Jimmy Panetta (00:00):
It's gotten a lot of publicity lately and 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's trade. And I can't stress that enough. I understand why we're talking about tariffs, especially considering how in 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% across the board cuts or 60% tariffs on China.
(00:35)
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 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's probably the last time we've had serious discussions about a trade deal, was when we actually worked together, Democrats and Republicans, to pass the USMCA.
(01:17)
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 the thing is that you don't know what the president-elect is going to do. People say he's not going to put forward these types of tariffs, he's just using it for leverage. And look, you're seeing, as was reported by the Wall Street Journal about five days ago, CEO's flocked 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%, according to some estimates, and part of a broader or dangerous trend where we're, like I said, going away from trade and talking about tariffs instead.
(02:18)
It's 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. 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.
(02:38)
Again, my name is Jimmy Panetta and I represent the 19th Congressional District in California. I have the southern part of Silicon Valley. I have the mouth of the Salinas Valley, so I have a lot of semiconductor chips and I have cow chips, put it that way. 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, 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% 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 would be the impact on ag?
Mr. Gresser (03:37):
Thank you, Congressman, for that question. It would be quite extensive. The 2018-19 tariffs were pretty limited to metals. That's about 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 only 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's 10% of all farm income in the United States. Farmers are always the first to be hit by retaliation. The last group went soybeans, sorghum, fruit, dairy, cotton, tree nuts, corn, lots of other things. And so, I think it would be a pretty difficult time for American agriculture.
Jimmy Panetta (04:27):
Gotcha. 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 seven million affordable homes already, what would broad tariffs do to the cost of housing?
Mrs. York (04:40):
Broad tariffs would increase lots of the components we use to build housing and so it would reduce the housing supply further.
Jimmy Panetta (04:46):
Great. Thank you, Mr. Chairman. Again, I appreciate this opportunity. Thank you for having me wave on and thank you for having this discussion.
Mr. Beyer (04:53):
Yeah. Thank you, Mr. Panetta, very much. I may now recognize the gentleman from Kansas, Mr. Estes.
Mr. Estes (04:59):
Thank you, Mr. Chairman, and thank you for all your witnesses for being here today. This Congress just has a few weeks remaining until the results of the November election take effect in Washington. Two years ago, Americans flipped 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.
(05:27)
And we know that, over the last 75 years, nothing's 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's a tool to help address and make sure that we do have free and fair trade. A lot of times, countries, as we've 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's restrictions, whether it's licensing agreements, whether it's just flat out rejection of some imports that show up on their shores.
(06:06)
Today, we're standing here and we're looking at four years of two different administrations to compare with, and we talk about the pocketbook issues as 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% under President Trump, that was 1.91%. And the truth is, if you add a cumulative amount, it was even worse over four years than what those yearly averages look. During the President Biden's administration, inflation has gone up over 20.6% cumulative versus only 7.3% during the entire four years President Trump was in office.
(06:49)
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've talked about earlier today. With my colleagues and some of the political pundits trying to scare the public into just rejecting the economic agenda, it's 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.
(07:16)
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 and bring in foreign countries to the negotiating table, creating new trade agreement opportunities and prevent bad actors from manipulating our markets or threatening our security.
(07:36)
Mr. Ferry, we saw vastly different economies and inflation rates under our current and former presidents, 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've seen and 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 (08:06):
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, what I would say, and I agree with what's 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 US manufacturing sector. We gave some wonderful javelin, shoulder-resting hand-held weapons to the Ukraine. Within weeks, we'd run out of the missiles that those javelins shoot. Why? Because the parts come from Asia. And it's not true that the prosperity of this country over the last 100 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.
(09:09)
We've 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's a choice we've 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.
Mr. Estes (09:48):
And let me correct if I misspoke. When I talked about the last 75 years of lifting people out of poverty, it's around the world. I would agree with you that innovation in the United States has been very important in terms of a driver and helping generate the US economy.
Mr. Ferry (10:05):
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, some people might not feel so good about that.
Mr. Estes (10:16):
Thank you. Mr. Chairman, I yield back.
