Pros and Cons of Tariffs

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CESifo Forum 4 / 2019 December Volume 20

John J. Forrer and Kathleen Harrington The Trump Administration’s Use of Trade Tariffs as Economic Sanctions

OVERVIEW

The Trump administration’s enthusiasm for eco- nomic sanctions has been reflected in their equally passionate embrace of trade tarif fs. Both foreign policy tools have been used to excess well beyond the practices of past administrations. Even most notable is the unprecedented re-purposing of trade tarif fs as economic sanctions. Rather than using tarif fs as intended by statute to adjust conditions for impor ts in response to unfair practices with trade par tners, the Trump administration has threatened and imposed tarif fs to pressure countries to change policies they oppose – the exact rationale behind the use of economic sanctions. The use of trade tar- if fs as economic sanctions raises impor tant ques- tions about the legitimacy and ef fectiveness of such a practice.

TRUMP ADMINISTRATION’S AGGRESSIVE USE OF ECONOMIC SANCTIONS

The Trump administration’s use of economic sanc- tions is best characterized as aggressive, par ticularly when compared to previous administrations. Eco- nomic sanctions have become a go-to foreign pol- icy tool to suppor t its ‘America First’ foreign policy strateg y. According to the US Treasur y Depar tment data, in 2017, the United States placed sanctions on 1,500 people, companies, and entities (Harrell 2019). This is 50 percent more than has ever been added to

John F. Forrer George Washing ton Universit y

the US Treasur y’s Specially Designated Nations and Blocked Persons List (SDN) in any single year, based on an analysis by the law firm Gibson Dunn (2019). The majority of these sanctions were related to nuclear-related sanctions on Iran, enhanced sanc- tions against Russia, and sanctions on Venezuelan people and entities (Gibson Dunn 2019).

The analysis shown in Figure 1 provides a clear visual of the uptick in sanctions during the Trump administration. In the years 2017 through 2018, there is a dramatic increase in additions to the Specially Designated Nations and Blocked Per- son’s list. Compare that sharp sloping increase from 2017–2018 to the ebb-and-flow rhy thms that characterized the experience earlier in this centur y during the Bush administration (2002–2009) and the Obama administration from 2009 to early 2016. Neither the Obama nor Bush administrations made more than 800 additions to the SDN list during their entire tenure, but the Trump administration quickly exceeded the 800 actions cap characteristic of pre - vious administrar tions.

Fundamentally, sanctions are a collection of tools designed to inflict economic losses on coun- tries, institutions, and/or individuals sufficient to induce a sought-after change in policy and behav- ior. The US Office of Foreign Assets Control (OFAC) defines sanctions as both broad-based and oriented geographically, which would include the tariffs against countries such as Cuba and Iran, while other forms of sanctions are considered more ‘targeted’. These targeted sanctions are applied in cases of counter-terrorism, counter-narcotics and focus on specific individuals and entities. These programs may encompass broad prohibitions at the countr y level as well as sanctions directed at specified tar- gets (US Depar tment of the Treasur y 2018). Sanc- tions are one of many government tools available to fur ther specified national security and foreign policy goals.

In addition to a dispropor tionate reliance on economic sanctions as the favored foreign pol- icy tool, there has been enhanced use of second-

ar y sanctions by the Trump administration. Secondar y sanctions are a tool designed to push foreign countries, companies, and individuals into halting business dealings with countries and entities on which primar y economic sanctions have been imposed (Harrell 2019). This aggressive push is evident in countries such as Venezuela, where US National Security Advi- sor John Bolton threatened sweeping bans on companies and individuals attempting to

Kathleen Harring ton George Washing ton Universit y

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ᵃ US Treasury’s Specially Designated Nations and Blocked Persons List . Source: Gibsondunn.com; US Department of the Treasury.

