and foreign languages and trying to learn them and failing
miserably, and sort of the use of kind of superlatives like
``all'' and ``across the board,'' I think that is where I am
starting to have some problems when I read the very complicated
material and I think about--thank all of our very distinguished
guests.
And I guess where I want to start--maybe, Mr. Ferry, I will
start with you since you are sitting right there and you just
finished testifying and really claimed such great--you seem to
be very fond of the thought of tariffs. But don't you think
that the tariffs that President Trump provided in his first
administration basically did nothing until there was some
industrial policy linked with it?
When Biden came along, many people said, well, why didn't
he end the tariffs if tariffs are so bad, might increase prices
and so on. Don't you think it is because the CHIPS and Science
provisions, you know, the reduction in inflation act, that all
these things really wrapped some policy and created a raison
d'etre for the tariffs?
I am thinking of my own Senator, Senator Tammy Baldwin, who
very successfully pushed the Buy America and helped the steel
industry, but it wouldn't have helped us very much had we not
put some policy and stuff behind it to incent investments in
that.
So I am wondering if one of the mistakes that all of us
might be making is the use of the word ``all''. I think that
when I hear about these across-the-board tariffs, I--you know--
and I am not an expert at these things--I wonder if that won't
have major winners and losers, if it won't invite some grift,
quite frankly, or it won't invite certain groups of people to,
you know, come in and ask to be excluded versus other groups.
And so I am wondering if--Mr. Ferry, just first very
quickly, will you admit that you got to have some industrial
policy wrapped around the tariffs, else they may not----
Mr. Ferry. No, I don't agree, Congresswoman.
Representative Moore. Anybody agree with me on the panel?
Mr. Duke?
Mr. Duke. Yes. So, I mean, I think the key thing is that,
you know, the Biden administration showed that you can combine,
you know, strategic investments in certain industries with the
tariffs to push forward. The problem with across the board is
you can't do industrial policy on everything, right? There is
no industrial policy by which the United States is going to
boost coffee or bananas. That is not going to happen.
And so why are we taxing that? Again, tariffs lose their
efficacy in terms of--you know, they drive production to a
certain industry, but if we are doing it to every industry, it
just doesn't make any sense, right?
So I think that is the key thing is that it kind of
devalues that. I mean, there is costs to, you know, driving
that production in a certain industry, but they can be worth it
on national security or other grounds. But doing it on
everything just doesn't make any sense.
Mr. Ferry. Can I explain a little bit my answer,
Congresswoman?
I think we saw very clearly that tariffs on their own
benefited many industries. The U.S. ITC study showed that out
of 12 industries they studied, including steel, production
increased in all of those 12 industries, and that involved more
jobs. They did not study washing machines, which is one of the
best examples of success.
Now, I agree with you that there are places where
industrial policy can play a role.
Representative Moore. Before my time runs out, Mrs. York,
Mr. Gresser, let's talk about washing machines. What we have--
has my time expired?
Representative Beyer. No.
Representative Moore. What we have, the makers of dryers
just automatically raising their prices because they can, I
mean----
Mrs. York. Yes, that is what we observed with the tariffs.
The price of washers and dryers both went up by about $90 each,
and that led to billions in added costs for consumers. And if
you look at the billions in added costs per job saved, it is
extremely wasteful. We are paying a lot more than the people in
those jobs are earning.
And I would say on the U.S. ITC report, they did find
production would increase in protected industries, but that
came at a cost to downstream industries, like construction,
like equipment manufacturers, who then had to pay higher costs
for their inputs.
Mr. Gresser. Yes. If I could add just a bit. In terms of
home appliances, probably advantage some and disadvantage
others, but we have fewer people making home appliances now
than we did before the tariffs. Likewise, the ITC's look at the
steel industry showed, yes, that it benefited them a bit as of
2021. They had grown by 2.2 billion, along with aluminum. But
steel users, in particular auto parts, machinery, cutlery and
tools, shrank by 3.5 billion. So the result was a slightly
smaller manufacturing sector with a slightly larger metals
sector within it. And you always have to count who is the
losers as well as the winners when you are assessing a policy.
Representative Moore. My time has expired. Thank you.
Representative Beyer. Thank you very much.
I now recognize the gentleman from Arizona, Mr. Schweikert.
Vice Chairman Schweikert. Thank you, Mr. Temporary
Chairman. You look good in that seat.
Sorry. He is actually one of the people I actually like,
which is a fairly small list.
Mr. Chairman, without----
Representative Moore. How small is that list, sir?
Vice Chairman Schweikert. You are way up on top of that
one. You know, she is actually--never mind.
Mr. Chairman, I would like to actually introduce a list
just for--partially to help me make a point of the number of
Members of Democrat leadership and basically national unions
who actually support the tariff policy both in the first Trump
administration and demanded that the continuation of those
tariffs continue under the Biden administration.
Without objection?
Representative Beyer. Without objection.
[Submission for the Record by Vice Chairman Schweikert]
Vice Chairman Schweikert. Thank you, Mr. Chairman.
Mrs. York, in reading over some of your testimony, can you
help me, because I have been working on sort of a concept, and
I don't know if I am speaking to traditional tariff models. But
much of the world has a tax arbitrage on us. You know, you
export to us, you get the refund of your VAT tax back. When we
send other countries something, they attach it back. And in
some places--and forgive me, I am a little out of date--you
know, Germany might be 18 points, China has actually graduated
according to industry.
Is there a design, whether it be a destination tax or cash
flow tax, or some of these other models, that actually at least
would mean, from a tax arbitrage standpoint, American workers,
American manufacturing might have a level playing field?
So there is a hierarchy in this question. What, first,
should I do so our manufacturing, both in and out, would
actually have a level playing field with tax?
Mrs. York. Yeah. Most other countries across Europe, they
rely on value-added taxes. Those are border adjusted, which
ends up being trade neutral, like if we adopted a value-added
tax or a DBCFT would end up being trade neutral. The reason we
have an impediment to manufacturing and investment and
productivity in our Tax Code is the way we define our income
tax base and that we would base your tax residence on being in
the United States. We have a source-based tax system or an
origin-based tax system.
So because we deny full deductions for investment, full
deductions for research and development, we increase the cost
of capital. And because we don't have a national level
consumption tax, we rely heavier on income taxes than many of
our trading partners rely.
Vice Chairman Schweikert. So, Mrs. York, what would you
design that would be in some ways maximized productivity,
maximized tax receipts, maximized benefit to working population
in this country but would be as minimally economically
distortive as possible? Is it a destination tax? And is that
sort of, you know, an economist's vision of what a future
tariff model would actually look like?
Mrs. York. It would be moving toward a consumption tax.
That can take on many different design elements. A DBCFT is one
option. That transforms the base of our corporate tax to a cash
flow tax. You can do that without the border adjustment if you
do full expensing for all capital investment, plus eliminate
that interest deduction. That gets us to a cash flow tax. That
removes that barrier to investment that is created by long
depreciation schedules.
If you don't want to border adjust that tax, you could do a
value-added tax if you want to add that element----
Vice Chairman Schweikert. I was trying to avoid moving to a
national VAT because----
Mrs. York. Then I would border adjust the cash flow tax.
Vice Chairman Schweikert. All right. Who really objects to
a border adjustment?
