JOINT ECONOMIC COMMITTEE HEARING
Overview
For questions on the note below, please contact Scott Parsons, Edmund Perry, or Ruth Lunsford.
On December 18, the Joint Economic Committee (JEC) held a hearing entitled “Trade Wars and Higher Costs: The Case Against Trump Tariffs.” Witnesses in the hearing were:
- Edward Gresser, Vice President, Progressive Policy Institute
- Brendan Duke, Senior Director for Economic Policy, Center for American Progress
- Erica York, Senior Economist and Research Director, Tax Foundation
- Jeff Ferry, Chief Economist, Coalition for a Prosperous America
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- The hearing focused on U.S. trade policy, particularly tariffs, on various economic sectors, highlighting the intended and unintended consequences for industries, consumers, and international trade relationships.
- Agricultural impacts emerged as a bipartisan concern, with Gresser citing $27 billion in farm export losses from 2018-19 tariffs and warnings of a potential ten percent impact on total farm incomes if tariffs target Canada, Mexico, and China.
- Democrats, led by Senior House Democrat Don Beyer (D-VA), pointed to the Tax Foundation’s estimate of 1.7 percent GDP shrinkage and Center for American Progress’s projection of a 1 to 2.5 percent inflation spike should Trump follow through on a blanket tariff on all imported goods.
- Republicans, particularly Representative Ron Estes (R-KS), highlighted that the previous Trump administration had lower inflation than President Biden’s Presidency.
- The revenue generation debate raised contrasting viewpoints, with Jeff Ferry from Coalition for Prosperous America, projecting $628 billion annual revenue and the CBO analysis, cited by Vice Chairman Schweikert (R-AZ), which suggests a $2.2 trillion deficit reduction from ten percent tariffs.
- Brendan Duke, Center for American Progress, argued that tariffs could not effectively both raise revenue and promote U.S. manufacturing.
- Constitutional authority emerged as another area of contention, with Chairman Don Beyer (D-VA), Representative Suzan Delbene (D-WA), Erica York, and Edward Gresser saying that Congress should hold constitutional power and authority over tariffs.
- The de minimis threshold sparked debate, raised by Chairman Don Beyer (D-VA), with both Jeff Ferry and Edward Gresser expressing concerns about its current implementation and analysis of differing approaches.
Opening Statements and Testimony
Chairman Don Beyer (D-VA)
The Constitution, not the President, decides trade policy. We are holding this hearing because the President-elect plans massive tariffs in his second term, claiming it will lower costs and bring back jobs. President Trump seems to forget the negative outcomes of previous trade wars: higher costs, outsourced jobs, and billions in corporate farm bailouts. He has proposed ten to twenty percent tariff on all imports, expanding the scope of tariffs to include everyday goods. Economists across the board agree tariffs are bad for the economy. Tariffs are paid by American businesses, who then pass the cost onto consumers. They also lead to exemptions for well-connected companies, often influenced by political donations. This plan will not help the middle class or lower costs; it is a tax hike in disguise. We must reassert Congress’s constitutional authority over trade policy.
Edward Gresser, Vice President, Progressive Policy Institute
I believe the proposed tariffs would lower American living standards, erode business competitiveness, harm exporters, and could damage U.S. governance and raise corruption risks. Tariffs are taxes paid by Americans. If tariffs rise to ten to twenty percent across the board, prices will rise for families, especially lower-income households, who spend a larger portion of their income on goods; economy-wide costs will increase, shrinking manufacturing, farming, retail, and construction sectors while benefiting non-goods sectors like real estate and financial services; and U.S. exporters will face the most harm. Countries retaliate against tariffs, targeting sectors like agriculture. For example, U.S. farmers lost $27 billion in 2018-19 due to foreign retaliation. U.S. exporters also suffer from “friendly fire,” such as tariffs on Mexico that reduce sales from U.S. suppliers to Mexican manufacturers, causing job losses in both countries. Finally, I am concerned about attempts to impose tariffs by decree without Congressional approval. Allowing a President to unilaterally set tariffs risks impulsive decisions and potential corruption, undermining the integrity of U.S. governance.