Mr. Beyer (10:18):
Thank you, Mr. Estes. Let me 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 four years without COVID, COVID in the last couple of months, and then President Biden having to put up with the supply chain chucks with the tripling of profit margins for many, many different places with green inflation, and that, in fact, the America did better than almost any other industrialized country in the world in dealing with the supply chain chucks in terms of inflation. And now we're back down to the 2% that we were at before, and hopefully we'll stay there unless we have these tariffs kicking in.
(10:57)
Mrs. York, thank you for your comment about the costs of steel and aluminum and others on building supplies. But I'd like to turn to Mr. Gresser too, because along with inflation, one of the great crises of America today is housing unaffordability. They're 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 had on steel and aluminum, but the bigger tariffs that are coming, the 10 and 20% and the 60%, likely to affect our housing supply chain?
Mr. Gresser (11:32):
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. 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, adding tariffs to building supplies is going in the wrong direction.
Mr. Beyer (12:00):
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 are retaliated against with tariffs from other countries?
Mr. Duke (12:14):
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 is proportionately hit.
Mr. Beyer (12:29):
And you mentioned that there's 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 (12:45):
Sure. The trade deficit is basically defined by the balance between investment and savings in the US economy. Tariffs, if they're not going to deficit reduction, and Donald Trump has talked about eight to $9 trillion of tax cuts, so I don't think we're talking about deficit reduction here, don't actually increase national saving.
(13:02)
And so, basically, what happens is imports as a share of the economy fall, which seems like it's accomplishing it, but then exports as a share of the economy also fall, so they net out. And again, what are we trying to do here? It's that we just get a portion of the economy falling and a portion of the economy falling. It doesn't really actually meet any strategic goals that we're trying to accomplish. If our goal is resiliency with China, that doesn't accomplish it of just causing the import share of GDP to fall a little and the export share of GDP to fall a little.
Mr. Beyer (13:35):
Thank you. Mrs. York, you talked extensively about the consumption-based cash flow tax. Let me ask you a yin and yang question. Number one is, whenever Democrats, at least, 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'd love your input on what that will mean for tax avoidance. As we know that 99% of people that have 10 99s or W2s pay their taxes, and that something like 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 (14:24):
Consumption is much more observable than income, so it's 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 a 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's a rebate, whether it's a large exemption or other design elements.
(14:47)
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're not actually hitting consumption that's coming out of wage income. You're hitting consumption that's coming from existing assets and future supernormal returns to capital. Because of that payroll exemption, it has a more progressive distribution than value-added taxes used in Europe.
Mr. Beyer (15:17):
Great, great. Thank you very much. My time is up. I would like to announce, if we're all game, we'll do a second round of questions because there's much to talk about, and you guys are… I know. You guys are all… You're so lucky that every member here is a member of the Distinguished Ways and Means committee, the only committee mentioned in the US Constitution. And with that, let me recognize the gentleman from Illinois, Mr. Schneider.
Mr. Schneider (15:40):
Thank you, Mr. Chairman. I think you also forgot we are under contract to say the very important, very powerful Ways and Means committee. No, but thank you all for being here and I want to thank the chair and ranking member for calling the hearing and your witnesses for sharing your perspectives with
Mr. Schneider (16:01):
[inaudible 00:16:01]. Being a member of the Ways and Means Committee, Trade and Subcommittee, but also on the House Foreign Affairs Committee, I'm proud that so much of our work is focused on international leadership. The world is better, I think, when United States leads in, when we're at the table, we're 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, this was probably already discussed, President-elect Trump has made a number of statements regarding his trade priorities for his incoming administration. He's proposed, for example, a 10% tariff on all products imported into the United States, a 60% tariff on all goods imported from China, and looking at our two largest trading partners, Canada and Mexico, a 25% tariff there. The threats will raise prices on everyday items for consumers. It will directly impact small and medium-sized businesses that have worked so hard to adapt and adjust and shift their supply chains away from China and has a potential to drastically reshape the global economy.
(17:14)
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.
(18:06)
Mr. Duke, I'll 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 US during its first term, and how you see those businesses and really businesses of all size preparing for what's ahead?
