January 23, 2018
The Trump Administration yesterday imposed steep tariffs on imported large residential washing machines and imported solar cell modules in separate cases that were initiated under Section 201 of the Trade Act of 1974. The Administration is expected over the coming weeks and months to make additional international trade rulings that are much bigger in scope, and which could have a significant impact on U.S. and foreign companies and on U.S. relations with some of our major trading partners.
The President’s decisions on solar cells and washing machines follow rulings by the International Trade Commission in earlier segments of the Section 201 proceedings that U.S. producers have been seriously injured by imports. A finding of serious injury by the ITC is necessary in order for the President to provide import relief.
In the solar case, the Administration announced that it will impose tariffs of 30 percent on imported solar cells and modules for four years, with the tariffs declining by five percent each year. The first 2.5 gigawatts of imported solar cells will be exempt from the tariffs in each of those four years.
In the washing machine case, the Administration imposed tariffs that will start at 20 percent and reach as high as 50 percent, with the tariffs increasing as imports reach predetermined quantities each year.
The decisions are another indication that the Trump Administration intends to match its tough-on-trade rhetoric with concrete action, especially on certain countries. In making the announcement in the solar case, the Office of the U.S. Trade Representative indicated that the United States is looking beyond this case and will initiate further discussions designed to ensure “fair and sustainable trade throughout the whole solar energy value chain, which would benefit U.S. producers, workers, and consumers.” While the Section 201 tariffs apply to all imports, the real target of such future talks would be China, a frequent target of this Administration in trade and national security investment cases. China dominates production in the solar sector and has been subject to U.S. antidumping duties on solar products, which USTR says China has evaded “by moving its production elsewhere.”
The Trump Administration last year also targeted China by initiating an investigation pursuant to Section 302 of the Trade Act of 1974 to determine whether “acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation are actionable under the Trade Act.” It also recently blocked the sale of the U.S. business MoneyGram International, Inc. to Ant Financial, in a case that was before the Committee on Foreign Investment in the United States.
While the washing machine and solar cases affect relatively narrow sectors of the U.S. economy, other looming trade decisions could have a much larger impact on both the economy and relations with some of the United States’ closest allies. This list includes decisions on whether tariffs or quotas will be imposed on steel and aluminum imports from some or all of our major trading partners; the extent to which the United States will continue the current renegotiation of the North American Free Trade Agreement; and the very future of NAFTA itself. These issues, especially with respect to NAFTA and steel tariffs, raise important legal issues that are mired in the broader context of U.S. domestic politics and could have an impact on near- and long-term investment and related business decisions.
The steel and aluminum cases raise the issue of whether the Trump Administration is exceeding the intent of a rarely used U.S. trade law designed to limit overreliance on foreign sources for U.S. defense products in order to broadly protect a U.S. industry. The White House recently received Commerce Department reports detailing the results of the concurrent investigations it launched last April under Section 232 of the Trade Expansion Act of 1962. The White House must now decide whether to impose tariffs or quotas on foreign steel and aluminum, as well as the severity of those trade remedies and the list of countries to which they will apply. There are several competing considerations at issue in these investigations.
The Trump Administration took the highly unusual step of self-initiating the case instead of waiting for the U.S. industry to file it and, further, by making public statements that appear to show a predisposition to ordering broad protection.
Under Section 232, the Administration must establish a connection between imports and national security before applying any remedy at all, let alone one that applies to a broad range of countries. Specifically, in determining the impact of imports on national security under Section 232, Commerce must consider, among other things, whether the products under investigation are used by the U.S. Department of Defense or are critical to the U.S. defense industry; whether the U.S. industry is capable of supplying such products; and whether there is excessive domestic dependency on unreliable foreign suppliers or if imports threaten to impair the capability of the U.S. industry to satisfy national security requirements. They also must look at the impact of exports on the health of the domestic industry.
Given this requirement, analysts will be looking closely at which products are targeted for tariffs or quotas, as the U.S. Defense Department has repeatedly found that some subsectors of the steel industry are not critical to U.S. national security. In addition, the list of countries targeted by any tariffs or quotas will be telling, as many countries that export steel to the United States include some of our closest military allies, members of NATO and countries with reciprocal defense procurement agreements with the United States.
Also given this requirement, there is a fundamental question about whether Section 232 is the appropriate remedy. It is generally agreed that there is global overcapacity in the steel sector driven by a handful of countries, leading to lower prices, declines in employment and, in certain cases, dumping. There may, however, be more appropriate remedies available that will not require the reach that a national security finding under Section 232 would likely entail. For dumped products—those sold for lower prices in the United States than in the foreign exporter’s home market—there is the U.S. antidumping law that in recent years has been used extensively by U.S. steel producers and resulted in very high dumping duties on imported steel, including from China. For unfairly subsidized imports, there is the U.S. countervailing duty law, which applies duties designed to offset illegal subsidies given to foreign steelmakers by their governments. There is also Section 201 of the Trade Act of 1974 for U.S. industries that can prove that imports are a substantial cause of serious injury to their industry, as noted above. All of those laws require findings of injury by the U.S. International Trade Commission, an independent, quasi-judicial federal agency, but Section 232 does not.