Mrs. York. What we saw in the debates in the lead-up to the
TCJA was that the big debate occurred over whether the currency
would appreciate. The currency appreciation is what makes it
trade neutral because you are applying the tax on imports by
denying that deduction and then you are not taxing exports by
providing that exemption if you have the currency adjustment.
Vice Chairman Schweikert. I know this is your specialty,
but slightly more complex because you also pick up, hopefully,
the export additional value of some of the refundability of
things being exported out.
Mrs. York. Yeah. You have a question if you are an exporter
in loss position whether you get that tax refunded to you.
Vice Chairman Schweikert. Yes.
Mrs. York. There are design options for that that you can
make it equivalent. But I think that was the big impediment,
the question of whether currency would appreciate. And I think
most models point to that it would. If you look at the
experience of the 2018-2019 tariffs, you saw currency
appreciation. If you look at recent tariff announcements, you
see currency appreciation just with the threat of tariffs. So I
think we have reasonable evidence to say that the currency
would move.
Vice Chairman Schweikert. We are out of time, and I really
had something I wanted to touch on.
Look, when this hearing was first announced, my first
thought was, well, this is another ``got you'' hearing. But the
reality of it is, I look at the history of my Democrat
colleagues, and in many ways this was my brothers and sisters
on the left side who this was what they evangelized. It is just
that we happen to now have a more populous President who is now
talking about it. So it is very confusing for folks.
My hunger is to try to find a way to make it economically
rational----
Representative Moore. Yes.
Vice Chairman Schweikert [continuing]. That it maximizes
exactly, you know, what my economist friend here was saying, it
maximizes the robustness of economic capital stock and
productivity.
And, Mr. Chairman, this is one of your moments to help us
actually try to find a common economic vision instead of trying
to wedge each other.
And with that, I yield back and hope for another round.
Representative Beyer. Thank you.
And just before I recognize the gentleman from California,
I would like to point out that I have never evangelized
tariffs.
Vice Chairman Schweikert. No. You are a purist. You win.
But you are also a car dealer.
Representative Beyer. Import car dealer.
The gentleman from California, Mr. Panetta, the floor is
yours.
Representative Panetta. Thank you, Mr. Beyer. It is always
entertaining when you have your vice chair next to you, be it
on the Joint Economic Committee or be it on our committee in
Ways and Means.
But I appreciate the fact that we are actually talking
about something that, fortunately or unfortunately, has gotten
a lot of publicity lately. And this is a popular thing to talk
about when it comes to tariffs. But to be honest with you, we
need to talk about the other ``T'' word, and that is trade. And
I can't stress that enough.
So I understand why we are talking about tariffs,
especially considering how kind of ``en vogue'' they are
politically, to be frank. And what would you expect when you
had the President-elect talking about how he wants to apply
either 10 to 25 percent across-the-board cuts or 60 percent
tariffs on China.
And so you also, though, had this first Trump
administration use tariffs accordingly, yet they were
maintained by the Biden administration. And then with the Biden
administration, you had them working on frameworks but really
not leaning in to any sort of agreements. And as I like to say
it, a framework to me is like having a hamburger without the
beef, to be frank.
And also, then you had a Vice President who actually voted
against the last major trade deal we had, USMCA. And I think
that is probably the last time we have had serious discussions
about a trade deal was when we actually worked together,
Democrats and Republicans, to pass the USMCA.
So I appreciate this type of discussion on tariffs, but I
just hope we get to a point, especially on the Ways and Means
Committee, where we can start talking trade again. Because I do
believe that these types of proposals that are put out there by
the President-elect could have serious consequences on the
American economy.
And I mean the thing is, is that you don't know what the
President-elect is going to do. I mean, people say, well, he is
not going to, you know, put forward these types of tariffs. He
is just using it for leverage.
And, look, you are seeing, as was reported by The Wall
Street Journal about 5 days ago, CEOs flock to Mar-a-Lago to
either try to persuade him or talk to him, hopefully, about not
following through with these types of policies; policies that
could shrink the economy by up to 3.6 percent, according to
some estimates. And part of a broader or dangerous trend where
we are, like I said, going away from trade and talking about
tariffs instead.
It is an approach that, I believe, could not only harm
businesses and workers and consumers here at home, but also
weaken the United States leadership in the global economy. So I
hope that we can dive more deeply into how tariffs affect
consumers, how we can talk more about trade, and how we can
have a sensible path going forward.
Again, my name is Jimmy Panetta, and I represent the 19th
Congressional District in California. We have a lot of--I have
the southern part of Silicon Valley, I have the mouth of the
Salinas Valley, so I have a lot of--I have a lot of
semiconductor chips and I have cow chips; put it that way. So a
lot of agriculture, a lot of high tech going on.
And what we saw, though, when it comes to the agriculture,
though, is when tariffs are levied, it is--the ag sector bears
a brunt of the retaliatory tariffs. And during the last Trump
administration, 30 billion of agriculture products were
targeted by retaliatory tariffs, which represent 22 percent of
all retaliated goods.
The administration gave $16 billion in relief payments to
farmers to mitigate the impacts of those trade policies. I
understand that.
But I guess, Mr. Gresser, if I could impose my first
question to you, if the proposed tariffs were implemented, what
is--what would be the impact on ag?
Mr. Gresser. Thank you, Congressman, for the question. It
would be quite extensive. The 2018-2019 tariffs were pretty
limited to metals. That is about 20 billion or--20 to 40
billion in imports, plus China. And according to the USDA,
farmers lost more than $27 billion in export income over that
time. And that was really for one country and small slices of
others.
If we have, for example, threats of tariffs on Canada and
Mexico and China together, that is 10 percent of all farm
income in the United States. Farmers are always the first to
hit--be hit with retaliation. The last group went soybeans,
sorghum, fruit, dairy, cotton, wheat, tree nuts, corn, lots of
other things. And so I think it would be a pretty difficult
time for American agriculture.
Representative Panetta. Got you. And, quickly, the number
one issue in my district is affordable housing or the lack of.
So, Mrs. York, given that there is an estimated shortage of 7
million affordable homes already, what would broad tariffs do
to the cost of housing?
Mrs. York. Broad tariffs would increase lots of the
components we use to build housing, and so it would reduce the
housing supply further.
Representative Panetta. Great.
Thank you, Mr. Chairman, again. I appreciate this
opportunity. Thank you for having me waive on, and thank you
for having this discussion.
Representative Beyer. Thank you, Mr. Panetta, very much.
Let me now recognize the gentleman from Kansas, Mr. Estes.
Representative Estes. Well, thank you, Mr. Chairman, and
thank you for all of your witnesses for being here today.
You know, this Congress just has a few weeks remaining
until the results of the November election take effect in
Washington. Two years ago, Americans split the House majority
from Democrat to Republican, and this year they flipped the
Senate and the White House.
If you ask voters across the country whether they were in
red districts or blue districts or anything in between, many
will say that the economy was the driving factor when they cast
their ballot. And we know that over the last 75 years, nothing
has lifted more people out of poverty than free and fair trade
and an open capitalistic market society.
And tariffs are part of that to help make--it is a tool to
help address and make sure that we do have free and fair trade.
A lot of times, countries, as we have seen, will have a stated
goal of having free and fair trade, but they don't always
follow up with the actual letter of the law in terms of the way
they implement it; whether it is restrictions, whether it is
licensing agreements, whether it is just flat-out rejection of
some imports that show up on their shores.
