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The Residential Construction Impact of Levying Tariffs on an Additional $200 Billion of Chinese Imports

Special Studies September 12, 2018
By David Logan
NAHB Economics and Housing Policy Group
Report available to the public as a courtesy of HousingEconomics.com 
 

In July 2018, the Department of Commerce announced that it would levy tariffs on $200 billion worth of imports from China under authority given to the President in section 301 of the Trade Act of 1974. The list of goods to be subjected to the tariffs constituted the fourth major round of tariffs that would be levied on Chinese imports in 2018. This list—known as “List 3”—contains hundreds of inputs vital to the residential construction industry. Of the 6,000 items on List 3, 463 are ubiquitous in home construction and remodeling.  Using International Trade Commission (ITC) and Bureau of Economic Analysis (BEA) data, this report finds that roughly $10 billion of goods used in residential construction would be subject to the tariff each year. At the proposed 25 percent rate, this would equate to a $2.5 billion, industry-wide cost increase over the 12 months following the imposition of tariffs on List 3.

Background

Although the Constitution assigns the President no specific power over international commerce and trade, domestic trade laws have gradually ceded the President executive authority to initiate or change trade restrictions such as tariffs.[1]  Sections 232 of the Trade Expansion Act of 1962 (TEA) and 301 of the Trade Act of 1974 (TA74) became statutes that grant this unilateral authority.[2] [3] Section 232 gives the President power to limit imports in the interest of national security if, after investigation, the Secretary of Commerce advises him or her that an article is being imported “under such circumstances as to threaten to impair the national security.” The legislation goes on to say the following:

“If the President concurs [with the findings of the investigation], [the President shall] determine the nature and duration of the action that, in the judgment of the President, must be taken to adjust the imports of the article and its derivatives so that such imports will not threaten to impair the national security.”[4]

In March 2018, President Trump announced that the United States would impose duties of 25 percent and 10 percent on steel and aluminum imports, respectively, pursuant to section 232.[5]  The 232 tariffs were initially imposed on imports from every country except Canada and Mexico, although many countries have since been limited by quotas (i.e. volume caps) rather than duties (i.e. taxes paid based on import prices).[6]

Like section 232 of the TEA, section 301 of TA74 gave the President power to unilaterally impose or alter tariffs, but for different reasons and to be used in different circumstances.[7] 

Under section 301, “if an act, policy, or practice of a foreign country is unjustifiable and burdens or restricts United States commerce…[a]ctions may be taken that are within the power of the President with respect to trade in any goods or services, or with respect to any other area of pertinent relations with the foreign country.”[8]

In late March, President Trump directed the United States Trade Representative (USTR) to provide a list of products and any intended tariff increases “to address the acts, policies, and practices of China that are unreasonable or discriminatory and that burden or restrict U.S. commerce” under section 301.[9]  Two weeks later, USTR proposed a list of $50 billion of Chinese imports on which it would levy a 25-percent duty.[10] 

On July 6, 2018, the 25 percent duty was levied on 818 items, or $34 billion of Chinese imports (List 1). List 1 includes large durable goods such as cranes, bulldozers, and earthmovers.[11]  “List 2,” comprised of 279 HTS codes, was finalized one month later with the corresponding duties taking effect on August 23, 2018. This second tranche of goods is primarily comprised of chemicals and minerals used as inputs for goods made in the United States.[12]

The most recently proposed tariffs—which would hit roughly 6,000 Chinese imports—have also been justified by section 301.[13] List 3 constitutes $200 billion worth of imports used in nearly every major NAICS sector, including residential construction.

Data

This analysis uses three government sources to calculate the potential impact of 25 percent proposed tariffs on List 3 items. The official list released by the ITC gives the eight-digit, Harmonized Tariff Schedule of the United States (HTSUS) code and a description of each item that would be subject to the 25 percent duty. The ITC’s DataWeb tool provides the dollar value of List 3 goods imported by the United States in 2017. Input-output tables published by the BEA are used to approximate the share of List 3 imports used in residential construction.

Analysis

The potential economic impact that a 25 percent tariff on List 3 items would have is evident in the sheer number of imports on the list—6,000 intermediate and finished goods. However, the composition of the list is more important than the number of items it contains, especially when analyzing industry-specific effects. 