A Trump Administration decision to terminate the North American Free Trade Agreement would have a wide-ranging economic impact on investors and U.S. workers, businesses and consumers and would certainly antagonize two of the United States’ closest trading partners. While not necessarily ripe for decision right now, the Trump Administration has threatened to kill the agreement with Mexico and Canada if it does not get what it wants.
The sixth round of the NAFTA negotiations that were initiated by the Trump Administration last year will take place this week in Montreal, Canada. In addition, the trade ministers from the United States, Canada and Mexico are also meeting to discuss NAFTA this week at the World Economic Forum in Davos. Thus far the negotiations, which started last August, have stalled due primarily to a stalemate over controversial U.S. positions, including mandatory U.S. content in North American automobiles, reviews and re-certification of NAFTA every five years and the dismantling of the NAFTA Chapter 19 dispute settlement mechanism, all of which have been roundly rejected by Mexico, Canada or both countries. The Administration has also called for strong labor rights enforcement as part of any new agreement, something Mexico has said would interfere with its sovereignty. President Trump has repeatedly threatened to remove the United States from NAFTA if progress is not made on these points and has called NAFTA the worst deal ever made.
Whether President Trump can actually kill NAFTA, all by himself, has been the subject of considerable debate, but the threat has already had economic and political consequences, at least in Mexico, which has begun sourcing from other markets, and soured relations among the three NAFTA signatories. It is clear that the President has the authority to renegotiate NAFTA, assuming he consults with and gives notice to Congress, which the Administration did last May in accordance with Section 105 (a) (1) (A) of the Bipartisan Congressional Trade Priorities Act of 2015. It is also clear that the United States may withdraw from NAFTA under the terms of the agreement. Under Section 2205 of the agreement, a party may withdraw from NAFTA six months after sending the other parties a written notice of its withdrawal. Presumably, that would be the job of the executive branch. Beyond that, lines of authority are not so simple, something Congress has made abundantly clear to the Administration.
Although NAFTA was signed by President George H.W. Bush in 19921, it did not go into effect until January 1, 1994, a month after Congress passed the implementing legislation that was required so that U.S. law would conform to the agreement. The fact that amending or repealing the provisions of that law is so fundamental to wiping out NAFTA as we know it gives Congress the ability to severely limit how far Trump or any President can go in doing more than writing a termination letter.
While there is some agreement that U.S. withdrawal from NAFTA would quickly result in higher tariffs on Mexican and Canadian products, there are many provisions of U.S. law that would need to be amended in order to undo the many additional U.S. obligations relating to trade, investment, intellectual property, dispute settlement and numerous other areas. Individual members of Congress have also suggested that some kind of Congressional approval would be needed if the President tries to withdraw from NAFTA. Rep. Richard Neal (D-MA), the ranking Democrat on the House Ways and Means Committee, which has jurisdiction over international trade, is quoted as stating during a television interview that if President Trump “even suggests that the United States should leave NAFTA, to undo that relationship, you would have to go back to Congress. And that would be a much more difficult task for him.”
President Trump has indicated that he could send a termination notice to Mexico and Canada merely to gain leverage in the stalled negotiations—giving him six months to try to press his case—although signaling that approach might reduce its impact. If the President actually carried through with his threat to kill NAFTA, U.S. tariff rates on Mexican and Canadian products would likely go back to those that existed prior to NAFTA once the six-month notice period expired. In the case of Mexico, that would be the Most Favored Nation tariff rates that apply to signatories of the WTO Agreement. It is unclear at this point whether Canadian imports would be subject to WTO tariff rates, or rather to those that applied to Canada under the U.S.-Canada Free Trade Agreement, which was the precursor of NAFTA. Given the political reaction that would likely follow such a U.S. withdrawal, it is not clear whether the FTA would survive the death of NAFTA.
There would also be practical economic consequences to a NAFTA withdrawal. Higher tariffs on American-made goods would go into effect in Canada and Mexico, with especially high tariffs on U.S. agricultural exports such as potatoes and beef. That not only would harm U.S. exporters, but would give Canada and Mexico an advantage in North America as they would still be able to apply NAFTA’s zero-rate tariffs to each other. Mexico and Canada would likely retaliate against U.S. exports in other ways as well, with grave consequences for U.S. exporters that depend on the Mexican and Canadian markets. For this reason, a broad range of U.S. industries have lobbied intensely for NAFTA to remain in place, including U.S. automakers, textile producers and a range of U.S. agricultural producers, including wheat, soybean, corn and apple farmers, and beef, chicken and turkey suppliers, among others. The U.S. Chamber of Commerce has also come out very strongly in opposition to NAFTA termination.
The potential U.S. withdrawal from NAFTA has become a high-stakes political game that raises important legal and Constitutional issues, and would likely lead to years of litigation if President Trump actually does follow through on his threat. The renegotiation of NAFTA and President Trump’s threat have already been blamed for the sharp devaluation of the Mexican peso, and an actual withdrawal, even for purposes of increasing U.S. leverage, could have a significant impact on the economies of all three NAFTA countries. While not equal in scope to NAFTA and steel tariffs, yesterday’s Section 201 announcements likely have U.S., Mexican and Canadian exporters just a bit more worried about what may happen next.Co-authored by Robert LaRussa and Lisa Raisner.