So today we are standing here, and we are looking at 4
years of two different administrations to compare with. And we
talk about the pocketbook issue is a top priority for so many
Americans. Inflation stands out as that problem.
Under President Biden, the average year over year inflation
rate was 4.99 percent. Under President Trump, that was 1.91
percent. And the truth is, if you add a cumulative amount, it
was even worse over 4 years than what those yearly averages
looked. During President Biden's administration, inflation has
gone up over 20.6 percent cumulative versus only 7.3 percent
during the entire 4 years President Trump was in office.
Americans have felt the pain of this inflation,
particularly after a booming economy with President Trump in
the White House. And during that time, inflation was low, even
with the tariffs, as we have talked about earlier today.
So with my colleagues and some of the political pundits
trying to scare the public into just rejecting the economic
agenda, it is important to remember that Americans do remember
the truth because they saw it every time they went to the
grocery store, paid a utility bill, or filled up their gas
tank.
The truth is, tariffs are one of those tools that a
President can use to help negotiate with allies and strengthen
national security. If used strategically, they can help build
our economic prosperity, bringing foreign countries to the
negotiating table, creating new trade agreement opportunities,
and prevent bad actors from manipulating our markets or
threatening our security.
Mr. Ferry, we saw vastly different economies and inflation
rates under the two different Presidents--through the two
previous--our current and former President, despite President
Biden keeping most of President Trump's tariffs intact.
Would you agree that the concerns raised by my colleagues
aren't necessarily as relevant based on what we have seen in
that the spending and poor economic agenda pose a far greater
threat to American consumers than the tariffs that President
Trump has talked about?
Mr. Ferry. I would certainly agree that the inflation
performance of the Biden administration was terrible and is one
of the reasons why your friend to the right is about to become
chairman of the committee. However, you know what I would say--
and I agree with what has been said about consumption taxes,
and I agree with some of the things Brendan Duke has said as
well. But the overriding fact, Congressman, is that today the
Chinese manufacturing sector is more than two times the size of
the U.S. manufacturing sector.
We gave some wonderful javelin hand--shoulder-resting,
hand-held weapons to the Ukraine. Within weeks, we had run out
of the missiles that those javelins shoot. Why? Because the
parts come from Asia.
And it is not true that the prosperity of this country over
the last hundred years is due to free and fair trade. The
prosperity of this country over the last hundred years is due
to industries that innovate and create high-productivity jobs
and high productivity--highly competitive products. We have
lost a lot of that through bad policies and also just through
the aging of these industries.
We need to take action to get those things back. The Trump
tariffs in the first administration were actually not
sufficient to bring back enough of those industries, and I
applaud President Biden for increasing them, particularly on
EVs, because we would lose our entire automobile industry if we
allowed China to take over the world market for EVs.
That is a choice we have got to make today, and the choices
we have to make are to take policies to benefit those high-
productivity sectors which are mostly manufacturing.
Representative Estes. And let me correct if I misspoke.
When I talked about the last 75 years of lifting people out of
poverty, it was around the world.
I would agree with you that innovation in United States has
been very important in terms of a driver and helping generate
the U.S. economy.
Mr. Ferry. And I would agree with you that Presidents Bush
and Clinton did a lot to lift the Chinese out of poverty, and
the day they invade Taiwan, we might--some people might not
feel so good about that.
Representative Estes. Thank you. Mr. Chairman, I yield
back.
Representative Beyer. Thank you, Mr. Estes. I will move on
to my own.
First of all, Mr. Estes, I want to agree with you the
inflation has been terrible, but we need to compare apples to
apples. We had Donald Trump in those 4 years without COVID,
COVID in the last couple of months, and then President Biden
having to put up with the supply chain shocks, with the
tripling of profit margins from many, many different places
with greedflation, and the fact that America did better than
almost any other industrialized country in the world in dealing
with the supply chain shocks in terms of inflation. And now we
are back down to the 2 percent that we were at before. And,
hopefully, it will stay there, unless we have these tariffs
kicking in.
Mrs. York, thank you for your comment about the costs of
steel and aluminum and others on building supplies, but I would
like to turn to Mr. Gresser too.
Along with inflation, one of the great crisis of America
today is housing unaffordability. They are not building new
houses. Every housing developer I talk to say it costs more to
build a house than they can sell it for.
How would these potential--not the little tariffs that they
just have on steel and aluminum, but the bigger tariffs that
are coming, the 10 and 20 percent and 60 percent, likely to
affect our housing supply chain?
Mr. Gresser. Whenever we are imposing high taxes on inputs,
that becomes part of the production cost. That becomes, then,
part of the price that the home builder has to sell it at. So
prices of housing will rise. It will rise at different rates
for different types of buildings.
But if one of our goals is to reduce home costs, make it
easier, that would be--adding tariffs to building supplies is
going in the wrong direction.
Representative Beyer. Thank you very much.
Mr. Duke, are the importers who pay the tariffs and pass on
to the consumers the same as the people who retaliated against
with tariffs from other countries?
Mr. Duke. I mean, first of all, America's exporters are our
biggest importers. So they get hit in that way, and they also
get hit by the appreciated dollar. And then, obviously, ag is a
whole other sector that gets disproportionately hit.
Representative Beyer. And you mentioned that there has been
no evidence to suggest that tariffs would change the trade
balance. Intuitively, it seems like it should help the trade
balance, that we would be importing less and, therefore, owing
other countries less. Why doesn't that happen?
Mr. Duke. Sure. The trade deficit is basically defined by
the balance between investment and savings and the U.S.
economy. Tariffs, if they are not going to deficit reduction--
and Donald Trump has talked about 8 to 9 trillion dollars of
tax cuts, so I don't think we are talking about deficit
reduction here--don't actually increase national saving.
And so it basically changes--it basically--what happens is
imports as a share of the economy fall, which seems like it is
accomplishing it. But then exports as a share of the economy
also fall, so they net out.
And, again, you know, what are we trying to do here, is
that we just get a portion of the economy falling and a portion
of the economy falling. It doesn't really actually, you know,
meet any strategic goals that we are trying to accomplish.
If our goal is resiliency with China, that doesn't
accomplish it if just causing the import share of GDP to fall a
little and the export share of GDP to fall a little.
Representative Beyer. Thank you.
Mrs. York, you talked extensively about the consumption-
based cash flow tax. Let me ask you a yin and a yang question.
Number one is, whenever Democrats always hear that, they
think regressivity. That the people at the bottom end who spend
almost all their income are going to pay a much greater share
of their income than the people that can save a third, a half,
whatever.
On the other hand, I would love your input on what that
will mean for tax avoidance, since we know that 99 percent of
people that have 1099s or 401--or W-2s pay the taxes and that
something like 650 billion to--650 billion to a trillion
dollars a year is missed in taxes not collected from people
that don't get their things that way.
Mrs. York. Consumption is much more observable than income.
So it is much easier to administer and enforce a consumption
tax than it is an income tax.
And then on the question of regressivity, I would point to
ideas like Senator Cardin's progressive consumption tax. There
are a number of design options that you have with a consumption
tax that can avoid a regressive impact, whether it is a rebate,
whether it is a large exemption or other design elements.
The DBCFT in particular is less regressive or has a more
progressive distribution than a value-added tax because a DBCFT
allows for a deduction of payroll expenses. So you are not
actually hitting consumption that is coming out of wage income.
You are hitting consumption that is coming from existing assets
and current future--or future super normal returns to capital.
