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Apr 09, 2020

Tariffs in the Time of COVID-19

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TARIFFS IN THE TIME OF COVID-19

Introduction

As the global economy slows down and much of the world is quarantined, economists warn that now is not the time to impose the type of protectionist international trade measures that are generally agreed to have exacerbated the Great Depression in the 1930s. As the COVID-19 virus has spread across the globe in the past few months, some countries have imposed restrictions on the export of certain critical medical products, which given the global supply chain could have a wide-ranging economic impact. In the United States, some lawmakers are calling for the Trump Administration to impose new tariffs on oil imports, measures that critics fear would inspire retaliatory responses from U.S. trading partners and raise prices for U.S. businesses and consumers.

In response, many U.S. business organizations have suggested that not only should the Trump Administration refrain from putting in place new trade protection, it should also reduce or eliminate the broad range of tariffs it has imposed over the past several years. What follows is a description of some of the U.S. trade protection that has been put in place, the legal basis for those measures, the response from our trading partners and the process businesses must go through to be excluded from those measures.

US Section 301 Tariffs on China

In August 2017, at the request of President Trump, the United States Trade Representative (USTR) initiated an investigation of certain alleged Chinese trade barriers under Section 301 of the Trade Act of 1974. The tariffs that the United States imposed as a result of that investigation remain in place today, although the Trump Administration is coming under increasing pressure to reduce or eliminate them altogether.

Section 301 authorizes USTR to investigate and take action to counter a foreign country’s denial of rights of the United States under any trade agreement or an “act, policy, or practice of a foreign country that is unreasonable or discriminatory and burdens or restricts United States commerce.” In such cases, USTR, on the direction of the president, can take a range of trade actions against the offending country, including imposing tariffs on its exports to the United States. While permitting tariffs and other trade remedies, Section 301 is really focused on prying open access to foreign markets and reducing foreign trade barriers. Since the United States acceded to the World Trade Organization (WTO) on January 1, 1995, U.S. administrations have been reluctant to use Section 301 to open foreign markets, opting instead to go through the WTO dispute settlement process.

As a result of its 2017 investigation, USTR found, among other things, that “the Chinese government uses foreign ownership restrictions, such as formal and informal JV requirements, and other foreign investment restrictions to require or pressure technology transfer from U.S. companies to Chinese entities.” In August 2018, the United States imposed tariffs of up to 25% on $34 billion worth of Chinese imports. Those tariffs were supplemented by three additional tranches of tariffs that, cumulatively, were applied to more than $500 billion of Chinese imports. China initially retaliated with $110 billion in tariffs against U.S. exports, and the tit-for-tat U.S.-China trade war continues until today, even with the announcement of a Phase One U.S.-China trade deal.In reaction to the broad impact on the U.S. economy, many business groups have called for a steep reduction in tariffs. For example, the National Association of Manufacturers released a COVID-19 “action plan,” much of which focused on reducing trade barriers. The plan includes the following recommendations:

  • Accelerating negotiations on a binding “phase two” China trade agreement to improve trade certainty.
  • Developing a targeted list of products for which Section 301 tariffs and retaliatory tariffs can be suspended or removed to spur economic growth and job creation.
  • Creating a White House-led interagency initiative to identify and reduce trade and regulatory barriers to U.S. exports of products used in a pandemic response.
  • Working with foreign governments to open procurement opportunities related to critical health care products to U.S. companies.
  • Implementing temporary duty waivers and expedited entry procedures to facilitate cross-border trade in health care items.
  • Extending critical tariff relief programs to allow import of components used in U.S. manufacturing of coronavirus-needed products.
  • Negotiating with other countries to reduce tariffs on products needed for a pandemic response.

While the Trump Administration has thus far indicated that it would not be terminating these tariffs, it has very recently expanded the process for excluding certain imported products from the Section 301 tariffs. Criteria for exclusion include the following:

  • Whether the particular product is available only from China and whether that product is available from sources in the United States and/or in third countries.
  • Whether the imposition of additional duties on the particular product would cause severe economic harm to the requestor or other U.S. interests.
  • Whether the particular product is strategically important or related to ‘‘Made in China 2025’’ or other Chinese industrial programs.