Brendan Duke, Senior Director for Economic Policy, Center for American Progress
Sweeping tariffs cannot both raise revenue and promote U.S. manufacturing effectively at the same time. Tariffs would apply to goods the U.S. does not produce, such as coffee or bananas, resulting in revenue generation without increasing domestic production. Economic theory and evidence show tariffs do not affect a country’s trade balance significantly. While tariffs may raise prices on imports, currency appreciation typically offsets this, making imports cheaper and reducing the competitiveness of U.S. exports. U.S. exporters would also face higher production costs due to increased input prices, making them less competitive globally. Moreover, across-the-board tariffs fail to target key industries or strategic sectors essential for national security or economic competitiveness. Instead, more targeted tariffs can promote specific industries, as demonstrated by the Biden administration’s focus on electric vehicles and targeted investments, which have led to significant manufacturing growth.
In terms of tax policy, a twenty percent tariff could raise $4.5 trillion over 10 years, but it would impose higher costs on American families. Research shows that these tariffs would more than offset any tax cuts families might receive, leading to a net tax increase for most households. This would result in a 1-2.5 percent inflation spike, with families bearing the burden as long as the tariffs are in place. Trump may rely on existing executive authority to implement these tariffs, bypassing Congress. This would shift significant budgetary control to the executive branch, allowing the president to raise revenue without legislative oversight. Such authority could lead to favoritism, where politically aligned firms gain preferential treatment, undermining the fairness of the system.
Erica York, Senior Economist and Research Director, Tax Foundation
In my area of tax policy, the goals of this Committee are best achieved through reforms that simplify and neutralize the tax system, not introduce new distortions like tariffs, no matter how well-intentioned. Tariffs, often proposed as a solution to boost manufacturing, have failed to deliver results. The 2018-2019 trade war tariffs shrank the U.S. economy, raised consumer prices, reduced manufacturing employment, and depressed investment. While steel and aluminum tariffs helped some firms, they harmed others, particularly in downstream industries like construction. Tariffs increase costs for American businesses by raising input prices, making it harder for them to compete globally.
Instead of tariffs, we should reform the tax system. A consumption tax system that shifts away from an income tax base would foster greater investment, productivity, and competitiveness. Despite the 2017 tax cuts, the U.S. tax code still discourages investment and savings, depressing productivity and wages. A better alternative is a destination-based cash flow tax (DBCFT), which would allow businesses to immediately deduct costs for capital and R&D, eliminate net interest deductions, and replace international tax provisions with a border adjustment. This would make U.S. businesses more competitive, reduce complexity, and encourage investment in the U.S., achieving the goals tariffs aim for without their negative effects.
Jeff Ferry, Chief Economist, Coalition for a Prosperous America
We support tariffs as a crucial tool to rebuild U.S. manufacturing, increase well-paying jobs, and restore national security. There are five key reasons to support tariffs: 1) economic growth and reduced inequality through high-wage industries; 2) national security by reducing dependence on foreign components for critical technologies; 3) economic resiliency by ensuring domestic production capacity during crises; 4) counteracting unfair foreign policies, especially from China; and 5) generating federal revenue to reduce the deficit, with our model showing broad-based tariffs could generate $628 billion annually.
Regarding price impacts, contrary to claims that tariffs would increase prices, the International Trade Commission’s (ITC) 2023 study found price increases were only ten to twenty percent of the tariff rate. For instance, a 25 percent steel tariff led to only a 2.39 percent price increase but resulted in fifteen new steel facilities and 5,000 high-paying jobs. Our model runs under the assumption of twenty percent tariffs on all imports, except sixty percent on China, and reciprocal tariffs on U.S. exports, finding that the U.S. GDP would rise two percent more than a no-tariff scenario over four years, with 5.97 million new jobs and a twelve percent increase in household incomes by 2035. Prices would rise only slightly under the proposed tariffs, by 0.6 percent more than the baseline, while manufacturing would grow, incomes would rise, and millions of jobs would be created.
