How the Shutdown Has Affected Tariff Exemptions

By Micha Gartz

You’re a small manufacturer and one of your key inputs is aluminum. You face a huge tariff, thanks to current US policy. You likely meet the conditions for an exemption and have even planned accordingly. Then, after all that time and money you spent navigating the tariff exemption request process, you get hung out to dry by government shutdown.

Many people report that the shutdown has not much affected their lives. Those whose businesses depend on the discretion of a government regulatory agency have not been so fortunate. In some cases, the costs of the shutdown have been financially devastating.

Ordinarily exemption requests are made to the Commerce Department or US Trade Representative’s (USTR) Office. They should be approved provided (according to Trump-imposed legal protocol)  that the item or a substitute for it are unavailable domestically, and there are no overriding "national security concerns”. But there are many speed bumps. The President’s determination to shut exemptions down while demanding money to build a great wall rivaling that of China’s is now one of them.

You were organized, and requested a tariff exemption from the USTR, which has miraculously remained open despite the government shutdown. It continues to review filed tariff exemption requests until it runs out of funding and commences orderly shutdown on January 14th. But there’s a problem: any information exchanges or approvals reliant on inter-agency cooperation have been delayed. Including the second phase approval you need, and which is overseen by the inactive Commerce Department.

On December 28 USTR granted nearly 1,000 universal product exclusion requests from the first round of Section 301 tariffs. However, these exclusions will not go into effect until 10 days after the government reopens because tariff changes need to be made within an automated system controlled by Customs and Border Protection, which shutdown a week earlier on December 21. While businesses will retroactively be able to claim back the 25% extra they paid for goods on the first round list, not all companies are quite so fortunate in the government’s new game picking winners and losers.

The Cost Advantage

Tariff-exempted businesses have a price advantage over competitors still awaiting verdicts on their requests and remain on a level playing field with imported products. The misfortune of being 100th in line instead of 99th in the queue means that companies whose requests are still being processed (and which otherwise may have been approved by now had the government not shut down) continue to pay higher prices. Because most exemption requests are not applied retroactively they also will not receive any refunds or compensation for the tariffs they pay during shutdown.

Ironically, the comparatively higher prices of domestically-produced goods are making competing foreign products more attractive to consumers - the exact opposite of what the tariffs are intended to do. When companies pay higher prices on key inputs, they have two options: divert funds from areas such as R&D, or pass costs on to consumers in the form of raised prices.

The 10% tariff local breweries are forced to pay for aluminum cans equates to an additional $347 million tax on the U.S. beer industry. Locally-made beers (and soft drinks such as Coca Cola) often have no choice but to increase prices for consumers while imported goods avoid higher production costs.

Consumers are not automatons who are willing to pay any increase in price or consume in the same quantity. Higher prices make the same product less competitive, all else equal, and, in this case, substitutes are readily available.

Is Protectionism a Pro-American Policy?

History has shown that tariffs adversely impact employment and economic growth, yet they continue to be touted as the solution to create more jobs and prosperity for Americans. Yet our current Secretary of Commerce, Wilbur Ross, claimed that the cost to consumers is ‘no big deal’ holding up a can of Campbell’s soup to prove his point.

Perhaps it is no big deal on an executive’s salary, but for the rest of us it makes a difference. When there is not enough domestic supply, prices get bid up along every step of the production, storage and transport process. That soup you paid 1 cent extra for on day one of tariffs ends up being 10 cents extra by the end of the month. And that adds up over a year. For every item in your grocery cart.

Essential and Non-Essential Services

You want to have a barbeque. You go down to your local butcher to buy some meat. The butcher accepts your order, but tells you that the man who usually delivers the meat is away on holiday. You will receive your order when he returns to work. You have already paid.

Similar to the butcher’s taking payment and orders but unable to provide the goods, some government departments would like to provide the goods, but their dependence on ‘non-essential’ departments in their supply chain means they cannot provide them. Much like the butcher waiting for the delivery-man, any information exchanges or approvals reliant on inter-agency cooperation are delayed. And businesses continue to pay tariffs for goods from which they might otherwise be gain an exemption.

The government shut-down, now the longest on record, should serve as a reminder of the dangers of all government regulation, especially when the regulators block the freedom to trade, promise to make exceptions, and then fail to perform at all. Right now, for some industries, the failure of process exemptions is wreaking havoc and draining wealth from consumers.

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Micha Gartz

Micha Gartz is currently interning with AIER through the generous support of the Mannkal Economic Education Foundation.

She is completing her Bachelor of Commerce majoring in Economics and International Relations at Curtin University, where she is Secretary for the Curtin Wall Street Club. In 2018 she studied German (CEFR level B2) through the Goethe Society Perth, and attended the Asia Institute for Political Economy summer school which was hosted by the University of Hong Kong, organised by George Mason University and the Fund for American Studies.

She has previously completed an internship at the West Australian Chamber of Commerce and Industry, in the International Trade and Investment division.