Tools for Enforcement in the Trump Administration: A Primer on Trade Remedies

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Tools for Enforcement in the Trump Administration: A Primer on Trade Remedies

By Doreen Edelman and Julius Bodie*

 

As the Trump Administration pursues its 2018 trade agenda, it is increasingly clear that the President will not hesitate to utilize a wide spectrum of enforcement mechanisms to remedy injustices to key domestic industries. By taking advantage of the various authorities latent in decades-old international trade legislation, the current Administration has enacted critical policy decisions in the last year to accompany the "America First" rhetoric that was first espoused during the 2016 presidential election. While the U.S. government has imposed various forms of trade remedies for decades to protect U.S. industries, the recent resurgence of aggressive international trade policy has featured a wide range of enforcement mechanisms. As these enforcement tools become more prominent in the national media spotlight, this article seeks to provide a brief primer on four remedy tools in particular that have recently been used in conjunction with the Department of Commerce, the Office of the U.S. Trade Representative, and the International Trade Commission (ITC): Section 201, Section 232, Section 301, and antidumping and countervailing duty investigations. All four enforcement mechanisms will likely continue to headline the U.S. trade agenda in 2018.


Background


The President issued two Executive Orders (E.O.s) on March 31, 2017, both of which underscored the new Administration's opposition to unfair trade practices and desire for stronger enforcement. The first, E.O. 13785, sought to establish enhanced measures for the U.S. to collect antidumping and countervailing duties (AD/CVD) and a stronger enforcement posture for trade violations. The other, E.O. 13786, directs the Department of Commerce and the U.S. Trade Representative (USTR) to conduct a broad review of differential tariffs, non-tariff barriers, injurious dumping, injurious government subsidization, foreign intellectual property theft, forced technology transfer, and denial of worker rights and labor standards, among other things. In 2018, these E.O.s have come to fruition in the form of increased AD/CVD investigations, Section 201 safeguard investigations into imports of solar technology and washing machines, Section 232 national security investigations into steel and aluminum imports, and a Section 301 investigation into Chinese intellectual property theft and forced technology transfers.


Antidumping and Countervailing Duty Investigations


U.S. industries and businesses may petition the Department of Commerce and ITC for relief when certain goods are imported and then sold at less than fair value ("dumped"), or which benefit from foreign government subsidy program assistance. If it is determined that the particular goods are being dumped and materially harming a domestic industry, "antidumping" tariff duties can be imposed to deter such dumping by effectually raising the price of the less-than-fair-value imports. Similarly, when imported goods are determined to be subsidized by a foreign government, "countervailing duties" may be imposed to similarly raise the price to ship and deter the harmful foreign subsidies. Commerce first determines if the imported products are being sold at less than fair value or are being subsidized, and the ITC then subsequently determines whether the domestic industry was materially injured. If the ITC determination is affirmative, the Secretary of Commerce issues an antidumping or countervailing duty order with an accompanying tariff classification.


While there was an uptick in antidumping and countervailing duty (AD/CVD) investigations under the Obama Administration, this particular remedy has become a mainstay of the Trump Administration's trade policy. From President Trump's inauguration through February 15, 2018, Commerce initiated 96 AD/CVD investigations – an 81 percent increase from the previous period according to Commerce. This includes the first "self-initiated" Commerce AD and CVD investigations in over 25 years. While normally, AD/CVD investigations are initiated in response to petitions filed by a domestic industry, the rarely used self-initiation authority can be exercised when the Secretary determines that a formal AD or CVD investigation is warranted. In this case, Commerce determined that an investigation into imports of common alloy aluminum sheet from China warranted an AD/CVD investigation. In total, Commerce maintains more than 420 antidumping and countervailing duty orders to provide relief to U.S. businesses and industries.


The expanded use of AD/CVD investigations as a trade remedy can have a wide range of consequences for your company depending on the industry and your position within the industry. Although cases involving iron, steel, and associated products make up a majority of standing AD/CVD orders, nearly any domestic industry that faces competition and sees their prices driven down as a result of increasing imports can potentially file for relief.


