More US exports without the nasty trade wars

Much of the tariff discussion over the past year has centered on the ability (or inability) of tariff increases to support and expand U.S. jobs.

Proponents argue that tariffs allow industries to increase employment while also forcing countries to the negotiating table to get better deals for American firms.

{mosads}Opponents of this approach say that tariffs are taxes that come at the expense of U.S. jobs supported by the global value chain and American imports. This ideal is compounded when the tariffs beget more tariffs by other countries that create new barriers to U.S. exports.

A better way to use tariff policy to promote U.S. jobs is to find strategic ways to reduce the tariff burden. Negotiating new free trade agreements is a proven way to accomplish this goal, but that involves willing trading partners, and the negotiations themselves often take years. 

A faster approach, which the U.S. can accomplish unilaterally, would involve cutting tariffs on goods that contain U.S. content.

The U.S. has experience doing this. For decades, the U.S. has managed a program known as 9802 that allows companies to deduct any U.S. component from their imported merchandise before assessing duty.

This not only encourages the use of U.S. content but also results in increased U.S. exports and reduces the tariff burden — all of which supports U.S. jobs.

Unfortunately, many companies are no longer able to use the 9802 program the way they once could because of narrow definitions by U.S. Customs Service officials on what constitutes a “component” under the 9802 program, combined with the evolution of today’s global value chains. 

If a company uses a U.S. component that is further processed abroad before it is assembled into an article, it is disqualified. Likewise, if any material — such as U.S. fabric or U.S. leather hides — is processed abroad and included, that U.S. content is disqualified too.  

As a result, a powerful U.S. export promotion platform is laying underutilized.

These contorted 9802 definitions result in bizarre outcomes. For example, consider a pair of jeans assembled offshore using U.S. sewing thread and containing U.S. yarns. 

The value of the sewing thread can be deducted because it is considered a “component” by U.S. Customs when it is assembled into the garment. But the yarn cannot because it must first be woven into fabric, then cut and sewn into the finished garment.

Even though sewing thread and yarn appear similar when they leave the United States as U.S. exports, they are treated differently when reimported as content in other products. 

A coalition of associations, including our organizations, is hoping to rectify this absurdity through a small tweak to the 9802 program that would have outsized benefits to the U.S. economy.

Instead of limiting the program to a small number of narrowly defined exported U.S. components, we suggest updating the program to include any exported U.S. content.

The benefit would be directly proportional to the amount of U.S. content an imported good includes. More U.S. content purchased and utilized in the final imported good equals a greater benefit. It’s a win-win.

Here’s how this would work.

Picture an imported bag valued at $10 containing U.S.-made content valued at $4. The U.S. content had been previously exported and processed abroad, before finally being assembled into the finished article.

Under the new system, the imported bag would be assessed duty on only the foreign value added, i.e., the $6. If the duty of that imported article is 17 percent, the assessed duty would drop from $1.70 to $1.02 — a savings of $0.68, or 40 percent.

In an industry where margins are slim and profits are calculated to the third decimal place, this duty break can yield enormous savings.

This would create a huge incentive to use more U.S.-exported content. Approximately 95 percent of all U.S.-produced cattle hides are exported for leather production purposes. Due to the limited tanning operations in the U.S., the only viable market for these cattle hides is offshore. 

But because the hides are processed offshore, they are disqualified from the existing 9802 program when they are reimported into the U.S. as a finished article. 

Updating the 9802 provisions would allow these hides to qualify for the program, spurring the use of U.S.-produced hides in foreign assembled bags, apparel and shoes.

Likewise, the textile industry would see a tremendous boost as new markets are opened up for U.S.-made fabrics and yarns that are currently disqualified.

It is hard to see who could oppose such a concept. President Trump has argued strongly for a trade policy that reduces the trade deficit and rebalances deals so that more U.S. workers benefit. 

By injecting more U.S. content into existing global supply chains, this program would accomplish both goals simultaneously. Manufacturing and agricultural exporters would benefit as would U.S. consumers, who could affordably enjoy goods made with U.S.-exported content.

Updating the 9802 provisions is not the stuff of headlines and trade policy fireworks. But to the many ranchers, farmers and manufacturers who will surely benefit, it can be a huge deal.

Stephen M. Sothmann is president of the U.S. Hide, Skin and Leather Association. Stephen Lamar is executive vice president of the American Apparel & Footwear Association (AAFA).