Mr. Duke (18:31):
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 retaliation and trade wars that were occurring, because of US appreciation, which obviously the Texas and Jobs Act helps fuel with the higher deficits that caused. So that's what we saw then. Obviously we hit COVID, obviously a very weird, difficult period and we're coming out. But I think the key thing is that just that uncertainty that the President can just rage post a trillions of dollars tax increase and what are business people supposed to do about it, putting it through an administrative process that they don't understand, the idea that a small Illinois business is going to have to follow the ins and outs of Politico pros trade newsletter is just not good policy. It's not what we should be doing here in Washington D.C.
Mr. Schneider (19:25):
Great, thank you. Mr. Gresser, it can take years to move supply chains to rejig your entire value chain. Can you share steps, in your mind, Congress should take to identify the products that are wholly manufactured in China and to work to help businesses make shifts necessary in the future?
Mr. Gresser (19:50):
Well, 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 core relationships, then we are going to be in a much worse position for leadership and economically and almost in any way you could think.
Mr. Schneider (20:36):
Yeah, I'm almost out of time, but it's not just crude oil. Canadian timber is important if you want to increase housing costs, increasing the raw materials that go to frame those houses doesn't make a lot of sense.
Mr. Gresser (20:49):
That's well put.
Mr. Schneider (20:50):
Yeah. So I yield back.
Mr. Beyer (20:52):
Yeah. Thank you Mr. Snyder. I again recognize the incoming chair of the Joint Economic Committee, Mr. Schweikert.
Mr. Schweikert (20:59):
I hope that had the tone of you being happy. Thank you, Mr. Chairman. Mr. Ferry, CBO a little while ago put out a letter, I mean hours ago I think, and one of their numbers was a dynamic score that a 10% across the board would static decrease deficits by about 2.2 trillion, dynamic about 2.1, but if it's a broad based, are you someone that is, 'cause 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 (21:45):
Are our own model shows with a larger tariff 20 and 60, roughly 6 trillion of federal income over 10 years, so that's considerably more. Okay. And that's because we assume the economy will grow more than I suspect the CBO does, although I haven't read the CBO-
Mr. Schweikert (22:13):
Yeah, the CBO letter was just, I don't think… They did a 60% tariff, but some of the numbers in there were solely focused on looks like on China, but have you ever run the 10% model?
Mr. Ferry (22:24):
Yes, we've run a 10% model and published it and it was somewhat consistent with what you're asking about. Let me answer your question directly-
Mr. Schweikert (22:32):
'Cause part of my-
Mr. Ferry (22:33):
Currency is what you're interested in?
Mr. Schweikert (22:34):
Yeah, currency is one of my, because there's a reason for that.
Mr. Ferry (22:38):
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's 50 years of evidence to show that. I would've supported the DBCFA if it had included a proposal to manage the currency. The US needs to manage the dollar to a competitive level. So what I'm 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're talking about is manage the dollar, hold it at a competitive level and say we're going to allow those tariffs to increase the size of the productive sector of the economy.
Mr. Schweikert (23:47):
Okay.
Mr. Ferry (23:48):
Does that answer your question?
Mr. Schweikert (23:49):
It does. Look, I don't have a PhD, but I always then worry 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 markets, particularly a country like ours, we'd brought what 10 trillion to market last year and with our demographics, it's going to get worse. Matter of fact, a couple of minutes ago, the ten-year went over four and a half percent, even though the Fed reduced interest rates. And I think that's partially future expectations of our demographics and our binging on debt. So I'm 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 we have a CR heading to the floor that may be about to add another $140 billion of an offset debt.
(24:58)
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're going to a 2.6, that means you're $80,000 a second. We got 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, it's somewhere here there has to be a unified theory, both receipt stabilization, economic growth maximization and accepting the reality of our demographics. Remember 100% of the debt basically from today to the next 10 years is interest it and demographics, it's healthcare costs. We got old. That's not Republican or Democrat, it's math, but it's so hard because we're 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. And sorry for the preaching, but I'm frustrated.
Mr. Ferry (26:07):
No, no, you're 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.
Mr. Schweikert (26:25):
Okay. And I hope there's actually even a third round because there's a difference between industrial policy and subsidized industrial policy ''cause across the world now, we've 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's about to do it. So all we did is now create rent seeking around the world, when it's 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.
Mr. Beyer (27:02):
Thank you Mr. Schweikert, recognize again, the gentlelady from Milwaukee.