USTR also recently announced that it has prioritized tariff exclusions for medical-care products needed to address the COVID-19 outbreak in consultation with the Department of Health and Human Services, with a focus on personal protective equipment products and other medical-care related products. Those products include “parts needed for MRI devices, combined PET/CT scanners, certain radiation therapy equipment, air purification equipment, and parts of homecare beds; sterile electrosurgical tools; digital clinical thermometers,” according to USTR.

On March 25, USTR published a Federal Register Notice requesting public comments on possible further medical modifications to the tariffs list. USTR instructs those submitting comments to “identify the particular product of concern and explain precisely how the product relates to the response to the COVID-19 outbreak. For example, the comment may address whether a product is directly used to treat COVID-19 or to limit the outbreak, and/or whether the product is used in the production of needed medical-care products.”

Businesses seeking to comment should submit their requests at Regulations.gov by entering docket number USTR–2020–0014 on the home page and clicking “search.” General information on how to navigate the exclusion process is available on the USTR web page.

Steel Tariffs Aren’t Going Away, but Duty Payment Deadlines May Be Extended

The COVID-19 crisis has also reopened debate about whether the Trump Administration’s 25 % tariffs on imported steel and 10% tariffs on imported aluminum should be terminated, pitting steelmakers and the United Steelworkers Union against U.S. manufacturers that incorporate steel into their downstream products. Under Section 232 of the Trade Expansion Act of 1962, either a U.S. domestic industry or the U.S. Administration may initiate a Section 232 action to determine whether the importation of certain products are in such quantities or under such circumstances as to threaten to impair the national security of the United States. Following the investigation, the U.S. Commerce Department issues a report addressing these issues in consultation with Defense Department and sends the report and recommendations to the President, who has broad authority to “adjust” imports as a remedy, including through the use of tariffs and quotas. President Trump’s reliance on Section 232 in this case, with its nexus to national security, particularly irritated our NATO trading partners, many of whom responded by putting retaliatory tariffs in place against U.S. exports.

The Administration has also investigated U.S. imports of automobiles and, separately, uranium under Section 232, but declined to impose a remedy. While used rarely, Section 232 is effective in that, unlike other U.S. trade laws, the process is entirely in the control of the U.S. Administration. Other such laws, such as Section 201 of the Trade of 1974 and U.S. antidumping laws, require an investigation by the U.S. International Trade Commission to determine whether imports have caused or threaten to cause injury to a U.S. domestic industry. Unlike the Commerce Department, the ITC is independent from the U.S. Administration and does not answer directly to the President.

Steel users, including U.S. automakers, have long opposed steel tariffs. One such group, the Coalition of American Metal Manufacturers and Users, which claims to represent more than 30,000 companies, has recently lobbied the Trump Administration to immediately terminate the Section 232 tariffs on steel and aluminum, noting in a statement that “Many steel- and aluminum-using manufacturers are supplying parts to the medical equipment industry and other essential sectors, and the U.S. government should be doing everything in its power to help them instead of needlessly taxing their operations with tariffs.” U.S. steel manufacturers and the USW have reiterated their support for the tariffs, and the Administration has shown no signs of terminating them. U.S. Customs and Border Protection has announced, however, that it will in certain cases extend the time that importers have to make tariff payments. Under U.S. law, Customs duties are paid by the importer of record, which in most cases is the U.S. business buying the foreign product.

There is an ongoing process for U.S. businesses to request exclusions from the tariffs on steel and aluminum not “produced in the United States in a sufficient and reasonably available amount or of a satisfactory quality” or exclusion requests “based upon specific national security considerations.” Companies seeking exclusions must sign up through the Commerce Department Section 232 Exclusion Request Portal.

The site can be used for exclusion requests, objections to exclusion requests, rebuttals and responses to rebuttals. There is currently no process in place for requesting exclusions from tariffs on derivative steel and aluminum products, which were imposed on certain steel-intensive products in February 2020.

