CPA’s Model Tariff Schedule Shows Industrial Policy can Boost U.S. Economy, Domestic Manufacturing, and Wages
WASHINGTON — The Coalition for a Prosperous America (CPA) today released the results of a new economic model, the CPA Model Tariff Project, that shows substantial benefits in growth and jobs from a broad-based implementation of additional tariffs on all goods imported to the U.S. Specifically, CPA proposes an additional 15% tariff increase on all imported goods from Free Trade Agreement (FTA) countries, and an additional 35% tariff increase on all imported goods from Non-Free Trade Agreement (NFTA) countries. For products that the United States cannot produce domestically, such as minerals, the CPA proposal calls for zero additional tariffs. The proposal includes no overall increase in the tax burden because the substantial new revenue ($603 billion) generated from the tariffs on imports would be used to reduce domestic taxes on American workers and small businesses, such as eliminating personal income taxes on a substantial majority of taxpayers.
According to CPA’s new economic model, increasing tariffs would shift large amounts of production and investment to the U.S. As a result, gross domestic product (GDP) would rise by an additional 7% and lead to the creation of 10 million new jobs. Real household incomes would also increase by 10% and domestic manufacturing output would rise by nearly 20%. CPA envisions the tariff implementation and economic changes would be phased in over a five-year period.
The CPA model used for this pro-growth tariff simulation is an improved version of the Global Trade and Analysis Project (GTAP) model, which is widely used by academic researchers and federal government agencies, including the U.S. International Trade Commission (USITC), to model the economic impact of trade policies.
For decades, policymakers have made decisions to cut tariffs based on GTAP modeling conducted by government and private sector economists that forecasted domestic economic benefits, including job growth. However, these forecasts have repeatedly failed to materialize, including failing to accurately predict the offshoring of jobs and production. The standard GTAP model has been roundly criticized for assuming that the total supply of labor, investment and capital in the economy is fixed, limiting the ability for domestic production to rise when trade patterns change.
CPA addressed some of these imperfections and improved the real world application of the GTAP model by making modifications to several key parameters based upon real-world estimates developed by other trade economists. Changes included allowing domestic firms to increase their production as imports decline. The tariff effectively raises returns to labor and capital as domestic output in tariffed sectors increases.
“In the real world, employment, production, and incomes move up and down in response to policy changes like free trade agreements,” said CPA Chief Economist Jeff Ferry. “GTAP is a marvel of modern computer science but the model locks the economy into an unnecessarily rigid framework. By allowing the economy to allocate more labor and capital to new production opportunities, we make the model more faithful to the real world, and we show how restraining imports can stimulate jobs, industrial production, and GDP.”
“The U.S. needs to get serious about re-shoring industries more broadly to avoid being held hostage by other global powers,” said Michael Stumo, CEO of CPA. “Tariffs have been wrongly eliminated from the economic policy toolbox in recent decades. We hope our Model Tariff Schedule proposal can re-start debate on how to use tariffs to rebuild American industrial strength, real incomes and overall growth.”
About the CPA Model Tariff Project
The CPA Model Tariff Schedule proposes an additional 15% tariff on all imported goods from FTA countries, and an additional 35% tariff on all imported goods from NFTA countries. The increase would, in practice, be phased in over a five year period. Industries where the U.S. has little domestic production capabilities due to physical limitations (i.e. selected minerals) receive a zero percent tariff increase.
- CPA’s simulation of the Model Tariff Schedule leads to increases in real GDP (7%) and domestic output (19%), including relatively large gains in chemical manufacturing (30%), textiles and clothing (54%), and electrical (52%).
- As growth in domestic production increases, the economy adds 9.9 million workers, including 3 million additional workers in manufacturing and 6.9 million in service sectors.
- The service sector also benefits from higher employment and incomes. For example, our simulation shows strong growth in health care and government employment.
- Tariff revenue rises sixfold to reach $696 billion a year, which could pay for pro-growth tax policies like reducing taxes on domestic producers and workers. In CPA’s Model Tariff Project, the $603 billion gain in tax revenue is used to reduce taxes on household and business income to avoid the deflationary effect of the government absorbing more funds.
To read more about CPA’s Model Tariff Project, including the improvements CPA made to the standard GTAP model, click here.