Ms. Moore (27:08):
Mr. Schweikert, you always give a great jumping off point.
Mr. Schweikert (27:13):
I do it just for you.
Ms. Moore (27:14):
You do it just for me, I think. I've been listening to very carefully to folks and listening to how the farmers really caught hell. I'm from Wisconsin, we have soybeans, that's in the mix of stuff that really took a beating, but the strategy was just to subsidize them. I want to know, number one, for people how sustainable that is and is that worth it? If we did the cross the board tariffs, we could just keep on subsidizing the losers and the $6 trillion, Mr. Ferry, you have been suggested that this could pay for the tax cuts? You mean all of them? The whole TCJ, FJ, they could pay for all of them without raising prices? And so I find that… The $6 trillion, we didn't find that the tariffs really trickled down to people that much, and I guess I'm wondering, your model, how you got to the $6 trillion.
Mr. Ferry (28:35):
Well-
Ms. Moore (28:36):
In a couple of seconds.
Mr. Ferry (28:40):
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.
Ms. Moore (28:50):
That was good money.
Mr. Ferry (28:51):
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're in a completely different economic mess. Now, I'll answer your question. $6 trillion comes from 600 billion a year. Our model suggests that if you've got $3 trillion of imports and you tariff them at 20%, that's 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're tariffing them at 20%, the net result is those $6 trillion. Now, what you do with those 6 trillion is critical, and I wrote a paper-
Ms. Moore (29:51):
That's right, because if it's just CEO pay, then that's going to be a problem, and that's what we've been experiencing. Mr. Gresser, to pick up from where he left off, the $6 trillion and how it circulates in economy.
Mr. Gresser (30:07):
For sure. A couple of things. One, if we're taxing 3 trillion imports and getting $600 billion out of it and the imports don't decline, one that's not realistic. Two, it would mean there is no effect on the employment mix that Mr. Ferry is talking about. So that's not a realistic assumption.
Ms. Moore (30:30):
It doesn't create jobs.
Mr. Gresser (30:33):
Not in the outcomes that he's 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 were talking about in a tariff of 20% on imports is a 20% tax on crude oil, 250 billion worth of crude oil. We're talking about a tariff of 20% on clothes. We're talking about 20% 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 UK, they have to cost about $300 each. You're talking about big, big impacts on middle-income and low-income families with very little return in the economy, and probably a negative-
Ms. Moore (31:27):
And then, how much do the subsidies cost to save soybeans and farmers? Is that worth it?
Mr. Gresser (31:36):
The subsidy for ag, I believe, is about $28 billion for lost exports. So you're essentially paying people who are making good livings and honest livings and doing very well because they're now on their backs. US government, we spend $7 trillion a year, we can afford to spend $28 billion a year, but why? Why not let people keep winning rather than subsidizing if we're losing?
Ms. Moore (00:00):
Ms Moore (32:01):
Well, so little time. So many questions. Yield back.
Mr. Beyer (32:06):
Thank you. Let me to recognize the gentleman from Kansas again. Mr. Estes.
Mr. Estes (32:11):
Well thank you Mr. Chairman. I hesitate to jump into the give and take you and Mr. Schweikert have. I don't know whether I should call you Acting Chairman or-
Mr. Beyer (32:19):
Lord Chairman.
Mr. Estes (32:21):
Lord Chairman. Okay sir, this is a-
Speaker 1 (32:24):
Current Chair.
Mr. Estes (32:25):
Current Chair. Excellent. Well great. This is a great opportunity to be able to get together and talk and have another round of questions. There's so many good things we want to talk about. I think so much of what we're 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.
(32:56)
There's a couple of questions I wanted to ask just as a follow-up and Mrs. York, one of the things going back into the testimony that you had, the 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. And because to me, if they make that decision, consume today after you're paid the payroll versus investing it, the tax would be on the earnings of the investment. Yes, it's delayed, but it wouldn't be on the original investment itself. So I was trying to follow that double taxation process.
Mrs. York (33:41):
Yeah, we've got a handy chart on our website if you want to see 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 like a 401k, you get to deduct that saving upfront and then pay tax on the total withdrawal at the end. Or like a Roth IRA, you've 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're neutral between when you're consuming your money because you're 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've already paid tax on your principal, that's further reducing what you would be able to consume in the future. So it discourages that saving activity.