Of the 6,000 items on “List 3,” 463 are commonly used in residential construction and remodeling. Twenty of these items (4.3 percent of the total)—as well as their HTSUS subheadings—are listed below, illustrating the breadth of impacts on the industry.  All 463 goods used in the analysis can be found in Appendix II.

HTSUS Subheading

In 2017, the United States imported $66.7 billion worth of goods included in this analysis. Of this total, nearly one-third ($21.4 billion) came from China.[14]

Imports of Residential Construction Goods on List 3

The $21.4 billion of imported goods represented above are not exclusively used in the residential construction industry. For example, commercial and infrastructure construction use many goods on List 3. Thus, the percentage of imports used in home building and remodeling must be calculated. To do so takes two steps.

First, the official list HTSUS subheadings must be converted to NAICS codes by using the U.S. Census Bureau’s NAICS concordance. This concordance allows the user to convert HTSUS headings and subheadings associated with commodities to six-digit NAICS codes.[15]

Second, the “use” input-output (I-O) table published by the BEA is used to approximate List 3 commodities used in residential construction as a percentage of each commodity’s domestic production (in dollar terms). The industries and associated NAICS designations assumed to constitute “residential construction” are single-family residential structures (233411), multifamily residential structures (233412), “other” residential structures (2334A0), and residential maintenance and repair (230302). 

These four industries consumed 46% of List 3 commodities produced domestically.[16]  Employing the same percentage to calculate the value of Chinese imports used as inputs in residential construction yields a total of $9.9 billion. If a 25 percent tariff were imposed on these goods, the cost of inputs would rise by $2.5 billion.

Conclusion

The next round of proposed tariffs on Chinese goods would affect roughly $200 billion worth of annual imports. More than 10 percent of the value of these goods is made up of items commonly used in residential construction. Even though less than half of the value ($9.9 billion) is exclusive to home building and remodeling, a 25 percent tariff would be equivalent to a $2.5 billion tax increase on the industry.

[1] Caitlain Devereaux Lewis. Presidential Authority over Trade: Imposing Tariffs and Duties. Congressional Research Service. Pages 1-3. December 9, 2016. https://fas.org/sgp/crs/misc/R44707.pdf. Accessed August 8, 2018.
[2] Public Law 87-794. The Trade Expansion Act of 1962. October 11, 1962. https://www.gpo.gov/fdsys/pkg/STATUTE-76/pdf/STATUTE-76-Pg872.pdf. Accessed August 22, 2018.
[3] Public Law 93-618. The Trade Act of 1974. January 3, 1975. https://legcounsel.house.gov/Comps/93-618.pdf. Accessed August 22, 2018.
[4] 19 U.S.C. § 1862(c)(1)(A)(ii)
[5]  The President of the United States. Proclamation 9704 [and 9705] of March 8, 2018: Adjusting Imports of Aluminum [and Steel] Into the United States. March 8, 2018. https://www.usitc.gov/documents/proc_9704_aluminum_relief_under_section_232_1.pdf and https://www.usitc.gov/documents/proc_9705_steel_relief_under_section_232_1.pdf. Accessed August 29, 2018.
[6] The President of the United States. Proclamation 9758 [and 9759] of May 31, 2018: Adjusting Imports of Aluminum [and Steel] Into the United States. May 31, 2018. https://www.usitc.gov/tariff_affairs/documents/20180531_proc_9758_aluminum_relief_under_section_232_amendment3.pdf and https://www.usitc.gov/tariff_affairs/documents/20180531_proc_9759_steel_relief_under_section_232_amendment3.pdf. Accessed August 29, 2018.
[7] Section 301 gives the United States Trade Representative this authority, but all actions must have the consent of the President.
[8] 19 U.S.C. § 2411
[13] Office of the United States Trade Representative. Request for Comments Concerning Proposed Modification of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation. Docket Number USTR-2018-0026. https://ustr.gov/sites/default/files/301/2018-0026%20China%20FRN%207-10-2018_0.pdf. Accessed September 4, 2018.
[14] Department of Commerce International Trade Commission and NAHB calculations.
[15] Conversions are shown in Appendix III.
[16] Detailed I-O use table, after redefinitions. NAHB calculations.


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