Discussion
Moore (D-WI): Will you admit that industrial policy is needed alongside tariffs? Ferry: No, I disagree. Tariffs alone benefited many industries. The ITC study found that in twelve industries, including steel, production increased and led to more jobs. While I agree that industrial policy can play a role in some areas, tariffs on their own were effective; Duke: The problem is we cannot apply industrial policy to everything, like coffee or bananas. Tariffs lose their effectiveness when applied across all industries. While tariffs can benefit certain sectors, applying them to everything does not make sense. There are costs to driving production in specific industries, but these might be justified on national security or other grounds; Gresser: The ITC’s study on steel showed that while steel and aluminum grew by $2.2 billion as of 2021, steel users, like automobiles, machinery, and tools, shrunk by $3.5 billion. The result was a slightly smaller manufacturing sector with a larger metals sector. You must consider both the winners and the losers when assessing a policy.
Schweikert (R-AZ): Is there a tax model, like a DBCFT, that could create a level playing field for American workers and manufacturing? York: A level playing field already exists with tax systems like those in Europe, which use VATs that are border-adjusted and trade neutral. If the U.S. adopted a VAT or DBCFT, it would be similarly trade neutral. The real issue for U.S. manufacturing and investment is our income tax base, which is source-based and penalizes investment. By denying full deductions for capital investment and R&D, we raise the cost of capital. Without a national consumption tax, we rely more on income taxes compared to our trading partners. The main objection to border adjustment during the Tax Cuts and Jobs Act (TCJA) debate was concern about currency appreciation, which is what makes it trade neutral. By taxing imports and exempting exports, currency appreciation offsets the effects. Some models questioned whether exporters would lose out and need a tax refund. However, most models suggest currency appreciation would occur, as seen in the 2018-2019 tariffs and with recent tariff threats.
Panetta (D-CA): If tariffs were implemented, what would the impact on agriculture be? Gresser: The impact would be extensive. The 2018-19 tariffs were focused on metals, with losses in agriculture totaling over $27 billion in export income, as farmers are often the first targets of retaliation. The combined threats to Canada, Mexico, and China could impact ten percent of all farm incomes.
Estes (R-KS): Do you agree that the poor economic policies of the Biden administration that led to record inflation pose a greater threat than the proposed tariffs? Ferry: I agree that inflation under Biden has been devastating, which is one reason Republicans swept the election. The real issue, though, is the size of China’s manufacturing sector, which is more than twice the size of the U.S. sector. Our reliance on Asian parts leaves us vulnerable. Our prosperity in the past was built on industries that innovated and created competitive and high-productivity jobs, not on free trade. We need policies that bring back these industries. Trump’s tariffs were not enough, but I applaud Biden for increasing them, especially for EVs. If China dominates the EV market, we risk losing our automobile industry.
Beyer (D-VA): The U.S. handled inflation better than most industrialized nations, and we are back to two percent inflation, as long as tariffs do not escalate. How would ten to twenty percent tariffs impact the housing supply chain? Gresser: High tariffs on inputs will increase production costs for homebuilders, raising housing prices. If the goal is to reduce costs, adding tariffs to building supplies is counterproductive. Duke: U.S. exporters are also the biggest importers, and they are hit by both tariffs and currency appreciation. Agriculture is particularly disadvantaged.
Beyer (D-VA): Why does not imposing tariffs reduce imports and lower our debts? Duke: The trade deficit is driven by the balance of investment and savings. While tariffs reduce imports as a share of GDP, they also reduce exports, leading to a net neutral effect. Tariffs do not achieve our strategic goals like improving resilience with China; York: A consumption tax is easier to administer and enforce than an income tax, and it can be designed to avoid regressivity, such as through rebates or exemptions. The DBCFT is less regressive than VAT and has a more progressive distribution, especially with payroll deductions. It targets consumption from existing assets or future returns to capital, not from wage income.