(34:31)
It's 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.
Mr. Estes (34:45):
All right. All right. Thank you. Mr. Ferry, the end of my previous round of question, you'd 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 is we're talking about how do we incentivize free and fair trade and making sure that we have open markets that people can engage in in a capitalist society and moving forward. One of the things I wanted to talk, I had a question in general for you is that one aspect of tariffs is to help protect the United States against some of these abusive practices by other countries. We've had major concern about the Chinese Communist Party stealing intellectual property for decades and now as Mr. Schweikert pointed out in terms of we've started this round-robin of multiple subsidizing, China's 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 (35:59):
It's 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's 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've got other countries also exploiting our propensity to consume rather than produce, how do we rebuild our economy?
(36:54)
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'll be duplication. China will be doing its own as they are. And to an incredible extent, it's 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.
Mr. Estes (37:20):
Well, thank you. Thank you for all the witnesses for being here today. I yield back.
Mr. Beyer (37:25):
Thank you Mr. Estes. I'll give my second round of questions. I first want to make the point that on the deficit reduction that the tariffs generate, it's only deficit reduction if we don't use it to pay for tax cuts, which is I think it's the intention right now. So we would anticipate the deficit, much to our consternation, continue to go up greatly in the next four years. Mr. Duke, Mr. Ferry said they want to manage the dollar to a competitive level, which is easy to state. I think Milton Friedman probably rolling over in his grave, which is okay with me. But I would love to get your take as a competing economist at Cap One, the idea of managing the dollar to a competitive level.
Mr. Duke (38:06):
Sure thing. So our trade partners, they can manipulate their currency. They did that in the teens, but I think fundamentally the reason why the dollar would appreciate from this is because we are taxing imports and that just causes the dollar… There's no distortion to fix here. That's just what we would expect to happen. And I think fundamentally, 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.
(38:43)
I think a really good way to reduce the deficit is to take the $5 trillion of tax increases on the wealthy incorporations that President Biden put out, put that toward deficit reduction, not just put the Trump tax cuts on the credit card causing the dollar to appreciate but bring down the deficit. It's about 7% of GDP right now. That strikes me as a way easier way than getting into managing the dollar, which I mean, Mr. Bessent made a lot of money off speculating for a hedge fund. I don't think we should exactly be doing that though with the US treasury. So I think there's a simple way to deal with an overvalued dollar if we think that's the case that hurts our exporters, which is to reduce the deficit. There's ways to do that without harming Americans.
Mr. Beyer (39:30):
Thank you very much. Mr. Gresser, in your stated remarks and even more length than you're written, you talk about the constitutional challenges that Article One, Section Eight of the US Constitution gives Congress the ability to set tariffs trade policy. Over the years, Congress has passed the least six bills that I know of. 201, 302, 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 that especially a bad thing in light of our inability to pass a continued 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 (40:21):
Well, I think the most direct answer is respect for the Constitution in 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're mentioning, there are definitely some that I think are responsible and useful delegations. If you create trade promotion authority bill that says negotiate trade agreements, here's what we want it to look like. If you succeed and you satisfy us, you have a proclamation authority to lower tariffs. Or on the other side, anti-dumping law. We think Congress, this is what dumping is. This is what we would like you to see do with petitions. Here's how we'd like you to investigate it. Here's what we'd like you to do.
(41:01)
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 whatever product, whatever country. I think that is a recipe for very bad government, for very bad choices. And going back to my first point, Congress should exercise its responsibility. Current institution says Congress has a right to or has a responsibility to deal with and regulate the commerce of foreign countries. And it has the sole right to lay and collect taxes, duties, imposts and excises. And I think that there's good reason for that. And if laws like AIPA or section 301 have gotten away from that, then I think Congress should think about dialing them back.
Mr. Beyer (41:48):
Thank you very much. Mr. Gresser, one more relevant question because I read your trade remarks every week. We're losing Earl Blumenauer who's been the champion for getting rid of the $800 de minimis exception for all these goods coming in from China. It's a big, big number, run a billion dollars a day or something like that. What's your perspective on de minimis, especially in light of the conversation about tariffs because it is closely related.