So because of that payroll exemption, it has a more progressive
distribution than value-added taxes used in Europe.
Representative Beyer. Great. Thank you very much. My time
is up.
I would like to announce that, if you all are game, we will
do a second round of questions because there is much to talk
about, and you guys are--I know you guys are all--you are so
lucky that every member here is a member of the distinguished
Ways and Means Committee, the only committee mentioned in the
U.S. Constitution.
And with that, let me recognize the gentleman from
Illinois, Mr. Schneider.
Representative Schneider. Thank you.
Mr. Chairman, I think you also forgot, we are under
contract to say the very important, very powerful Ways and
Means Committee. But thank you all for being here.
And I want to thank the chairman and ranking member for
calling the hearing and you witnesses for sharing your
perspectives with us.
Being a member of the Ways and Means Committee, Trade and--
Subcommittee, but also on the House Foreign Affairs Committee,
I am proud that so much of our work is focused on international
leadership. The world is better, I think, when the United
States leads in, when we are at the table, we help establishing
the standards and help defining the rules.
We are strongest when we work with our international
partners and allies, and we should do well to remember this as
we move into the next Congress.
In recent months, as was probably already discussed,
President-elect Trump has made a number of statements regarding
his trade priorities for his incoming administration. He has
proposed, for example, a 10 percent tariff on all products
imported into the United States, a 60 percent tariff on all
goods imported from China. And looking at our two largest
trading partners, Canada and Mexico, a 25 percent tariff there.
The threats will raise prices on everyday items for
consumers, will directly impact small- and medium-sized
businesses that have worked so hard to adapt and adjust and
ship their supply chains away from China, and has a potential
to drastically reshape the global economy.
We saw the chaos President Trump's trade war created during
his first term. During that administration, I met with
manufacturers and businesses throughout the Illinois 10th
Congressional District, my district, and heard directly from
constituents about the impact tariffs were having on their
businesses and how employers had to quickly adapt to a
challenging trade environment.
They talked about having to make hard decisions not to make
certain investments, having to make decisions about whether to
hire or expand. And while each business was distinct, they all
had this same common message: Tariffs create uncertainty, raise
the cost of doing business, and make it harder to hire new
people and expand their operations.
So looking towards the next Congress, we have to ensure
that our trade rules work for American workers, for businesses
and consumers.
Mr. Duke, I will start with you. President Trump's recent
threats to put tariffs on goods coming from China and Mexico
have caused a lot of uncertainty among small- and medium-sized
businesses. Can you discuss the lasting impact that the last
administration's agenda had--last Trump administration's agenda
had on businesses in the U.S. during his first term and how you
see those businesses and really businesses of all size
preparing for what is ahead?
Mr. Duke. Sure. So the United States actually was in a
manufacturing recession right before COVID. We were actually
shedding manufacturing jobs while they were happening, in part
because of the trade war--the retaliation and trade wars that
were occurring, because of U.S. dollar appreciation, which,
obviously, the Taxes and Jobs Act helps fuel with the higher
deficits that that caused. So that is what we saw then.
Obviously, we hit COVID. You know, obviously, a very weird,
difficult period, and we are coming out. But I think the key
thing is that, just out of uncertainty, that the President can
just rage post a trillions of dollars tax increase, and what
are businesspeople supposed to do about it, putting it through
an administrative process that they don't understand.
The idea that a, you know, small Illinois business is going
to have to follow the ins and outs of Politico Pro's trade
newsletter is just not good policy. It is not what we should be
doing here in Washington, D.C.
Representative Schneider. Great. Thank you.
Mr. Gresser, it can take years to move supply chains, to
rejigger your entire value chain. Can you share steps Congress
should take, in your mind, Congress should take, to identify
the products that are wholly manufactured in China and to work
to shift--help businesses make the shifts necessary in the
future?
Mr. Gresser. Well, the one thing I would say right away is
that a policy of making threats and picking fights with our two
large neighbors is directly against that.
The auto industry has spent tens of billions of dollars and
moved mountains to reshape its North American supply chains,
and if we are now going to put tariffs on Mexican cars and
Canadian auto parts and Canadian crude oil, that will wreck a
lot of their work.
So what we need, the first thing I would say is, solidify
and calm our relationships with allies and neighbors and
friends, and then we can turn to China. But if we are
disturbing those, you know, core relationships, then we are
going to be in a much worse position for leadership and
economically and in almost any way you could think.
Representative Schneider. Yeah. I am almost out of time,
but it is not just crude oil. Canadian timber----
Mr. Gresser. Timber----
Representative Schneider [continuing]. Is important. If you
want to decrease housing costs, increasing the raw materials
that go to frame those houses doesn't make a lot of sense.
Mr. Gresser. That is well put.
Representative Schneider. Yeah.
I yield back.
Representative Beyer. Thank you, Mr. Schneider.
I again recognize the incoming chair of the Joint Economic
Committee, Mr. Schweikert.
Vice Chairman Schweikert. I hope that had the tone of you
being happy.
Representative Beyer. Yes.
Vice Chairman Schweikert. Thank you, Mr. Chairman.
Mr. Ferry, CBO, a little while ago, put a letter--I mean,
hours ago, I think. And one of their numbers was a dynamic
score, that a 10-percent across the board would, static,
decrease deficits by about $2.2 trillion; dynamic, about $2.1
trillion.
But if it is a broad-based, are you someone, as--you know,
because you have pretty impressive economic credentials--do you
also see the currency adjustment within a broad-based sort of
flat model tariff like that?
Mr. Ferry. Our own model shows with a larger tariff, 20 and
60, roughly $6 trillion of Federal income over 10 years. So
that is considerably more, okay? And that is because we assume
the economy will grow more than I suspect the CBO does,
although I haven't read the CBO's----
Vice Chairman Schweikert. Well, but--yeah, the CBO letter
was just--I don't think--they did a 60-percent tariff, but some
of the numbers in there were solely focused, it looks like, on
China.
But have you ever run the 10-percent model?
Mr. Ferry. Yes, we have run a 10-percent model and
published it, and it was somewhat consistent with what you are
asking about.
Let me answer your question directly.
Vice Chairman Schweikert. Well, because----
Mr. Ferry. Currency is what you are interested in?
Vice Chairman Schweikert. Yeah, currency is one of my--
because there is a reason for that.
Mr. Ferry. Right. And most of these models do not include
currency, because currency is a nominal variable, a monetary
variable, not a real variable. So you have to take a position
on what you think would happen in the currency.
And my view is that the currency value of the dollar is not
determined by the trade balance. And I think there is 50 years
of evidence to show that.
I would have supported the DBCFA if it had included a
proposal to manage the currency. The U.S. needs to manage the
dollar to a competitive level.
So what I am saying is, the currency is completely
unpredictable. I actually agree with the incoming Treasury
Secretary that governments in certain advanced countries,
particularly the Anglo-Saxon countries, will typically allow
stupid things to happen to their currency.
So what we would need to do to achieve what you are talking
about is manage the dollar, hold it at a competitive level, and
say we are going to allow those tariffs to increase the size of
the productive sector of the economy.
Vice Chairman Schweikert. Okay. And----
Mr. Ferry. Does that answer your question?
Vice Chairman Schweikert. It does.
