Monday, April 30, 2012

Duties and Tariffs

This post is a little off topic from my normal posts about chemical security, chemical safety or cybersecurity, but I think that death and taxes are always fair game for discussion. But let me segue into this by explaining a part of my daily information search routine.

Checking Legislation

Knowing that every day that one or more houses of Congress are in session legislation is introduced I try to check the Daily Digest of the Congressional Record for the bill numbers introduced the previous day. Then I check the Library of Congress’ Thomas (named after Thomas Jefferson) web site to review the titles of each of those bills. Bills that look like they may contain subject matter of interest to me get downloaded from the GPO web site when they become available for detailed reading.

Typically this doesn’t take up too much time as there are not that many bills introduced on most days. One of the exceptions to that rule is the start of each new Congress when the docket is cleared and the legislative process begins anew; then it’s not unusual to see a hundred or more bills introduced for each of the first few days of the session. Another period of heavy bill introduction is the last week of April, apparently there is a deadline for the submission of bills that have to do with duties and tariffs; taxes paid on goods that come into the United States.

Last week we saw a total 776 bills introduced in the House and Senate to ‘extend or modify’ existing suspensions or reductions in duties on goods imported into the United States. Now bills are assigned numbers based upon the order in which they are given to the clerk so any other legislation introduced last week was intermingled in the stack of ‘duty’ bills. I may have missed some interesting bills for this stack of tax related stuff.

The bills cover a wide range of materials from basic chemicals to completed kitchen appliances. Almost every industry is represented on both the manufacturing and user sides. The biggest single category of materials is chemicals, ranging from basic chemical raw materials to pharmaceuticals, both intermediates and finished products.

Purpose of Duties and Tariffs

Duties and tariffs are typically used to protect domestic producers of products from competition from abroad. Since the United States is a ‘free trade’ country, we like to think that our use of these tax tools is designed to protect domestic manufacturers from ‘unfair competition’.

Countries that allow their manufacturers to use cost-cutting practices that would be illegal here, for example, would have a duty placed on their goods coming into the United States. There is a complex legal process that is used to determine which goods and countries fall into this category.

There are a number of legitimate political reasons that duties are placed upon in coming goods. This is one of the types of low level sanctions that can be placed upon countries that we are having serious disagreements with about various types of policies. It makes it more costly for them to sell their goods in this country, hitting them in the pocketbooks of producers of goods who then, in theory, will encourage their government to be more responsive to our way of thinking.

There have also been periods in our not too distant past where congresscritters routinely used the power to levy duties to please manufacturers in their district or State. Those manufacturers would then in turn support the re-election efforts or post-retirement employment efforts of those congresscritters.

Tariffs and Duties Can Hurt

As more and more basic manufacturing moves out of the United States it becomes necessary for domestic manufacturers to buy raw materials from overseas sources; either because there are no longer domestic suppliers or there are not enough domestic suppliers to provide the necessary volume. When there is a tariff or duty on these raw materials then the domestic manufacturer in effect pays the tax on the incoming goods and in turn passes those costs on to their customers.

Additionally, if that manufacturer has competitors in friendly countries, they may be able to buy the raw material without paying a duty and be able to sell the manufactured product at a lower price because of that.

Finally, when finished goods come into the United States with a tariff or duty applied, the end user, the consumer, pays that tax in the higher price they pay for the merchandise.


Now manufacturers who are forced by the market to buy foreign produced goods that have tariffs or duties laid upon them have a legitimate gripe; they are being forced to pay for a political or economic penalty that they have nothing to do with. They have every right and even a responsibility to petition their representatives to reduce or modify a duty or tariff to reduce the burden that the manufacture is being forced to pay.

On the other hand if a company moves their manufacturing facility overseas to take advantage of local conditions that allow for lower manufacturing costs they should be unsurprised when a competitor that keeps manufacturing in this country cries foul when some of those cost savings strategies are less than legal in this country. When a tariff or duty is subsequently laid upon those goods the manufacturer with overseas products has less of an expectation that their congresscritter has a responsibility or obligation to reduce or suspend such a tax.

Now the 776 bills submitted last week almost certainly contain proposals that are based on both of the situations described above. One would like to think that our legislators have adequately investigated the individual situations to ensure that they are due to the former rather than the later. One would like to think so, but I would very rather suspect that no such investigation took place in most instances and, for the most part, the ones that were done were questionable in their professionalism and diligence; congressional staffs aren’t that big, nor are they paid that much.

Now I have no way of knowing which of these are legitimate exercises of political power, but there is at least one that I would suspect based upon the politics and economics of the area where I lived most of my adult life. But, I have no staff and few resources to conduct an appropriate investigation, nor really the inclination to do so. As a result I won’t point a specific finger at a particular target.

There must be some percentage of these bills that are morally or politically suspect, hopefully it is rather small. With so many bills being considered in a relatively short period of time by one committee in the House and another in the Senate, I doubt that any but the most egregious bills will be removed from consideration. Since they will be rolled into a single bill for floor consideration (neither body could afford the time needed to consider 776 bills in even the most abbreviated legislative process) there is little likelihood that there will be any significant opposition to these bills being passed.

I don’t know of a better way to do this, but the light of public scrutiny should be shown on the process.

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