For U.S. producers of goods who believe they are facing unfair, discriminatory foreign competition, it is easier than ever to file AD/CVD petitions and there is an increased likelihood of success based on the Administration's new enforcement-focused policy. For U.S. importers of goods, although AD/CVD orders target foreign manufacturers and exporters, the duties imposed are collected from the importer of record, and if you are not staying up to date on the release of new orders, you may find your imported goods are subject to extra duties that could potentially exceed the value of the import itself. Importers will also certainly face increased scrutiny into their documentation practices and should confirm that their goods are being correctly classified. Importers should also coordinate and engage with their freight forwarders and customs brokers to ensure all regulations are being complied with. Finally, for international suppliers and foreign entities exporting to the U.S., it will also be crucial to follow which new goods and products are being investigated and which have already been issued a final duty order.


AD/CVD investigations can also act as a precursor for the use of other U.S. trade remedies and investigatory tools, such as a Section 201 safeguard investigation.


Section 201


Section 201 of the Trade Act of 1974 provides for so-called Global Safeguard Investigations, which allow domestic industries that have been seriously injured or threatened with injury by increased imports to petition the ITC for import relief. Unlike AD/CVD investigations, a Section 201 action is not country-specific, but instead is utilized to provide domestic protection from imports from all countries of a particular good. Section 201 actions also do not require an allegation of dumping, foreign subsidization, or any other unfair trade practice. Rather, Section 201 cases investigate import surges of fairly traded goods. The investigation is conducted entirely by the ITC, and if the ITC makes an affirmative decision, it recommends a solution to prevent or resolve the injury. In response to the ITC determination, the President then makes the final decision on whether to provide relief, whether in the form of tariffs, tariff rate quotas, quantitative restrictions or other actions, and the amount of relief given.


Historically, such Section 201 safeguard investigations have rarely resulted in the imposition of tariffs. In fact, between 1974 and 2016, in the 40 cases where past presidents could have implemented protections based on ITC recommendations, such trade barriers were only imposed 19 times. However, in January 2018, President Trump imposed tariffs on both residential washing machines and solar panel technology based on ITC recommendations in what was the first completed Section 201 investigation since 2001. The ITC investigations into solar panel technology and washing machines imports were first respectively initiated in May and June 2017.


First, based on a petition from two bankrupt U.S. solar companies, the ITC instituted a Section 201 investigation in May 2017 to determine whether increased imports were a substantial cause of serious injury to the domestic solar panel industry. The U.S. had previously imposed antidumping and countervailing duties for certain solar technology from China in 2012, but producers evaded the duties by moving production to Taiwan and then to Malaysia, Singapore, Germany, and South Korea. From 2012 to 2016, solar imports grew by 500 percent, prices fell by 60 percent, and many U.S. manufacturers ceased production, moved their facilities abroad, or went bankrupt. As a result of the Section 201 investigation, the ITC found that between 2012 and 2016, artificially low-priced solar technology from China tripled the volume of solar generation capacity in the U.S. It further determined that the increased solar cell and module imports were a substantial cause of serious injury to the domestic industry.


Similarly, a U.S. washing machine producer filed a petition for an AD/CVD investigation in 2011 requesting relief from washer imports from South Korea and Mexico, alleging they were dumped and subsidized. A final duty order was eventually issued in 2013. In early 2017, an AD order was also issued on washers from China. This led to a shift in production to other regions in Southeast Asia such as Thailand and Vietnam. In June 2017, after receiving further petitions for relief, the ITC initiated an investigation under Section 201 covering the years 2012 – 2016. The ITC found that imports of washers into the U.S. had increased dramatically, causing a substantial loss in market share to domestic producers. By 2016, U.S. washing machine producers were running net operating losses in the millions.


As a result of these investigations, President Trump issued a joint announcement in January 2018 that he would impose additional tariffs on imports of large residential washing machines, solar cells, and modules effective February 7, 2018. A four-year safeguard was implemented for solar technology imports that levies a 30 percent tariff on solar modules and subsequently descends by five percent each year (i.e., 30 percent in 2018, 25 percent in 2019). A three-year safeguard was implemented for residential washers and parts; however, these duties contain a threshold quota-like element. In the first year, the first 1.2 million washing machines that are imported will face a tariff of 20 percent, while all subsequent imports will have a tariff of 50 percent. Those tariffs are then gradually phased down in the second and third years.