Additions to the SDN List ᵃ by Year

Number of newly sanctioned parties

Bush Obama Trump

Figure 1

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CESifo Forum 4 / 2019 December Volume 20

conduct business in Venezu- ela; bans that applied across hundreds of companies and individuals (Goodman and Smith 2019). The broad scope of secondar y sanctions, such as those applied to Venezuela, cause significant fringe dam- age to allied countries such as Spain and France, countries who still have oil and avia- tion companies operating in Venezuela. Or the threats of secondar y sanctions against ever y countr y that conducted commerce with Iran following the US abrogation of their par- ticipation in the Joint Comprehensive Plan of Action (JCPOA) − see also Calamur (2018).

The Trump administration’s liberal use of pri- mar y and secondar y sanctions is a tool to compel others to adhere to US national security and for- eign policy goals. The Trump administration’s cor- responding aggressive use of trade tariffs has lured what has been a clear distinction between sanctions as applied through the US Treasur y Depar tment and tariffs pushed for ward through the United States Trade Representative (USTR) and the US Depar tment of Commerce. Employing these two separate for- eign policy tools as one in the same raises question: should tariffs and sanctions be used in a similar way and with similar justifications, and if they are being used in similar ways, what effect might the dual-use purpose of these foreign tools have on effectiveness of US foreign policy?

USE OF SANCTIONS AND TRADE TARIFFS

Similar to its expansive use of economic sanctions, the Trump administration has also imposed trade tariffs on allies and adversaries at an alarming rate. USTR has announced not only more tariffs in terms of volume of products globally, but the executive body has also applied tariffs at a higher percentage level (Office of the United States Trade Representative 2019). A more specific example of this ramping up of tariffs is exemplified through the tar- iffs imposed on China. The Peterson Institute for Interna- tional Economics developed two graphics to showcase the ramp-up of the China tariffs.

Figure 2 highlights the increased percentage of the tarif f rate threatened by the Trump administration

throughout the year. Increasing how much a prod- uct is taxed is one method of using tarif fs aggres- sively, and China’s expor ts into the United States were threatened by increasingly high percentages of tarif f tax rates. Along a similar vein, Figure 3 highlights the percentage of US impor ts from China subject to special US trade protection. The United States has maintained a special protection tarif f towards China since the 1980’s, but this figure high- lights how much more expansive this special tarif f protection has become in the Trump administration (Bown and Zhang 2019b). In essence, the admin- istration is threatening to apply the special tarif f protection on more products being impor ted from China. Both the percentage rate of the tarif f and the amount of impor ts af fected by the tarif fs have are markedly higher, revealing an aggressive use of tar- if fs. Threatened tarif f rates and volumes are used by the Trump administration as leverage points to fur ther an ‘American first’ economic policy, and in response to China’s unfair trade practices related to the forced transfer of American technolog y and intellectual proper t y (Of fice of the United States Trade Representative 2019).

In their use of tariffs against China and in numer- ous other instances, the Trump administration

2017 2018 10 May 2019 1 September 2019

1 October 2019

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Section 301 Aluminum Steel

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Source: Based on data from Bown (2019); author’s calculation.

US Average Tariffs on Imports from China

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Figure 2

1980 1985 1990 1995 2000 2005 2010 2015

Other Electronics and electrical machinery Plastics Metals Textiles and apparel

Source: Bown and Zhang (2019b).

US Imports from China Covered by Special Protection by Sector 1980–2018

Pre-WTO Post-WTO accession

Figure 3

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CESifo Forum 4 / 2019 December Volume 20

flaunts trade tariffs as a foreign policy tool used for similar purposes as economic sanction. The use of tariffs as economic sanctions raises serious ques- tions about the statutor y authority and indented goals of this familiar foreign policy tool. Evidence of the Trump administration’s sanctions-like use of tariffs is best demonstrated through the tariff taxes applied on Turkey. The ‘Turkey tariffs’ highlight the increasingly nebulous and nefarious roles tariffs play in the administration’s foreign policy. The first of the tariffs affecting Turkey began on 8 March 2018, when President Trump issued a Presidential Proclamation to impose an overall 25-percent ad valorem tax on steel ar ticles impor ted to the United States from abroad (The White House 2018a). This was applied broadly, across a number of countries.