Look, I don't have a Ph.D., but I always am worried about
nominal interest rates' effects on the selling of debt. A good
example, I mean, look what happened to Brazil yesterday and
other countries that have also tried to do some of the
management of the currency value. You know, the debt mark--
particularly a country like ours--we brought, what, $10
trillion to market last year? And with our demographics, it is
going to get worse.
As a matter of fact, a couple minutes ago, the 10-year went
over 4\1/2\ percent, even though the Fed reduced interest
rates. And I think that is partially future expectations of our
demographics and our binging on debt.
So I am trying to work with my brothers and sisters on this
committee and Ways and Means on, how do we maximize economic
productivity and growth, tax receipts, as an offset to a debt
where--you know, we have a CR heading to the floor that may be
about to have another $140 billion of un-offset debt. So that
means our baseline now is already, what, $2.3 trillion debt
this coming year? Maybe with some of the other economic
factors--if interest rates stay this high--you are going to
2.6? That means you are borrowing $80,000 a second. We have a
math problem.
And so, is a tariff destination tax choosing those who we
like and incentivizing trade with them and punishing those we
don't? I mean, somewhere here there has to be a unified theory,
both receipt stabilization, economic growth maximization, and
accepting the reality of our demographics.
Remember, 100 percent of the debt, basically, from today
through the next 10 years is interest and demographics. It is
healthcare costs. We got old. That is not Republican or
Democrat; it is math.
But it is so hard, because we are so busy beating the crap
out of each other partisan-wise that we don't actually pull out
things called--what are they called? Oh, calculators.
Mr. Ferry. Well----
Vice Chairman Schweikert. And sorry for the preaching, but
I am frustrated.
Mr. Ferry. No, you are right; this is a serious problem.
What we have to do is get the budget deficit down, which
involves cutting spending. We can, as you say, increase tax
receipts by growing the productive sector through tariffs and
industrial policies. And we can hold interest rates down in
doing that. We could----
Vice Chairman Schweikert. And I hope there is actually even
a third round, because there is a difference between industrial
policy and subsidized industrial policy. Because across the
world, now, we have set off a cascade where China, I think, has
put 30, 36 billion into their chip sector. Europe just did
almost the same thing. Taiwan is about to do it.
So all we did is now create rent-seeking around the world
when it is industrial policy with cash. And there becomes the
problem. We didn't actually gain, really, that much true
productivity, because we just set off a subsidization cycle
around the world.
So, with that, I yield back. Thank you for your patience.
Representative Beyer. Thank you, Mr. Schweikert.
I will recognize again the gentlelady from Milwaukee.
Representative Moore. You know, Mr. Schweikert, you always
give a great jumping-off point.
Vice Chairman Schweikert. I do it just for you.
Representative Moore. You do it just for me, I think.
You know, I have been listening very carefully to folks and
listening to how the farmers really caught hell. I am from
Wisconsin; we have soybeans. That is in the mix of stuff that
really took a beating. But the strategy was just to subsidize
them.
I want to know, number one, from people how sustainable
that is and is that worth it, if we had across-the-board--if we
did the across-the-board tariffs. You know, we could just keep
on subsidizing the losers.
And, you know, the $6 trillion, Mr. Ferry, are you
suggesting--you have been suggesting that this could pay for
the tax cuts. You mean all of them? The whole TCJ--FJ?
Mr. Ferry. It could, yes.
Representative Moore. It could pay for all of them, without
raising prices.
And so I find that--you know, the $6 trillion, we didn't
find that the tariffs really trickled down to people that much.
And I guess I am wondering, your model, you know, how you got
to the $6 trillion.
Mr. Ferry. Well----
Representative Moore. In a couple of seconds.
Mr. Ferry. The first thing I want to say is that, when I
was a kid in the 1970s, my dad was a union print worker in New
York City earning $200 a week, okay?
Representative Moore. That was good money.
Mr. Ferry. That was very good money. And on a part-
scholarship I went to Harvard. And the reason why a lot of the
kids from my neighborhood went to Ivy League schools was
because their dads were working in jobs that had high
productivity and they were able to get good money in those
days. Today, we are in a completely different economic mess.
Now I will answer your question.
Six trillion dollars comes from $600 billion a year. Our
model suggests that if you have $3 trillion of imports and you
tariff them at 20 percent, that is $600 billion a year.
The difference between my model and--one difference--there
are many differences. One difference between our model and
other models is that other models assume imports will decline.
Brendan Duke and I actually agree that imports are only going
to decline for a short period of time. The trade deficit will
remain. So imports move up again. You are tariffing them at 20
percent. The net result is those 6 trillion dollars.
Now, what you do with those 6 trillion is critical. And I
wrote a paper----
Representative Moore. That is right, because if it is just
CEO pay, then that is going to be a problem. And that is what
we have been experiencing.
Mr. Gresser, pick up from where he left off, the $6
trillion and how it circulates in the economy.
Mr. Gresser. For sure. A couple of things.
One, if we are taxing 3 trillion in imports and getting
$600 billion out of it and the imports don't decline, one, that
is not realistic; two, it would mean there is no effect on the
employment mix that Mr. Ferry is talking about. So that is not
a realistic assumption.
Representative Moore. It doesn't create jobs.
Mr. Gresser. Not in the outcomes that he is discussing.
There have been very serious criticisms of this model, done
by, for example, Robert Koopman, the former USITC director who
oversees the USITC modeling. So I would be very careful about
accepting these figures at face value.
What we are talking about in a tariff of 20 percent on
imports is a 20-percent tax on crude oil, $250 billion worth of
crude oil; we are talking about a tariff of 20 percent on
clothes; we are talking about 20 percent on appliances. Most of
these things will bring in some money and raise prices.
I did look at one appliance, toasters. In order to make
toasters in the United States, and pop-ups, based on the
experience of Japan and Italy and U.K., they have to cost about
$300 each. You are talking about big, big impacts on middle-
income and low-income families, with very little return in the
economy and probably negative----
Representative Moore. And then how much do the subsidies
cost to save soybeans and farmers? Is that worth it?
Mr. Gresser. The subsidy for ag, I believe, is about $28
billion for lost exports. So you are essentially paying people,
who were making good livings and honest livings and doing very
well, because they are now kind of on their backs.
The U.S. Government, we spend $7 trillion a year; we can
afford to spend $28 billion a year. But why? You know, why not
let people keep winning, rather than subsidizing if we are
losing?
Representative Moore. Well--so little time, so many
questions.
I yield back.
Representative Beyer. Thank you.
I want to recognize the gentleman from Kansas again, Mr.
Estes.
Representative Estes. Well, thank you, Mr. Chairman. I
hesitate to jump into the give-and-take you and Mr. Schweikert
had. I don't know whether I should call you ``Acting Chairman''
or----
Vice Chairman Schweikert. ``Lord Chairman.''
Representative Estes. ``Lord Chairman''? Okay, sure.
Representative Estes. This is a----
Representative Moore. ``Current Chair.''
Representative Estes. ``Current Chair.'' Excellent.
Well, great. This is great opportunity to be able to get
together and talk and have another round of questions. There
are so many good things we want to talk about.
I think so much of what we are all trying to look at is,
how do we get a good, strong growing economy which ultimately
provides good jobs for Americans and ultimately helps with
raising tax revenue to help support the government functions
that we want to have? And trying to figure out what the right
policy decisions are for all of those implementations.
There are a couple of questions I wanted to ask just as a
followup.