Mr. Gresser (42:21):
In terms of de minimis, I believe when the Congress passed this law, there were about a hundred million packages coming to the US. Now there's about a billion. That does raise interesting questions and it does put American retailers in a difficult position where they're paying the full tariff and individuals buying online or not. So I think Congress has some good reason to rethink some of this. I would like to think that there's some ways to do it without raising prices on individuals and families. So that's where my starting points are.
Mr. Beyer (42:54):
I agree. Mr. Ferry, did you have an input on de minimis?
Mr. Ferry (42:58):
Yes. I-
Mr. Beyer (42:58):
I saw your eyes twinkle over there.
Mr. Ferry (43:01):
Yes. I think de minimis is effectively a free trade agreement with China. It's enabled them to ship billions of dollars of goods into the US putting thousands of manufacturers out of business. Now as it accelerates, it's putting retailers out of business and I'm hearing from business people that if we lose our retail channel to the consumer, then we lose the ability to sell. So it's hurting both manufacturers and retailers and I think we ought to put a stop to it immediately by abolishing it entirely. And remember, we're the only country in the world with an $800 limit on de minimis. And I'll say it again very briefly. We have to decide whether we are a country that consumes or produces. Too much of what I've 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're now buying through de minimis.
Mr. Beyer (44:10):
Thank you. My research assistant from Arizona has just pointed out that de minimis went up 209% in the last six years. And I would recognize my friend from Illinois, the distinguished Congressman Mr. Schneider.
Mr. Schneider (44:25):
Thank you. And I'll go to Mr. Gresser. In looking at your testimony, this may or may not be a fair question, but as I study history a little bit, in the 1980s, we imposed an embargo on shipping grain to the Soviet Union. And I've 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. I'm wondering if you look at the last four 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 (45:12):
That's a great question. There's, I think, strong evidence that agriculture has not recovered from that, that we have lost market share for the long run. One thing that's interesting to me on the manufacturing side is that over these past four years, the use of steel in the United States has declined pretty sharply. So we were importing a lot less steel than we did before, but we're 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 US manufacturing sector, which is being overcome over time, but not because we're making more steel over time. It's because 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.
Mr. Schneider (46:19):
Yeah, I mean, expanding on your comment about necessity. Necessity is the mother of invention. It is not just that they make do, it's they find alternatives or innovation comes and it accelerates that replacement of one product for another. Mr. Ferry, I want to pick on what you said, the loss of retailers. When we talk about supply chains, value chains [inaudible 00:46:43], it's a chain, and the saying, I guess I'm into the aphorisms right now, but a chain is only strong as its weakest link. And for a manufacturer to get its products ultimately to a consumer, there's 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 is the long-term impact of a decline in retail because of inability to address the de minimis issue?
Mr. Ferry (47:12):
The impact of the decline in retail is, well, it's serious at several levels. First of all, it's 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 Shein and the other de minimis China sellers that are selling tax-free, the more that tax revenue declines. That's number one. Number two, retail provides a lot of jobs, even though they're not high-paid jobs, they're jobs for a certain type of person. The person who loves fashion works in a fashion retailer, person who loves bicycles works in a bike shop. And those jobs are in decline,
Mr. Ferry (48:00):
… which adds to the problem of mediocre jobs and more and more people working in temporary jobs, working in warehouse or delivery type jobs or which are unfortunately two of the main growth sectors for people without college degrees or without high school degrees. So it's a serious issue.
Mr. Schneider (48:19):
Thank you. And then let me close Mrs. York, I'll turn to you. You had an article on tax foundation last month talking about the inflationary impact of terrorists. Can you describe some of the other effects tariffs will have on the economy, both short and long-term?
Mrs. York (48:35):
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's currently employed. And we have evidence from 2018 and 2019 that that's what happened. If you look at the US International Trade Commission report, if you look at studies by academics, they find net 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 US economy is very clearly negative.
Mr. Schneider (49:19):
Great. Thank you. With that I yield back.
Mr. Beyer (49:22):
Thank you. We're honored to be joined this afternoon by the distinguished lady from the state of Washington, former chair of the New Democrat Coalition and many other honors. Ms. Delbene, the chair is yours. Or the floor is yours.