Senators Call for Trade Protection for US Oil Producers on National Security Grounds

Several members of the U.S. Senate, led by the chairman of the Senate Armed Services Committee, have requested in a recent letter that President Trump impose tariffs on crude oil from Russia and Saudi Arabia, using his authority under Section 232 or under U.S. antidumping laws. U.S. fracking companies, led by Continental Resources, support the imposition of tariffs, while the American Petroleum Institute (API) opposes them. Mike Sommers, president and CEO of API, said in a March 2020 op-ed in Fortune that “We’ve seen time and again that free market policies provide greater stability and growth. Certain reactions in times of global market unrest—such as tariffs or sanctions—ultimately hurt U.S. producers and consumers.” Responding to a question about oil tariffs, President Trump reportedly said this week that he would “use tariffs if I had to.”

Another potential option mentioned by the senators involves the use of the U.S. antidumping laws. Under Title VII of the Trade Act of 1974, the U.S. Administration or a U.S. domestic industry may bring an antidumping action against imports of a product from one or several countries. At a very general level, dumping means that a foreign supplier sells its products in the United States at prices that, when adjusted, are lower than the price for which the same product sells in the supplier’s home market. In 2000, a group of U.S. companies brought an antidumping case against certain imports of oil. The action was dismissed by the U.S. Commerce Department for lack of legal standing by the companies that brought the action.

There are currently no restrictions on U.S. exports of crude oil. In 1975, the U.S. Congress passed, and the President signed, the Energy Policy and Conservation Act of 1975, which restricted U.S.-produced crude oil exports. Under the law, the U.S. president could lift the export restrictions in certain cases. President Reagan did so regarding exports of crude oil to Canada, following Canada’s decision to remove price and volume controls on exports to the United States. In December 2015, Congress repealed and President Obama signed revocation of the U.S. oil export ban.

A Warning about Trade Restrictions on Medical Supplies and Medicine

Global Trade Alert, an organization that monitors global trade policy and protectionist measures, warned in a March 2020 report of “a sharp increase in zero-sum, unilateral trade policy acts as governments scramble for medical supplies and equipment.” Using potential export restrictions on medical ventilators as a case study, the report warns that “During a pandemic such zero-sum behaviour risks inflicting an unconscionable human toll.” The report notes that as of March 21, 2020, “a total of 54 governments have implemented some type of export curb on medical supplies and medicines associated with the COVID-19 pandemic.” Global Trade Alert was established in June 2009 when, in its words “it was feared that the global financial crisis would lead governments to adopt widespread 1930s-style beggar-thy-neighbour policies.”

In a related matter, the Federal Emergency Management Agency (FEMA) just issued a temporary rule “to allocate certain scarce or threatened materials for domestic use, so that these materials may not be exported from the United States without explicit approval by FEMA. The rule covers five types of personal protective equipment. While this rule remains in effect, and subject to certain exemptions… no shipments of such designated materials may leave the United States without explicit approval by FEMA.”

The International Emergency Economic Powers Act

A review of the powers of the U.S. President to impose trade measures during times of crisis would not be complete without mentioning the International Emergency Economic Powers Act, which grants the U.S. President extraordinary powers to regulate or prohibit certain economic activity that poses a national security threat to the United States and emanates from outside of the United States. The statute specifically permits the President “to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the President declares a national emergency with respect to such threat.” The President may, among a broad range of options, block any importation or exportation of “any property in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States.” Although more frequently used to impose economic sanctions, the law was used by President Trump in 2019 to threaten a tariff of up to 25% on all U.S. imports of products from Mexico. Trump said at the time that he was invoking these powers to deal with what he termed “the illegal migration crisis at the Mexican border.”

Conclusion

The lessons from the Great Depression are important to keep in mind in times of national crisis—be it national security, economic or health related. The Smoot-Hawley tariffs put in place by the United States after WWI were answered by reciprocal tariffs from our trading partners, reducing global trade, hurting the global economy and extending the Great Depression.

Special thanks to Lisa Raisner, Head of Government Relations, who co-authored this publication.

Authors and Contributors

Robert S. LaRussa

Counsel

Committee on Foreign Investment in the United States (CFIUS)

+1 202 508 8180

+1 202 508 8180

Washington DC