And, Mrs. York, one of the things, going back into the
testimony that you had, a question I had--I was trying to
follow through the thought process on the double taxation of
savings as it relates to a decision that somebody makes to
consume today versus invest.
Because, to me, if they make that decision, consume today
after you are paid the payroll versus investing it, the tax
would be on the earnings of the investment--yes, it is delayed,
but it wouldn't be on the original investment itself.
So I was trying to follow that double-taxation process.
Mrs. York. Yeah. We have a handy chart on our website if
you want to see, like, some number examples.
But, essentially, when you pay tax when you earn your
money, that reduces how much you have able to put into savings,
and then when you pay tax again on the return to that, it
further reduces it; compared to a tax where you either, like a
401(k), you get to deduct that saving upfront and then pay tax
on the total withdrawal at the end, or, like a Roth IRA, you
have already paid tax on your income, you save it, and then you
don't pay tax again when you make your withdrawal.
In that system, you are neutral between when you are
consuming your money, because you are not facing that
additional layer of tax for delaying your consumption. But if
we do put that additional layer of tax on the returns when you
have already paid tax on your principal, that is further
reducing what you would be able to consume in the future, so it
discourages that saving activity.
It is similar to what we see under the corporate tax, where
you don't get to fully deduct the cost of your investment
immediately, so the tax falls on that investment and increases
the cost of capital. Very similar to double-taxing saving at
the individual level.
Representative Estes. All right. Thank you.
Mr. Ferry, at the end of my previous round of questions,
you had made a comment that really stood out, in terms of that
China's manufacturing base is double the United States.
And that goes to highlight a lot of what I was trying to
highlight as we are talking about how do we incentivize free
and fair trade and making sure that we have, you know, open
markets that people can engage in and a capitalist society
moving forward.
One of the things I wanted to talk--I had a question in
general about for you is that, you know, one aspect of tariffs
is to help protect the United States against some of these
abusive practices by other countries. We have had major concern
about the Chinese Communist Party stealing intellectual
property for decades.
And now, as Mr. Schweikert pointed out, we have started
this round-robin of multiple subsidizing. China is doing a
super-deduction for research and development expensing, which
makes the United States even more vulnerable.
How do you think tariffs or other trade tactics can be used
to protect United States' intellectual property in future
years?
Mr. Ferry. It is very difficult to protect intellectual
property from such a resourceful, secret service and a huge
operation that the Chinese run. I, myself, worked for
technology companies that were victims of Chinese intellectual
property theft.
I don't think tariffs are the central weapon to protect
against that. There are export controls, and there is better
security.
But what you have to understand--and I think we sometimes
don't take a strategic enough view. We have to step back, and
we have to say to ourselves: In a world like this, where we run
a trillion-dollar trade deficit, China runs a trillion-dollar
trade surplus, and you have other countries also exploiting our
propensity to consume rather than produce, how do we rebuild
our economy?
And the way we do that is, we rebuild sectors that are
strategic. And semiconductors are one sector. There are many,
many sectors that are strategic.
And, yes, there will be duplication. China will be doing
its own, as they are. And it is mostly--to an incredible
extent, it is based on technology that was developed here,
often in Silicon Valley, and stolen. But we have to accept that
duplication if we want to maintain our country as a free
country.
Representative Estes. Yeah.
Well, thank you. Thank you for all the witnesses for being
here today.
I yield back.
Representative Beyer. Thank you, Mr. Estes.
I will go to my second round of questions.
I first want to make the point that, on the deficit
reduction that the tariffs generate, that is only deficit
reduction if we don't use it to pay for tax cuts, which is, I
think, the intention right now. So we would anticipate that
deficit, much to our consternation, will continue to go up
greatly in the next 4 years.
Mr. Duke, Mr. Ferry said they want to manage the dollar to
a competitive level, which is easy to say. I think Milton
Friedman is probably rolling over in his grave, which is okay
with me. But I would love to get your take, as a competing
economist, on capital and the idea of managing the dollar to a
competitive level.
Mr. Duke. Sure thing.
So, you know, our trade partners, they can manipulate their
currency, they divide into teams. But I think, fundamentally,
the reason why the dollar would appreciate from this is because
we are taxing imports, right? And that just causes the dollar--
like, there is no distortion to fix here. Like, that is just
what we would expect to happen.
And I think, fundamentally, like, I think the reason why we
have a trade deficit--a big part of the reason why we have a
trade deficit is because we have a fiscal deficit, because we
don't save enough. If we want to address the dollar, the
simplest way to do that is to reduce the deficit.
I think a really good way to reduce the deficit is to take
the $5 trillion of tax increases on the wealthy and
corporations that President Biden put out, put that toward
deficit reduction, you know, not just put the Trump tax cuts on
the credit card, causing the dollar to appreciate, but, you
know, bring down the deficit. It is about 7 percent of GDP
right now.
That strikes me as a way easier way than getting into
managing the dollar, which I don't--you know, I mean, Mr.
Buffet made a lot of money off, you know, speculating for a
hedge fund. I don't think, you know, we should exactly be doing
that, though, with the U.S. Treasury.
So I think there is a simple way to deal with an overvalued
dollar, if we think that is the case, that hurts our, you know,
exporters, which is to reduce the deficit. There are ways to do
that without harming Americans.
Representative Beyer. Great. Thank you very much.
Mr. Gresser, in your stated remarks and even at more length
in your written, you talk about the constitutional challenges,
that Article I, section 8 of the U.S. Constitution gives
Congress the ability to set tariffs, trade policy.
Over the years, Congress has passed at least six bills that
I know of--201, 302, you know, the IEEP that my friend Ms.
DelBene has a very good bill on right now--that basically give
this power back to the President.
Why is that a bad thing? And why is it especially a bad
thing in light of our inability to pass a continuing resolution
this afternoon? When Congress does things so very slowly, why
not defend the President's right to manage trade policy all on
his own?
Mr. Gresser. Well, I think the most direct answer is,
respect for, you know, the Constitution and its text and what
powers it gives to the Congress and what powers it gives to the
President.
But in terms of the laws you are mentioning, there are
definitely some that I think are responsible and useful
delegations. If you create a Trade Promotion Authority bill,
that says negotiate trade agreements, here is what we want it
to look like, if you succeed and you satisfy us, you have
proclamation authority to lower tariffs. Or, on the other side,
anti-dumping law. You know, we think, the Congress, this is
what dumping is, this is what we would like you to do with
petitions, here is how we would like you to investigate it,
here is what we would like you to do.
What concerns me is an open-ended right for the President
to create any new tariff he wants, to cut any tariff he wants,
to do whatever product, whatever country. I that is a recipe
for very bad government, for very bad choices.
And, going back to my first point, Congress should exercise
its responsibility. The Constitution says Congress has the
right to--or has a responsibility to deal with foreign--
regulate the commerce of foreign countries, and it has the sole
right to lay and collect taxes, duties, and posts and excises.
And I think that there is good reason for that, and if laws
like IEEPA or Section 301 have gotten away from that, then I
think Congress should think about dialing them back.
Representative Beyer. Thank you very much.
Mr. Gresser, one more relevant question--because I read
your trade remarks every week.
Mr. Gresser. Uh-huh.
Representative Beyer. We are losing Earl Blumenauer, who
has been the champion for getting rid of the $800 de minimis
exception for all these goods coming in from China. I forget
what it--it is a big, big number, a billion dollars a day or
something like that.
