(Not So) Fun Fact: The Shipment estimates that the forced labor Section 301 tariff will cost U.S. businesses and consumers between $53–$55 billion annually.

Congress: Give Me a Slice of That Tariff Pie

What’s Happening: To no one’s surprise, politicians are proposing a slew of bills promising tariff-revenue checks to favored constituencies. First, these proposals to pay U.S. businesses or individuals appear to be a recognition that the administration’s tariff policies have caused widespread economic harm. Second, much of this should be treated as simple political pandering in the lead-up to the midterms, meaning these hypothetical checks may bounce once election season passes. Nevertheless, it is useful to review some of the key proposals. Representative John James – a Michigan Republican running for governor – introduced the Tariff Relief for American Development and Employment (TRADE) Act, which would create a program to offset the economic harm caused by U.S. tariff policy and retaliation from foreign countries. Interestingly enough, the bill’s Tariff Impact Relief Program would be funded by the very tariff revenue causing economic harm in the first place. The stated purpose of the TRADE Act is to protect U.S. manufacturers, workers, farmers, and supply chains by recognizing the costs associated with tariffs and providing “targeted, temporary assistance to United States businesses that demonstrate actual tariff-related economic injury.” At the same time, the legislation would preserve tariffs as leverage against unfair foreign trade practices and for national security. Earlier this year, Congressman Henry Cuellar (D-TX) proposed the American Consumer Tariff Rebate Act which would send more than $230 billion to taxpayers, ostensibly to pay back tariff-impacted consumers. Similarly, Senator Martin Heinrich’s (D-NM) Tariff Refunds for Working Families Act would pay $600 to certain individuals plus an additional $600 per dependent. These are just a few examples in a long list of tariff-related legislation that primarily sprung up in the aftermath of the Supreme Court’s decision to strike down the International Emergency Economic Powers Act (IEEPA) tariffs (see Figure 1).

While many members of Congress continue their attempts to direct where IEEPA revenue and refunds might go, Customs and Border Protection launched a refund portal on April 20 and has been issuing tariff refunds to importers ever since. As of October 6, impacted importers have been paid back $126 billion of an estimated $166–$175 billion in total IEEPA refunds. Recall, these importer refunds were required due to the illegality of IEEPA, meaning all the revenue brought in with IEEPA tariffs is already spoken for. This has not stopped politicians from suggesting ways to spend IEEPA money on industrial policy objectives and consumer stimulus packages.

Why It Matters: Again, many of these proposals may simply be pre-election pandering. Yet it is reasonable to take some of the ideas seriously, as they may foreshadow future legislation to dole out tariff dollars to favored constituencies during the next Congress. Let’s start with an overview of the TRADE Act. This bill would set up a TRADE fund within the U.S. Treasury that takes in an unspecified amount of tariff revenue required to pay for the Tariff Impact Relief Program. This program provides loans and credits to a select group of firms chosen by the federal government, and places various strings on how the funds can be used, thereby limiting the operational freedom of a business. Let’s also consider the American Tariff Rebate Act – introduced on September 17 by Representative Valerie Foushee (D-NC). The bill would give $2,000 tax credits to eligible individuals ($4,000 for joint tax returns) plus $600 per dependent (subject to income thresholds). In short, the bill would pay tens to hundreds of billions to chosen constituents without any relation to who paid tariffs or how much. While each bill is designed to assist different groups, they each have the same approach and end result: government intervention in the economy dictating who gets a slice of the tariff revenue pie.

Here are a few important reminders and takeaways. First, tariff refunds are being distributed to businesses that initially paid the tariffs and are legally entitled to get their money back (read more here). Issuing separate tax rebates or checks for consumers would be on top of the $126 billion already refunded (≈75 percent of the total), resulting in the government spending more than IEEPA tariffs ever took in. Second, money is fungible and tariff refunds for businesses should be viewed in the context of a company’s broader budget. Companies were illegally taxed by the federal government and adjusted to U.S. tariff policy by deciding whether to raise prices, cut labor, or shift supply chains. Now that these companies are being refunded for these illegal taxes, it would be a heavy-handed, interventionist approach to mandate how that money is utilized. Every business situation is different, and major retailers as well as shipping companies have decided to pass on savings to consumers. As midterms – and the next Congress – approach, serious policymakers and informed voters should consider these economic realities.

Looking Ahead: The likelihood of major tariff legislation passing Congress next year will depend primarily on the results of the midterms. Much of the legislation put forward has come from Democrats, the party favored to win the House and potentially the Senate according to both polling and prediction market data. This may increase the odds that at least one of the bills becomes a serious contender for passing in the next Congress. There may even be room for a bipartisan consensus on so-called “tariff-rebate” legislation, given the fact some Republicans have pushed for consumer-facing rebates and further government intervention in how tariff revenues are used. Other, more promising bills that are intended to restrict President Trump’s tariff authorities will likely be fully partisan votes and rejected by the president. If politicians are serious about assisting U.S. taxpayers and consumers, it is far better policy to rein in executive authority over tariff policy or at the very least allow the court system to determine which tariffs are legal.

In Other News

How Businesses Are Using Tariff Refunds: For roughly half a year, businesses have been receiving IEEPA tariff refunds. According to a recent survey by the Federal Reserve Bank of Atlanta, a little over 75 percent of firms plan to keep the refund in cash and about 53 percent plan to invest it in research and development or capital projects (respondents could pick multiple options). Additionally, 32 percent plan to lower prices or issue customer rebates, 16 percent plan payouts to shareholders, 13 percent plan staff bonuses, 10 percent plan manager bonuses, and 8 percent plan to pay down liabilities. In short, firms plan to use tariff refunds for a number of different business operations and strategies. One might see these statistics and wonder why all businesses are not simply lowering consumer prices – since many had raised prices due to higher tariff costs. There are a few possible explanations. The first is that not all businesses solely raised prices to adjust to higher tariff costs – some reduced labor costs or shifted supply chains. The second is that the current business environment is very different now than it was one year ago as U.S. gas prices are up about 40 percent and diesel is up over 70 percent; higher energy prices factor into higher global shipping costs, raising the cost of inputs generally. The third potential explanation for why some businesses are not directly lowering prices may be that they are foregoing previously planned price hikes, so that simply leaving prices where they are effectively functions as a price cut. Finally, the most likely explanation is that there is still a historically high tariff regime currently in place. The Section 301 tariff regime coupled with Section 232 national security tariffs raise costs by tens of billions of dollars annually, with uncertainty remaining on what new tariffs may be imposed going forward.

Figure 1: List of Tariff Refund and Tariff Authority Legislation in Congress

Source: Congress.gov