CEI Comments on Section 232 National Security Investigation of Imports of Personal Protective Equipment, Medical Consumables, and Medical Equipment, Including Devices

Comments of the Competitive Enterprise Institute

Dear Deputy Assistant Secretary Khersonsky,

The Competitive Enterprise Institute (CEI) submits these comments in opposition to the use of trade policies such as tariffs and quotas, under Section 232 of the Trade Expansion Act, on all of the items being considered in this investigation. This is not to diminish the importance of any of these products to our national security, whether that encompasses defense, the economy, health, or any other quality of American life. It is, in fact, because these products are necessary for Americans that we at CEI oppose the top-down and blunt instruments of tariffs and quotas to secure their supply.

Applying tariffs and quotas to certain products with the purpose of attracting more production domestically should be done very carefully and with consideration of myriad factors. I lay many of these out below. The underlying thread, however, is that the factors are so multitudinous, varied, and complicated that the entire approach of using tariffs and quotas should be considered only as a last resort, and other options should be considered first. Trade restrictions are too blunt an instrument and being wielded by individuals, regardless of how informed they are, will surely lead to unexpected outcomes and are unlikely to achieve the goals laid out.

Ideal use of Section 232

Historically, tariffs and quotas implemented under Section 232 were highly focused on one country and one good. Focusing on a single country has the enormous benefit of creating space for other countries to adapt and provide the good or service in question, minimizing the deleterious consequences of trade restrictions, which are reductions in availability and increases in price. Oftentimes, for national security reasons, the country and its population are willing to make such sacrifices, and, indeed, when considering the benefits to their security, the benefits still outweigh the costs.

However, when dozens or hundreds of products and a multitude of countries are being implicated, the ability for the global supply chain to adjust and minimize the damage is substantially hindered. The effect of this is to make the detrimental aspects more pronounced—the goods become even less available and the price increases become sharper, which alters the cost/benefits equation, making the costs much higher.

Products on a national security spectrum

While many of the products that were previously or are currently being reviewed under Section 232 are important to national security, it would be wrong to think of them all as equally important. Goods such as aluminum, oil, etc., should be evaluated differently from medical gloves. As an economist, I propose thinking of most things on a scale and not as an either/or proposition. As a result of thinking of these goods as less vital in times of war or emergency, the benefits from the tariffs are reduced, further pushing the cost/benefit outcome negative.

Substitutability of necessary products

One of the reasons that these goods are less important than others is because of their substitutability. Certain PPE, such as masks, gowns, and gloves could easily be substituted by other products or used more frequently to increase their lifespan and reduce the need for more. Product substitutability is a factor that should certainly be considered in any Section 232 investigation. Essentially, what is vital to national security isn’t necessarily the good or product itself, but its application and distinctiveness. Oil is not easily substitutable. Given the use, though, many masks may be.

Effect on domestic production of other goods

Some of the goods being investigated, while important, are extremely complex technology, like MRI machines. As such, an important consideration is if we push domestic production higher, which products will be produced in smaller quantities. Some of these products may be just as or more important to national security and will be crowded out. Consider the possibility that an increase in MRI production means the reduction of highly advanced construction equipment or machines necessary for high-output automation of factories. Economies are complex, and favoring certain goods over others because they’re more important on the surface can have large, unintended, and harmful consequences.

This must also be considered even for low-value goods. Low-value goods still require workers. Outsourcing production to other countries frees Americans to be producing more efficiently. Interfering with that dynamic will make domestic production less efficient and come at the cost of producing some other good. The economy is much too complicated to be able to predict what good will be reduced, but without knowing that, it is also impossible to know the harm inflicted on the economy broadly.

International substitutability

Just as policymakers cannot know the effect of increased domestic production of one good on all the other goods and the degree to which Americans are harmed, they also cannot know those same effects on a global scale. Imposing tariffs on one country has a minimal effect on efficiency, because there are nearly two hundred different countries with varied economies that can replace it, and a free market will ensure that the country that can produce that good most efficiently will do so. However, imposing broader tariffs on every country narrows the opportunities and pushes manufacturing to go to the US, regardless of the efficiency of production. As in the paragraph above discussing domestic production and goods, this will serve to make the costs higher than they otherwise would be. A supply chain can be strengthened without resorting to universal tariffs, and indeed, a strong supply chain is diversified sourcing from the countries most able to produce those goods.

Likelihood of emergency

Neither war nor supply emergencies is inevitable. Imposing a tariff/quota system on goods under the expectation of war would be a waste of resources if war never occurs. In light of the unpredictability of an emergency, trade restrictions should also incorporate the probability of needing these goods. It would be harmful to Americans if the tariffs or quotas exceed the need. This becomes more significant with less important goods. For example, if an antagonistic country were our only source of medical gloves, it would not be necessary to shift production to other countries if the chance of a direct conflict was infinitesimal. Doing so could increase the price of such gloves in the US considerably, making Americans worse off with zero benefit.

Risk of sabotage

One final factor to consider is the worst-case scenario of having an antagonistic country in charge of producing a good choose to sabotage it. For certain goods, such as syringes and medicines, this is an important element. For other goods however, such as gloves and gowns, the potential for damage is nonexistent. Consequently, tariffs/quotas on the latter goods should be lower.