 

These Section 201 tariffs have spurred controversy, both within the industry and internationally. For example, in February 2018 Canadian solar panel manufacturers filed a lawsuit against the Trump Administration claiming that the 30 percent tariff violates the North American Free Trade Agreement (NAFTA) obligations and the 1974 Trade Act. The European Union has also filed a request for a consultation with the World Trade Organization (WTO) in response to the tariffs, following similar actions taken by China, Taiwan, and South Korea. While the impact of these particular Section 201 investigations is industry-specific, they also represent a larger policy of increased protectionism that both puts pressure on international exporters and gives cause for concern for U.S. economic rivals and allies alike. However, these tariffs are not as controversial as the potential outcome of another recent trade enforcement mechanism that has been described as the "first shot" in a global trade war: the Section 232 national security investigation into steel and aluminum imports.


Section 232

Section 232, part of the Trade Expansion Act of 1962, is a trade restriction mechanism that is used to determine the impact of imports on national security, historically in times of emergency. Investigations can be initiated by an interested party, a request from a department or agency head, or may be self-initiated by the Secretary of Commerce. Commerce conducts an investigation on the imports and then presents the findings and makes recommendations to the President. If the imports are found to threaten national security, the President has 90 days to determine whether he agrees and then may adjust the import restriction accordingly (the statute notably does not place a limit on the nature of trade remedy restrictions or set out a tariff limit).

Section 232 national security investigations have been initiated cautiously in the past – since 1980 there have been only 14 investigations conducted by Commerce and very few have resulted in actions taken by the Executive to restrict imports. However, in a significant shift of U.S. trade policy, in April 2017, President Trump requested that the Department of Commerce initiate a Section 232 investigation into whether steel and aluminum imports were threatening U.S. national security. Due to excess global steel and aluminum production, global markets have been flooded in recent years leading to import volumes far above historical levels. As mentioned above, the steel industry has been primed for AD/CVD orders, and as of February, the U.S. already had 169 AD/CVD orders in place on steel imports, of which only 29 were against China.

Following a nine-month investigation, Commerce issued its reports to President Trump in January 2018, which were then released in redacted form to the public in February. The reports concluded that current quantities of steel and aluminum imports are displacing domestic industry and "weakening our internal economy," and thus threaten to impair U.S. national security as defined by Section 232.[1] Both domestic industries were described as critical to the U.S. Department of Defense and to critical U.S. infrastructure, and the recent surge in imports were concluded to have seriously harmed domestic production.

Commerce recommended a menu of options for restricting steel imports, including: 1.) a global tariff of at least 24 percent on all steel imports from all countries; 2.) a 50 percent tariff on the 12 largest U.S. importers and a quota equal to 100 percent of 2017 imports on all other countries; and 3.) no tariff, but a quota on all steel products from all countries equal to 63 percent of each country's 2017 exports. For aluminum, Commerce's three recommendations were: 1.) 7.7 percent on all aluminum exports from all countries; 2.) a tariff of 23.6 percent on all products from China, Hong Kong, Russia, Venezuela, and Vietnam, with all other countries be subject to quotas of 100 percent of 2017 exports to the U.S.; or 3.) a quota on all imports from all countries equal to a maximum of 86.7 percent of their 2017 exports to the U.S.

On March 5, President Trump announced plans to implement a 25 percent tariff on steel and a 10 percent tariff on aluminum under Section 232 authority, and the ad valorem tariffs formally went into effect on March 23.  However, temporary country-based exemptions were also issued, and the steel and aluminum tariffs will not apply to imports from Argentina, Australia, Brazil, Canada, the European Union, Mexico, and South Korea until May 1, 2018.  The President may extend such country-based exemptions based on national security factors, and may also add additional countries to the exempt list in the future. Additionally, individuals and entities operating in the U.S. that utilize steel or aluminum in their business activities may apply to Commerce for specific product-based exclusions. Commerce has signaled it intends to issue specific exclusions only sparingly, and will grant an exclusion only if the steel and aluminum articles that are imported are not produced in the United States in a sufficient and reasonable quantity or of a satisfactory quality. It will also take into account the national security factors outlined in Section 232.