Ms. Delbene (49:36):
Thank you Congressman Beyer. Thanks all of you for joining us and for sharing all of your thoughts. I'm 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 and the trade subcommittee because trade is very, very important to my state's economy. More than 40% 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 of 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 on Americans that pay… Americans pay on imported goods because the cost of these taxes are mostly passed along to consumers in the forms of higher prices. To be clear, sometimes using tariffs as a targeted tool can be helpful.
(50:50)
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've introduced legislation that would pose 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 five years for India to drop those tariffs, and during that time, many multi-generational family farmers left the industry. And so these kinds of sweeping tariffs could fundamentally reshape our economy and risks sending us into recession or sending our communities into economic hardship. So Congress needs to have a say in major economic decisions like this that affect our district. As Congressman Beyer talked about, I've 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 Ms. York, do you think the president should be able to raise taxes on Americans by billions of dollars without consulting Congress?
Mrs. York (52:57):
I think it's very clear that broad sweeping tariffs would have a negative effect on Americans. We've also estimated tax increases on US households exceeding $2,000 with universal tariffs, and Congress very clearly has the authority here whether that is repealing a tariff that's already been imposed or whether that is adding some checks to the tariff powers that have been delegated to the President.
Ms. Delbene (53:20):
Mr. Gresser.
Mr. Gresser (53:22):
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's not a positive sign. In the case of the US tax and tariff system, the Constitution is very clear. This is a congressional power. And so no, I don't think it's 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've introduced on IEPA in particular.
Ms. Delbene (53:51):
Thank you. Mr. Duke, how could sweeping tariff increases on Canada and Mexico and other trap trading partners impact export focused industries and jobs like those in Washington state?
Mr. Duke (54:08):
Yeah, I can think of four way. I think of three ways. First of all, as we discussed, tariffs caused the dollar to appreciate, so all of a sudden they're less competitive abroad that Indians, the Washington apple costs more to them in the Indian rupee and that's what happens. I think a second part is that US 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 were the equivalent of a 2% tariff on US 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's just to do a sales tax on coffee and bananas. That doesn't make any sense to me.
Ms. Delbene (54:55):
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've gone over my time. Thanks. I appreciate it. And I yield back Mr. Beyer.
Mr. Beyer (55:11):
Ms. Delbene, thank you very much. We're almost done, but I have a couple quick questions. First of all, Mr. Schneider said that necessity is the mother of invention. I want to point out the 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 [inaudible 00:55:38] 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 (56:07):
Yes, tariff systems are going back 200 years. Former treasurer secretary, Mr. Gallatin for Jefferson Madison tariffs are very opaque and non-transparent 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 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 seven minutes from a supervisor. So it was a generator of random outcomes. It wasn't a real process.
(56:56)
And I could easily imagine that businesses which are larger or older, or for whatever reason more tied into the political system, would've 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're spot on.
Mr. Beyer (57:36):
Great. Great. Thank you very much. One last question from Mrs. York. Thank you for educating us all to, I know all the initials, but the cashflow tax system. There are many things that I'd love to see when falling asleep at night, getting rid of the electoral college or meaningful immigration reform, or 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 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 (58:22):
The first two steps are fairly straightforward when we've already taken steps toward them. Full expensing for capital investment that's had bipartisan support in the past, like expensing research and development costs, doing bonus depreciation, 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's 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's more novel to the policy community who hasn't been in the weeds of what tax economists have been writing since the seventies. So this isn't a new idea when it comes to academics who study tax policy and who study what's 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.
Mr. Beyer (59:36):
By the way, I rarely defend the TCJA. I'm not going to now, but full expensing is the one thing that I've seen has a significant impact on investments. With that, thank you all very much for joining us. This probably won't be the last you've heard on tariffs in the coming weeks and months, but 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've emphasized again, again is the constitution 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 for my colleagues and thank you for letting our fellow Ways and Means members wave onto this discussion. Questions for the record may be submitted after the hearing. The record will remain open for three business days and the hearing is now adjourned.
Speaker 2 (01:00:28):
And thank you for letting me give you notes.
Mr. Beyer (01:00:30):
Yeah, thank you. I'll get this back in four years, right?
Speaker 2 (01:00:33):
I actually [inaudible 01:00:35] to.