What is your perspective on de minimis, especially in light
of the conversation about tariffs? Because it is closely
related.
Mr. Gresser. In terms of de minimis, I believe there are
about--you know, when Congress passed this law, there were
about 100 million packages coming into the U.S. Now there is
about a billion. That does raise interesting questions, and it
does put American retailers in a difficult position, where they
are paying the full tariff and individuals buying online are
not.
So I think there is some--you know, Congress has some good
reason to rethink some of this. I would like to think that
there are some ways to do it without raising prices on
individuals and families. So that is where my starting points
are.
Representative Beyer. Okay. Great.
Mr. Ferry, did you have any input on de minimis?
Mr. Ferry. Yes. I----
Representative Beyer. I saw your eyes twinkle over there.
Mr. Ferry. Yes.
I think de minimis is effectively a free-trade agreement
with China. It has enabled them to ship billions of dollars of
goods into the U.S., putting thousands of manufacturers out of
business. Now, as it accelerates, it is putting retailers out
of business. And I am hearing from businesspeople that if we
lose our retail channel to the consumer, then we lose the
ability to sell.
So it is hurting both manufacturers and retailers, and I
think we ought to put a stop to it immediately by abolishing it
entirely. And, remember, we are the only country in the world
with an $800 limit on de minimis.
And, you know, I will say it again very briefly. We have to
decide whether we are a country that consumes or produces. Too
much of what I have heard today is about how wonderful
consumption is. If you look in history, the decline of empires,
like the Spanish and Dutch and the British, come about because
the ruling class gets obsessed with consumption and does not
produce enough and then a crash comes. We need to produce more
of all the goods that we are now buying through de minimis.
Representative Beyer. Thank you.
My research assistant from Arizona has just pointed out
that de minimis went up 209 percent in the----
Vice Chairman Schweikert. Since----
Representative Beyer [continuing]. Last 6 years.
And I would recognize my friend from Illinois, the
distinguished Congressman, Mr. Schneider.
Representative Schneider. Thank you.
And I will go to Mr. Gresser.
And this may or may not--looking at your testimony, this
may or may not be a fair question, but, you know, as I study
history a little bit, you know, in the 1980s we had imposed an
embargo on shipping grain to the Soviet Union. And I have
looked at reports that show, in Illinois, we never really
recovered from that. The high point was 1979. And we lost those
markets because people went to other places.
What I am wondering is: You look at the last 4 years of the
last administration and the embargoes. Have industries
recovered from the impact of the trade war, or are American
industries still struggling?
Mr. Gresser. That is a great question.
There is, I think, strong evidence that agriculture has not
recovered from that, that we have lost market share for the
long run.
One thing that is interesting to me, on the manufacturing
side, is that, over these past 4 years, the use of steel in the
United States has declined pretty sharply. So we are importing
a lot less steel than we did before, but we are not making any
more steel than we did before. And capacity utilization is
below what it was before the tariffs. What that suggests to me
is that construction and auto businesses, big buyers of steel,
are figuring out how to make do with less.
So they may be recovering over time the losses they got
from that. But that, overall, means a contraction in the U.S.
manufacturing sector, which is being overcome over time, but
not because we are making more steel over time; it is because,
you know, people learn from scarcity and they can adjust
sometimes.
So your question is right-on, that these things have long-
lasting effects and they sometimes rebound on the people or
industries they were meant to support.
Representative Schneider. Yeah. I mean, expanding on your
comment about necessity, necessity is the mother of invention.
It is not just that they make do; it is, they find alternatives
or innovation comes and it accelerates that replacement of one
product for another.
Mr. Ferry, I want to pick up on what you said, the loss of
retailers. When we were talking about supply chains, value
chains, whatever, it is a chain, and--I guess I am into the
aphorisms right now, but--a chain is only as strong as its
weakest link. And for a manufacturer to get its products
ultimately to a consumer, there are a lot of links in that
chain, but the last one is the interface where the consumer
actually can see, touch, and acquire the product.
What do you see as the long-term impact of a decline in
retail because of inability to, you know, address the de
minimis issue?
Mr. Ferry. The impact of the decline in retail is, among
other things--well, it is serious at several levels.
First of all, it is a decline in tax revenue for State and
local governments, which depend dramatically on retail revenue.
And Congressman Beyer and I live in the same district, and a
lot of the revenue for the city of Alexandria comes from the
retail community. And the more they buy from machine (ph) and
the other off--you know, the other de minimis China sellers
that are selling tax-free, the more that tax revenue declines.
That is number one.
Number two, retail provides a lot of jobs. Even though they
are not high-paid jobs, they are jobs for a certain type of
person. A person who loves fashion works in a fashion retailer.
A person who loves bicycles works in a bike shop. And those
jobs are in decline, which adds to the problem of mediocre jobs
and more and more people working in temporary jobs, working in
warehouse- or delivery-type jobs, which are unfortunately two
of the main growth sectors for people without college degrees
or without high school degrees.
So it is a serious issue.
Representative Schneider. Thank you.
And let me close--Mrs. York, I will turn to you. You had in
article in Tax Foundation last month talking about the
inflationary impact of tariffs. Can you describe some of the
other effects tariffs will have on the economy, both short- and
long-term?
Mrs. York. Yeah. The big long-term effect is that they
reduce the real value of after-tax incomes by increasing prices
that we pay in the United States.
And they also lead to a less efficient allocation of
resources by transferring income, transferring jobs,
transferring production to the targeted firms and away from
where it is currently employed.
And we have evidence from 2018 and 2019 that that is what
happened. If you look at the U.S. International Trade
Commission report, if you look at studies by academics, they
found that decreases in manufacturing employment net decreases
in manufacturing production because of these downstream
effects.
Yes, tariffs can create benefits in the protected industry,
but you have to weigh those against the downstream costs, as
well as against retaliation. And the net impact for the U.S.
economy is very clearly negative.
Representative Schneider. Great. Thank you.
With that, I yield back.
Representative Beyer. Thank you.
We are honored to be joined this afternoon by the
distinguished lady from the State of Washington, former chair
of the New Democratic Coalition and many other honors.
Ms. DelBene, the chair is yours--or, the floor is yours.
Representative DelBene. Thank you, Congressman Beyer.
Thanks, all of you, for joining us and for sharing all of
your thoughts.
I am joining today's committee hearing because my
constituents in Washington have a lot of questions and concerns
about the incoming President's new, sweeping tariff proposals.
I serve on the Ways and Means Committee, on the Trade
Subcommittee, because trade is very, very important to my
State's economy. More than 40 percent of jobs in Washington are
tied to trade, ranging from technology products to aircraft and
trucks, as well as billions of dollars of agricultural products
like seafood and dairy.
Our port workers serve as a gateway to the rest the world,
bringing in energy products and semiconductors that fuel our
economy and exporting American wheat, corn, soybeans, and much
more.
People in my district generally benefit from lower tariffs,
which are just another word for taxes that Americans pay on
imported goods, because the costs of these taxes are mostly
passed along to consumers in the form of higher prices.
To be clear, sometimes using tariffs as a targeted tool can
be helpful. Tariffs can be part of a holistic strategy to push
back against unfair trade practices of another country and to
reduce dependency within our supply chains or to protect
American industries that are important for our national
security or fighting climate change.
I have introduced legislation that would impose a tariff on
certain goods that are produced in carbon-intensive ways. But
sweeping tariffs, like the ones that President Trump has
proposed, can damage communities across the country and raise
prices of everyday goods like groceries, gas, and prescription
drugs.