 

It will be imperative for U.S. and foreign entities to follow the international reaction and the potential imposition of retaliatory measures, as a wide range of everyday products and industries could soon be affected – anyone from beer can manufacturers to the manufacturers of airplanes, from the auto industry to soup can producers – steel and aluminum tariffs will have a real-world impact. And if U.S. industries are singled out by both economic allies and rivals, it will be difficult to predict the reaction from the Trump Administration. But if one thing is certain, it is that the potential for further escalation of a global trade war is very real.

                                                                                                                

Section 301

In August 2017, President Trump directed USTR Robert Lighthizer to initiate an investigation into China's theft of U.S. IP and forced technology transfers under Section 301 of the Trade Act of 1974. Section 301 provides the U.S. government authority to investigate and take action in response to unfair and discriminatory trade practices in foreign countries found to burden or restrict U.S. commerce.[2] While frequently used by the U.S. prior to the establishment of the WTO in 1995 and its associated dispute settlement apparatuses, Section 301 has been rarely used since.

However, as President Trump's August 2017 memorandum to the USTR noted, in the last decade China has implemented laws, policies, and practices that serve to "inhibit United States exports, deprive U.S. citizens of fair remuneration for their innovations, divert American jobs to workers in China, contribute to our trade deficit with China, and otherwise undermine American manufacturing, services, and innovation." Due to widespread IP infringement, including trade secret theft, online piracy, and counterfeiting, as well as the rigorous requirements expected of U.S. firms seeking to develop or transfer IP into the Chinese market, U.S. businesses across a gamut of industries have complained in recent years, including those in the semiconductor, biotechnology, manufacturing, pharmaceutical, telecommunications, and software sectors. Chinese law often forces foreign firms to agree to transfer their technology and IP to their Chinese joint-venture partners as part of the terms of gaining access to Chinese markets.

On March 22, 2018, President Trump directed the Office of the USTR to implement tariffs on approximately $50 billion worth of Chinese products based on the findings of the Section 301 investigation. Reports indicate that the USTR has already identified a potential list of 1,300 products eligible for new tariffs. which will target specific products in the strategic sectors of Xi Jinping's "Made in China 2025" plan - including in aerospace, information and communication technology, and machinery.  According to the USTR, 25% ad valorem duties could be imposed, and additional tariffs will be proposed against Chinese products with an annual trade value commensurate to the harm caused to the U.S. economy from China's unfair policies.

Under his Section 301 authority, the President further directed the USTR to confront China's technology licensing practices through a World Trade Organization (WTO) dispute, and directed the Treasury Department to work with other federal agencies to increase restrictions on Chinese investment practices involving the acquisition of sensitive technologies.

Key Takeaways

So far 2018 is heading towards a record year for U.S. trade actions. Global companies should:

  • stay up to date on which goods are being investigated by the U.S. government;  
  • make sure your import/export documentation is in order;
  • review product classifications for accuracy since classification determines the duty;
  • educate your supply chain regarding duties; and
  • consider supply chain alternative sources so you can adjust to not only these duties but also any coming retaliatory tariffs imposed by key trading partners that stand to impact a wide array of U.S. industries.

 


 

 

[1] See 19 U.S.C. §1862(d). Under Section 232, the Secretary examines the effect of imports on national security by considering, among others, factors such as: the domestic production needed for projected national defense requirements; the capacity of domestic industries to meet such requirements; existing and anticipated availabilities of the human resources, products, and raw materials essential to the national defense; the importation of goods in terms of their quantities, availabilities, and use as those affect such industries; the close relation of the economic welfare of the United States to its national security; the impact of foreign competition on the economic welfare of individual domestic industries; and any substantial unemployment, decrease in revenues of government, loss of skills, or any other serious effects resulting from the displacement of any domestic products by excessive imports.

 

[2] See 19 U.S.C. §2411.

 


 

[*] Doreen M. Edelman is a shareholder and co-leader of the Global Business Team at Baker Donelson (Washington, D.C.). With more than 25 years of experience in import and export compliance, foreign investment, and global expansion, she advises both U.S.- and foreign-based companies on international business matters. Julius Bodie is also a member of Baker Donelson's Global Business Team.

photo
Washington, DC 
photo
Washington, DC 
Wednesday, April 25, 2018
International Trade & Customs, Trade Law / Trade Regulation