However, a second presidential proclamation was issued a few months later, on 10 August 2018. This proclamation set to adjust impor ts of steel into the US, but this time, the proclamation was target- ing specific countries. This second proclamation (the August 10 proclamation) had the stated and legally authorized goal of increasing domestic capacity uti- lization and ensuring the viability of the domestic steel industr y (The White House 2018b). The Procla- mation investigation conducted by the US Depar t- ment of Commerce recommended that a tariff be applied on cer tain countries, and Turkey was specif- ically targeted. Turkey is one of the major expor ters of steel for domestic use in the United States. Using executive authority granted through Section 232 of the Trade Expansion Act of 1962,1 the tariff levels determined in this August 10 proclamation went into effect. The United States imposed a 50 -percent ad valorem tariff rate on steel ar ticles impor ted from Turkey, a dramatic doubling of the previous 25-per- cent tariff imposed in March.

The tariffs on Turkey illustrate their creep into the realm of sanctions. The tariffs have an under- pinning justification of national security, a terri- tor y typically reser ved for sanctions. Invoking the national security clause of the Trade Expansion Act to justif y sanctions on Turkey is not credible and it is clear the tariffs were imposed to cause economic hardship on Turkey. Also, the messaging surround- ing these tariffs also was more aligned with the fur- therance of foreign policy goals typically befitting a sanction. External messaging through social media outlets such as Twitter explicitly stated that the tar- iff was punishment on Turkish political actions. An August 16, 2018 tweet from Donald Trump’s handle @realDonaldTrump proclaimed the ad valorem tar- iffs imposed just six days before were a reaction to Turkey’s detainment of Pastor Andrew Brunson, a major foreign policy concern happening at the same time. The tweet states “we will pay nothing for the release of an innocent man, but we are cutting back 1 See Public Law 87-794-Oct. 11, 1962, https://www.gpo.gov/fdsys/ pkg /STATUTE-76/pdf/STATUTE-76-Pg872.pdf.

on Turkey!” ‘Cutting back’ signals the effects of the ad valorem tax: reducing Turkish steel impor ts by the United States. Such a justification was absent from the official Presidential Proclamations announcing the tariffs.

Around this same time, in early August the US Treasur y Depar tment’s Office of Foreign Assets Con- trol imposed sanctions targeting two Turkish offi- cials, Minister of Justice Abdulhamit Gul and Minister of Interior Suleyman Soylu, for their role in the arrest and detention of Pastor Brunson. These sanctions had the explicit goal of forcefully expressing the US’ position that Brunson’s continued prosecution was wrongful (US Depar tment of the Treasur y 2018). The tariffs and sanctions imposed upon Turkey had sig- nificant overlap both in timing and intent, and again, highlight the heav y use of both policy tools by the Trump administration, but also the significant cross- over of the role of tariffs.

TRADE TARIFFS AS ECONOMIC SANCTIONS: A GOOD OR BAD IDEA?2

The basic justification for economic sanctions is that economic losses that are sufficiently painful will con- vince another countr y to change a policy objected to by the sending countr y. At the same time, countries’ vulnerability to economic sanctions var y widely, and may have many viable options that help them evade the actual effects of an economic sanction. At the hear t of a successful economic sanctions pol- icy is knowing (i) how much economic suffering is required to compel the target countr y to yield and make the sought after change in policy; and (ii) an ability to implement sanctions in such a way that results in real economic losses commensurate with the planned level of losses (Forrer 2017).

The determination of the success of economic sanctions is problematic. Research on economic sanction episodes throughout histor y have struggled to make a definitive case on the role played by eco- nomic sanctions in determining the outcomes of the events (Hufbauer et al. 2007; Askari et al. 2003). Once imposed, as long as the offending policy remains intact, sanctions could be viewed as a failed effor t. If sanctions are removed before the policy has been revoked, claims of failure or premature action could be offered. And if the policy targeted by sanctions is revoked, sanctions can be highlighted as the reason for the change, even if other factors caused the pol- icy change. As in all situations, ‘sanctions don’t work until they do’.