Schneider (D-IL): Can you discuss the lasting impact of the Trump Administration’s trade policies on U.S. businesses and how businesses of all sizes are preparing for the future? Duke: Before COVID, the U.S. was already in a manufacturing recession, shedding jobs partly due to the trade war, retaliatory tariffs, and U.S. dollar appreciation fueled by tax cuts. The uncertainty surrounding trade policy, combined with tax increases and a complex administrative process, made it difficult for businesses to plan. Small businesses are not equipped to navigate these complexities. The uncertainty is a major hindrance to growth.
Schneider (D-IL): What steps should Congress take to identify products made entirely in China and work to shift production? Gresser: A policy of threatening and picking fights with large neighbors like Mexico and Canada is not the way to do that. The auto industry, for example, has invested billions to reshape its supply chains. If we impose tariffs on Mexican or Canadian cars or crude oil, it will undo much of their work. The priority should be stabilizing relationships with our allies and neighbors. Only after securing these core relationships should we turn our attention to China, or we risk harming our global leadership and economy.
Schweikert (R-AZ): Do you also see currency adjustments playing a role in a broad tariff model like this? Ferry: Our model shows that a larger tariff, like twenty percent or sixty percent, could generate around $6 trillion in federal income over 10 years, significantly more than the CBO’s estimate. The difference likely stems from our assumption that the economy will grow more than what the CBO expects. Many models do not account for currency effects, but I believe the value of the dollar is not purely determined by the trade balance, and there is plenty of evidence over the past 50 years to support this. I would have supported the DBCFT if it included a currency management component. The U.S. needs to manage the dollar at a competitive level to help tariffs stimulate growth. To make this work, we would need to cut spending to bring down the budget deficit while using tariffs and industrial policies to boost the productive sector.
Moore (D-WI): How sustainable are across-the-board tariffs if we continue subsidizing the losers? Are you suggesting that tariffs could pay for the $6 trillion in tax cuts, such as those in the TCJA? Ferry: Currently, the U.S. imports about $3 trillion worth of goods annually. If we tariff those at twenty percent, that is $600 billion per year in revenue. The difference between our model and others is that we assume imports will only temporarily decline. Ultimately, the trade deficit will remain. Even if imports increase again, the tariffs would still generate a net result of about $6 trillion over ten years.
Moore (D-WI): How would this $6 trillion circulate through the economy? Gresser: If we are taxing $3 trillion in imports and generating $600 billion in revenue, we must consider the realism of that scenario. Imports do not just decline indefinitely. If they do not, then tariffs would not impact the job market as Ferry suggests. Critics like Robert Koopman, ITC, have raised concerns about this model, particularly regarding the assumptions that tariffs would generate jobs and boost employment. Imposing tariffs on essential goods like crude oil and appliances could result in higher costs without delivering the promised economic benefits.
Gwen Moore (D-WI): How much do subsidies for soybeans and farmers cost? Gresser: The subsidies for lost exports to farmers are around $28 billion. While it is not a huge sum relative to the federal budget, it raises the question: why are we paying for losses when we could focus on helping people continue to succeed in the first place? The subsidies essentially keep people from adapting and innovating. Rather than subsidizing failure, we should support the industries that are already doing well.
Ron Estes (R-KS): How do you think tariffs or other trade policies can protect U.S. intellectual property in the future? Ferry: Protecting intellectual property from countries like China is difficult because of their sophisticated methods of stealing technology. While tariffs are not the primary tool for protection, there are other measures, such as export controls and improving national security. To truly rebuild our economy, we must focus on strategic sectors like semiconductors, where China has aggressively competed with U.S. technology. We need to accept that duplication in tech may happen, but we must rebuild our key industries to maintain a competitive edge.