Economists, including several of our witnesses today, have
estimated that if these proposals aren't tempered, the average
American family will pay thousands of dollars more per year
because of increased prices. And the last thing Americans need
right now is higher prices.
These estimates don't account for retaliation, which can be
devastating for American industries. In my State of Washington,
in 2019, apple growers across our State lost millions of
dollars in market share in India when they retaliated for
tariffs that Trump imposed on steel and aluminum. It took 5
years for India to drop those tariffs, and during that time
many multigenerational family farmers left the industry.
So these kinds of sweeping tariffs could fundamentally
reshape our economy and risk sending us into a recession or
sending our communities into economic hardship.
So Congress needs to have a say in major economic decisions
like this that affect our districts. As Congressman Beyer
talked about, I have introduced legislation, called the Prevent
Tariff Abuse Act, to prevent any President, Democrat or
Republican, from imposing sweeping tariffs under the guise of a
national emergency without a vote in Congress.
I know we talked about this a little bit earlier, but, Mr.
Gresser or Mrs. York, do you think the President should be able
to raise taxes on Americans by billions of dollars without
consulting Congress?
Mrs. York. I think it is very clear that broad, sweeping
tariffs would have a negative effect on Americans. We have also
estimated tax increases on U.S. households exceeding $2,000
with universal tariffs.
Congress very clearly has the authority here, whether that
is repealing a tariff that has already been imposed or whether
that is adding some checks to the tariff powers that have been
delegated to the President.
Representative DelBene. Mr. Gresser.
Mr. Gresser. I think, almost anytime, anywhere in the
world, where a President or Prime Minister declares states of
emergency and tries to rule by decree, it is not a positive
sign.
In the case of the U.S. tax and tariff system, the
Constitution is very clear, this is a congressional power. And
so, no, I don't think it is appropriate for a President to
declare a state of emergency and then use it to do whatever he
likes, especially if there is no emergency.
And I applaud you for the bill you have introduced, IEEPA
in particular.
Representative DelBene. Thank you.
Mr. Duke, how could sweeping tariff increases on Canada,
Mexico, and other trading partners impact export-focused
industries and jobs like those in Washington State?
Mr. Duke. Yeah. I can think of four ways--I can think of
three ways.
First of all, as we discussed, tariffs cause the dollar to
appreciate. So, all of a sudden, they are less competitive
abroad. The Indians, the Washington apple costs more to them in
the Indian rupee. And that is what happens.
I think a second part is that U.S. exporters are our
biggest importers. They rely on imported goods to stay
competitive. There was a study that showed Trump's first round
of tariffs was equal to a 2-percent tariff on U.S. goods abroad
because of those higher costs that they bore.
The third part is obviously retaliation, just as you said.
And, again, for no appreciable gain. It is just to do a sales
tax on coffee and bananas. That doesn't make any sense to me.
Representative DelBene. And lots of times, the retaliation
is on industries that have nothing to do with what the original
tariffs are, so it makes it even more complicated now.
Thank you.
I have gone over my time. Thanks. I appreciate it. And I
yield back, Mr. Beyer.
Representative Beyer. Ms. DelBene, thank you very much.
We are almost done, but I have a couple quick questions.
First of all, Mr. Schneider said that necessity is the
mother of invention, and I wanted to point out that Thorstein
Veblen said that invention is the mother of necessity too.
Second, I am concerned about how, in the last round with
Trump, our office, among many others, was deluged with
businesses applying for tariff exemptions and wanting us to
write letters and intervene with the administration and the
like.
I mentioned earlier that--at least somebody had done
research that showed that firms favorable to the administration
get better treatment than firms unfavorable to the
administration.
Mr. Gresser, could you talk at all about how corporations
could game this system? Or is there an opening for corruption
because of who gets to pay the tariffs and who doesn't.
Mr. Gresser. Yes. Tariff systems are--going back 200 years,
former Treasury Secretary, Mr. Gallatin, for Jefferson and
Madison, wrote that tariffs are very opaque and nontransparent
in comparison to other sorts of taxes and relatively easily
manipulated by wealthy and connected businesses.
The problem I saw with the exclusion system you mentioned
was that they were asking about 30 or 35, you know, trained and
talented people to handle 53,000 applications for relief. The
GAO found that each of these petitions got, on average, 10 to
15 minutes' review from a frontline staffer and then 7 minutes
from a supervisor. So it was a generator of random outcomes; it
wasn't a real process.
And I could easily imagine that businesses which are larger
or older or for whatever reason more tied into the political
system would have been better at getting these petitions in
front of a political person who could say, ``Oh, actually, this
one looks kind of meritorious. Let's give it another thought.''
So, yes, a system of this sort is going to attract so many
applications it will overwhelm the people working on it, and
the outcomes from that level will be unpredictable. And those
which are better connected for whatever reason are probably
more likely to get a better read on their petition. So I think
you are spot-on.
Representative Beyer. Great. Great. Thank you very much.
One last question for Mrs. York.
Thank you for educating us all to--I don't know all the
initials, but--the cash-flow tax system.
There are many things that I would love to see, you know,
when falling asleep at night--you know, getting rid of the
electoral college, or meaningful immigration reform, or, you
know, getting our budget deficit down from $37 trillion.
When you talk about what sounds like a wholesale change of
the way we tax in America, a completely different vision, how
do you see overcoming, you know, 125 years or 140 years of
history? What are the steps between where we are and the Erica
York vision for tax policy?
Mrs. York. So the first two steps were fairly
straightforward, and we have already taken steps toward them.
Full expensing for capital investment, that has had
bipartisan support in the past, like expensing research and
development costs, doing bonus appreciation, improving the tax
treatment of structures. So that's fairly familiar policy.
And, then, in the TCJA, there was also introduced a
limitation on interest deductions. So it is going further in
that direction and fully moving the tax treatment of interest.
So both of those are within the political realm of things
that have already been enacted.
The big change is, of course, the border adjustment. And I
do think that is more novel to the policy community, who hasn't
been in the weeds of what tax economists have been writing
since, like, the 1970s. So this isn't a new idea when it comes
to academics who study tax policy and who study what is the
most efficient way to structure taxes.
But, again, even if you just do those first two steps--full
expensing and offset some of the cost of that by reforming the
tax treatment of interest--you eliminate many of the
impediments in the Tax Code right now that discourage
investment and discourage production. So you go a long way, and
you don't even have to do the border-adjustment side of it to
get that benefit.
Representative Beyer. By the way, the--I rarely defend the
TCJA, and I am not going to now. But full expensing is the one
thing that I have seen has a significant impact on investment.
So, with that, thank you all very much for joining us.
This probably won't be the last you hear of tariffs in the
coming weeks and months. But we have--we just want to say again
that economists on the left and right fear that President-elect
Trump's tariffs risk shrinking our economy and harming
Americans. We have emphasized again and again that the
Constitution says this is our responsibility, not the
President's.
And I want to thank all of you for participating so nobly
in this.
And thank you to my colleagues. And thank you for letting
our fellow Ways and Means members waive on to this discussion.
Questions for the record may be submitted after the
hearing, and the record will remain open for 3 business days.
[The information follows:]
Representative Beyer. And the hearing is now adjourned.
[Whereupon, at 4:14 p.m., the committee was adjourned.]
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