The cost-effectiveness of economic sanctions is more easily assessed. Economic sanctions cause

2 The terms trade tariffs and economic sanctions tend to be used interchangeably as both a tool of foreign policy – a foreign policy strategy – and a legal action taken based on an authority granted to a government agency. Our discussion on trade tariffs as economic sanctions addresses the first sense of the terms largely unanticipat- ed by the second sense.

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intended and anticipated economic losses to govern- ment agencies, firms, and individuals in the sending and target countries. Innocent communities also suf- fer economic (and personal) losses due to economic sanctions. Since all these losses can be estimated, an assessment could be made as to whether the value of a change in the offending policy is wor th the losses suffered by all par ties. It also opens up for consid- eration the question of whether an alternative to economic sanctions would be more cost-effective in achieving the foreign policy goal.

In the context of economic sanctions, trade tariffs might be seen as simply ‘economic sanc- tions-lite’: rather than banning a specific economic activity, trade tariffs have the effect of raising prices on designate products and ser vices, and thereby discouraging their purchase. But economic sanc- tions can be designed with great nuance relating to the level of economic loses and who bears those loses. In practice, trade tariffs do not enhance the capacities of a countr y to stylize sanctions to have the desired effects. In addition, trade tariffs suffer from the same set of design and enforcement chal- lenges faced by economic sanctions that limit their effectiveness:

‒ Limited enforcement capacities ‒ Smuggling ‒ Fraud ‒ Evasion ‒ Re-exporting

Trade tariffs offer no more advantages over eco- nomic sanctions as the legal instruments used to inflict economic losses on countries in an effor t to change their policies. But using trade tariffs as eco- nomic sanctions does per ver t the established public policy justification for imposing any trade tariff, and thereby undermines public accountability of govern- ment actions taken to pursue foreign policy goals.

Placing a tariff on expor ts from another countr y raises the price on those goods and ser vices to the consumers in the countr y imposing the tariffs. The tariff can be in the form of a fixed fee or percentage of the cost per item. The resultant price increase gives an economic advantage to domestic firms compared to foreign expor ting firms. Such a market inter ven- tion through the use of trade tariffs that are justified by ver y specific conditions has specific rationales behind this approach.

The adoption of a trade tariff against specific goods and ser vices requires that a finding be con- ducted that shows evidence of unfair trade practices. Such a finding not only justifies the adoption from a public policy perspective, but the analysis of the trade practices in question provides valuable infor- mation to determine the form of the remediate trade tariff. At their core, trade tariffs are justified by cor- recting an unfair trade relationship between coun-

tries. The scope and scale of the tariff – to accomplish that goal – must be tailored to the specific situation. Trade tariffs are by design intended to correct – or at a minimum remediate – trade relationships that impose an unfair condition on a countr y. Trade tariffs are justified due to their ability to claim that it is solv- ing an existing problem and making it ‘right’.

Alternatively, economic sanctions are justified by the argument that suffering experienced by the sanctioned countr y is sufficient to persuade it to alter the offending policy in question. It is recog- nized that economic pain on innocents will result in both the sanctioning and target countries, but the impor tance of achieving the foreign policy in ques- tion should account for this unavoidable collateral as par t of the price paid when using an economic sanc- tion. Economic sanctions are justified by pressuring other countries to adopt desired policies.

But to make matters worse, trade tariffs have become the easiest ‘path of least resistance’ for the Trump administration to adopt foreign policies. In the Trump administration, trade tariffs have become the ‘poor person’s’ economic sanctions. Relying on a clause that allows trade tariffs to be invoked at the discretion of the President, trade tariffs allow a path of least resistance to placing economic sanc- tions-like activity on countries in dispute with the US, but not necessarily involving trade issues.