Beyer (D-VA): The deficit reduction from tariffs would only count as genuine deficit reduction if we do not use it to pay for tax cuts. What is your take on managing the dollar at a competitive level? Duke: Our trade partners, especially China, can manipulate their currencies, but the reason the dollar appreciates under tariffs is simply that we are taxing imports. This naturally drives up the value of the dollar. A major factor in the trade deficit is the fiscal deficit. If we want to address the trade deficit and the dollar, the easiest way is to reduce the national deficit. Instead of focusing on manipulating the dollar, we could achieve balance by cutting spending and addressing the root causes of the trade imbalance, particularly through policies that promote savings and reduce the deficit.
Beyer (D-VA): Why is it a bad idea to defend the President’s right to independently manage trade policy? Gresser: While laws like the Trade Promotion Authority (TPA) allow presidents to negotiate trade agreements, they should still have clear guidelines and constraints set by Congress. Allowing the president to unilaterally impose or reduce tariffs on any product or from any country undermines the checks and balances that ensure trade policies are in the national interest and not subject to the whims of the executive branch.
Beyer (D-VA): What are your thoughts on de minimis? Gresser: When Congress passed the de minimis law, it applied to about 100 million packages a year. Now, there are over a billion packages coming through, which creates challenges for American retailers. Congress may need to revisit this law to strike a better balance without raising costs for American families; Ferry: De minimis is essentially a free trade agreement with China, enabling them to send billions of dollars of goods into the U.S. without paying tariffs. We are the only country with such a high de minimis threshold, and it is causing harm to U.S. industries. If we want to rebuild our manufacturing base, we need to eliminate de minimis and focus on producing more goods domestically rather than relying on imports.
Schneider (D-IL): Have industries recovered from the impact of the trade war, or is American industry still struggling? Gresser: There is strong evidence that agriculture has not recovered fully, and in fact, we have likely lost market share in the long run. On the manufacturing side, over the past few years, the use of steel in the U.S. has declined sharply. Capacity utilization is still below pre-tariff levels. This suggests that industries like construction and automobiles have learned to make do with less. The trade war’s long-term effects are real, and they have led to contraction in sectors that the tariffs were supposed to support. So, while there is some recovery, it is not a simple rebound driven by increased manufacturing; it is more about adaptation.
Schneider (D-IL): Can you speak more about the decline in retail due to de minimis? Ferry: The decline in retail is multifaceted and serious. For one, it leads to a reduction in tax revenue for local governments, which rely heavily on retail sales tax. When consumers buy from overseas, they are essentially avoiding taxes, which further erodes local tax bases. The retail sector also provides a lot of jobs, even if they are not high-wage jobs. This is one of the most significant impacts of de minimis: it is undermining both local economies and job markets in America.
Beyer (D-VA): In the last round of tariffs, many businesses were applying for tariff exemptions. How easy is it for corporations to game the system, and is there a potential for corruption? Gresser: Tariffs are inherently opaque, and that has made them easy to manipulate. When 53,000 exemption requests were filed, only about 30 or 35 trained personnel were tasked with reviewing them. Unsurprisingly, the businesses that are better connected or more politically influential were more likely to get their petitions approved.
Beyer (D-VA): What steps are needed to move from our current tax system to the vision for tax policy that Erica York has outlined? York: Full expensing for capital investment has bipartisan support, and we have already taken some steps in this direction. This would allow businesses to immediately deduct the cost of new investments, which would encourage more investment and growth. Other tax policies, like the bonus depreciation of R&D costs, also align with this vision. The larger changes involve more novel ideas, such as border adjustment taxes, which have been studied by academics but have not yet been widely adopted. These changes, though more ambitious, would address the inefficiencies in our tax code, reducing impediments to investment and production. Even without those more novel policies, full expensing and reforming the tax treatment of interest would help create a tax environment that encourages investment and production in the U.S.