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INTRODUCTION AND SUMMARY

The Congress is currently considering a variety of proposals that would impose surcharges on the imports of selected U.S. trading partners. This study discusses the economic implications of such targeted surcharges.

Surcharges, in general, tend to redistribute economic activity and, by doing so, lead the U.S. economy to divert its resources away from the production of those goods that it produces most efficiently. They encourage the production of domestic substitutes for imports and, therefore, increase output and employment in those industries. But these benefits may be offset by losses elsewhere in the U.S. economy by:

• Raising the U.S. price level and, therefore, reducing the real purchasing power of U.S. consumers;
  
  
• Raising the prices of imported components or inputs that are used in the production of U.S. goods (such as integrated circuits used in computers or specialized metals used in aircraft engines), thus reducing their competitiveness in world trade;
  
  
• Reducing the incomes of those nations that export to the United States and, as a consequence, their ability to buy U.S. exports;
  
  
• Forcing a further appreciation of the dollar, thus handicapping U.S. exports; and
  
  
• Inviting retaliation by other nations.

Targeted surcharges, in contrast to general ones, raise a variety of other issues. First, what criteria should be used to determine which nations will be targeted? Virtually any criterion contains some element of arbitrariness or unintended effects. Criteria based on merchandise trade, for example, aimed at such nations as South Korea or Taiwan, could also target such nations as Italy or West Germany. A second issue concerns the potential for "origin swapping"; that is, substituting imports from untargeted nations for those from targeted ones--such as untargeted Mexican steel for targeted Japanese steel. This possibility makes the effects of targeted surcharges more difficult to predict than those of general ones, since a targeted surcharge could change the composition of U.S. imports without any real effect on their overall level. Such a circumstance would reduce both the negative effects of the surcharge and the benefits it creates for industries that compete with imports.¹

The effects of surcharges on the targeted nations must also be considered, particularly in the cases of nations that need to run trade surpluses to finance large debt burdens. Brazil, for example, has a $6 billion merchandise trade surplus with the United States, but will need approximately $45 billion in 1985 to pay principal and interest on its outstanding debt to foreign lenders. Finally, the decision to target surcharges implicitly regards balanced bilateral trade as a policy goal. Bilateral trade imbalances, however, may be the norm in a world of nations with diverse resources, abilities, and economic situations. The United States itself, for example, exported 50 percent more than it imported from the European Community in 1980.

Targeted surcharges also raise the issue of the United States' commitment to the procedures set forth in the General Agreement on Tariffs and Trade (GATT), the international covenant that has promoted free trade throughout the post-war period. While the GATT sanctions a variety of protectionist practices for nations that are injured by imports of specific goods or by balance of payments difficulties, surcharges aimed at selected nations are not permissible under GATT rules. A unilateral abridgement of GATT procedures of the magnitude of a targeted surcharge may not only invite further action that weakens the GATT, but would call into question the U.S. credibility in other international economic agreements.

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1. In fact, considerable administrative effort would be needed to prevent fraudulent circumvention of a targeted surcharge, either by shipping finished goods to untargeted countries for reshipping to the United States, or by misrepresenting the origins of goods in shipping invoices.