CONCLUSION

The use of trade tariffs to impose economic sanc- tions on other countries may be consistent with the Trump administration campaign of assailing US trade agreements as unfair, and providing a political jus- tification for using trade tariffs as the best remedy, and impinging on the territor y of economic sanc- tions. But the conventional policy justification for using trade tariffs as economic sanctions has been circumvented, undermining public accountability for the actions taken by the government and their effectiveness. Any administration that intends to continue using tariffs as a ‘sanction-lite’ tool should have their use clarified and codified in a revision of existing legislative authority. A legislation change would ideally bring more statutor y clarity defining the two economic tools (sanctions and tariffs) and could set a foundation for a more accountable for- eign policy approach by and across government agencies. Greater clarity on the boundaries of trade tariffs to advance purposeful US foreign policy would be an available step in that direction.

REFERENCES

Askari, H. G, J. Forrer, H. Teegen and J. Yang (2003), Case Studies of U.S. Economic Sanctions – The Chinese, Cuban, and Iranian Experience, Praeger Publishers, Westport CT.

Bown, C. P. (2019), US-China Trade War: The Guns of August, Peterson Institute for International Economics, 20 September,

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https://www.piie.com/blogs/trade-and-investment-policy-watch/ us-china-trade-war-guns-august.

Bown, C. P. and E. Zhang, (2019a), Trump’s Trade War against China Covers Historically Huge Amount of Imports, Peterson Institute for Inter- national Economics, 1 May, https://www.piie.com/research/piie-charts/ trumps-trade-war-against-china-covers-historically-huge-amount-imports.

Bown, C. P. and E. Zhang (2019b), Trump’s 2019 Protection Could Push China Back to Smoot-Hawley Tariff Levels, 14 May, Peterson Institute for International Economics, https://www.piie.com/blogs/trade-and-investment-policy-watch/ trumps-2019-protection-could-push-china-back-smoot-hawley.

Calamur, K. (2018), “Trump Goes from Threatening Iran to Threatening the World”, The Atlantic Magazine, 7 August, https://www.theatlantic.com/ international/archive/2018/08/trump-iran-tweet/566948/.

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Gibson Dunn (2019), 2018 Year-End Sanctions Update, 11 February, https://www.gibsondunn.com/2018-year-end-sanctions-update/.

Goodman, J. and S. Smith (2019), “Bolton Warns Foreigners That Violate Venezuelan Asset Freeze”, AP News, 6 August, https://apnews. com/7314263d68924c2990e52f1ff1ea99d8.

Harrell, P. E. (2019), “Trump’s Use of Sanctions Is Nothing Like Obama’s”, Foreign Policy Magazine, 5 October, https://foreignpolicy.com/2019/10/05/ trump-sanctions-iran-venezuela-russia-north-korea-different-obamas/.

Hufbauer, G. C., J. J. Schott, K. A. Elliott and B. Oegg (2007), Economic Sanctions Reconsidered: Case Studies of U.S. Economic Sanctions, Peterson Institute for International Economics, Washington DC.

Office of the United States Trade Representative (2019), USTR Issues Tariffs on Chinese Products in Response to Unfair Trade Practices, Press Releases, 15 June, https://ustr.gov/about-us/policy-offices/press-office/ press-releases/2018/june/ustr-issues-tariffs-chinese-products.

The White House (2018a), Presidential Proclamation Adjusting Imports of Steel into the United States, Press Releases, 8 March, https://www.whitehouse.gov/presidential-actions/ presidential-proclamation-adjusting-imports-steel-united-states/.

The White House (2018b), Presidential Proclamation Adjusting Imports of Steel into the United States, Press Releases, 10 August, https://www.whitehouse.gov/presidential-actions/ presidential-proclamation-adjusting-imports-steel-united-states-5/.

Trump, D. (@realDonald Trump, 2018), Tweet, 1 August at 4:30 pm, https://twitter.com/realdonaldtrump/status/1030235363258851328?lan g=en.

US Department of the Treasury (2018a), Resource Center: Financial Sanc- tions, https://www.treasury.gov/resource-center/sanctions/Programs/ Pages/faq_10_page.aspx.

US Department of the Treasury (2018b), Treasury Sanctions Turkish Officials with Leading Roles in Unjust Detention of U.S. Pastor Andrew Brunson, Press Releases, 1 August, https://home.treasury.gov/news/ press-releases/sm453.

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