Leibowitz on Trade: Presidential Overreach?

The problems of the global economy are more easily understood than the solutions to those problems. Any government involvement in solving economic issues necessarily is inefficient because the government is a less efficient allocator of resources than the private sector. Phil ably articulates the view that governments are always involved in the private economy and the U.S. should get involved too. Phil and I spent our time talking about a key example—Section 232 of the Trade Expansion Act of 1962, the foundational authority for steel and aluminum tariffs and quotas.

It’s hard to dispute that government interferes with the market—but that fact does not help arrive at practical solutions that do as much good as harm. This week, we saw a few examples of government involvement gone awry.

Countervailing Duties—Currency Undervaluation as a Subsidy

Last week, there were two important countervailing duty decisions, one involving “currency manipulation” and the other Canadian softwood lumber.

In a countervailing duty investigation on passenger car and truck tires from Vietnam, the U.S. Treasury Department found for the first time that a foreign currency was undervalued against the U.S. dollar. This means that the amount of undervaluation could be used to assess countervailing duties on Vietnamese tires. The same could be used to assess duties on any other product subject to countervailing duties under U.S. law. This new methodology was announced by the Commerce Department in February 2020. Importers from any country need to keep this issue in view—it could affect countervailing duty liability in these cases.

U.S.-Canada Softwood Lumber Dispute

The World Trade Organization issued a decision on a perennial trade dispute on softwood lumber from Canada, used extensively in residential and commercial construction. For nearly 40 years, the U.S. lumber industry has accused its Canadian counterparts of importing unfairly traded lumber because of Canadian government subsidies in the form of “stumpage” allowances (payments to the Canadian government, which owns most standing timber in Canada). The Canadians counter that “stumpage” is not a subsidy because the standing timber is fairly valued. Since the U.S. Commerce Department administers the U.S. countervailing duty law, they tend to take the U.S. position.

The WTO report on the dispute sided with Canada over some technical issues. The U.S. Department of Commerce, which calculates the amount of subsidies in countervailing duty cases, used a method for determining the “value” of Canadian lumber in four provinces (British Columbia, Alberta, Ontario and Quebec) based on the stumpage allowances in Nova Scotia, a small province in eastern Canada whose lumber market is quite different from the vast lands in western Canada where most of the lumber exported to the U.S. originates.

The reaction of the U.S. was predictable: “This flawed report confirms what the United States has been saying for years—the WTO dispute settlement system is being used to shield non-market practices and harm U.S. interests,” USTR Robert Lighthizer said. “The panel’s findings would prevent the United States from taking legitimate action in response to Canada’s pervasive subsidies for its softwood lumber industry.”

The U.S. and Canada called a truce on this plainly intractable issue in 2006. The agreement, which required Canada to restrict exports of lumber to the U.S., expired in 2015. Trade cases (antidumping and countervailing duty) commenced thereafter and continue. Whether stumpage allowance levels constitute a government subsidy has never gone the way the U.S. wanted in an international context; NAFTA panels and the WTO have both ruled against the U.S. position.

Now, the WTO system is being held hostage because of decisions the United States disagrees with. If the WTO system is worth nothing, then it really doesn’t matter. However, if the system is worth something, it is worth fixing through negotiation, which means the U.S. needs to give something to get something.

China in the News

China was also in the news this past week, in the context of U.S. politics. President Trump declared what many have seen for a while—the split between the U.S. and China. The two economies are being driven apart by government action. Some see it as necessary because of geopolitics. Others lament the loss of positive global change by the cooperation of China and the U.S., as well as the commercial and economic competition. The issues are complex, not good vs. evil, but what is needed is a strategy to achieve worthwhile and practical goals.

The tariffs on Chinese imports have caused U.S. companies to divert some of their supply chains from China—but it is increasingly clear, as the media has consistently reported, that the loss of production in China does not mean an increase here in the United States. Other countries, including India, Thailand, Indonesia and Vietnam in Asia, are succeeding in attracting supply chain investment much more than the United States. Moreover, quite a few companies are reconciled to keeping production in China, especially in industries (such as automotive) where the Chinese market is as important as the U.S. market. The split is neither as complete nor as lasting as the president declares.

Aluminum and Steel in North America

In North America, steel and aluminum have been in the news. We saw in August the reimposition of 10 percent tariffs on raw aluminum imported from Canada. This step by the administration, with dubious legal authority, led immediately to $3 billion-plus retaliation from Canada against exports to Canada from the United States. The aluminum industry, with very few exceptions, is opposed to this new round of tariffs.

Mexico, obviously under some pressure, has announced a new system of export licensing to assure that steel exports from Mexico are not being transshipped through Mexico from other countries. The new export certificates go into effect on Friday, Sept. 4. Mexico announced this in an apparent effort to stave off new tariffs against Mexican imports by the Trump administration. It’s not clear whether the move will have the desired effect.

In another development, Brazil has been hit with a reduction in steel import quotas lasting until the end of 2020. The proclamation, released on Friday evening, does not include the “Annex” that sets forth the actual reductions. Nevertheless, the quota reductions are effective as of last Friday.

The proclamation contains a hardship exception that permits companies to apply quota exclusion if they certify, at the most senior levels of the company, that the steel is needed urgently and that alternative arrangements cannot practically be made. That helps in theory, but the requirements are very stringent and the process of exclusion from steel and aluminum tariffs has been fraught with uncertainty from the beginning. The devil, as always, is in the details.

Government filings in several cases before the Court of International Trade have argued that Section 232 gives the president the authority to modify import restrictions at will. The modification of the quotas on Brazil are the latest of several modifications of the Section 232 restrictions going back to March 2018. Canada, Mexico and the European Union have been included, then Canada and Mexico excluded, the exclusions process modified, Turkish tariffs doubled, then un-doubled, etc. If these were lawful, the ability to make trade policy through tariffs and quotas would be unlimited, with no action by Congress required. The law is not likely to be so broad and discretionary—if it were, the Section 232 statute might well be unconstitutional after all, as an excessive delegation of legislative power to the president.

As these actions pile up, it seems clear that the president is aiming to take control of international trade policy, not to mention immigration policy and COVID-19 relief policy, leaving Congress on the sidelines. It’s important to our system of government to set reasonable limits on Executive power—trade may be one of the arenas where this happens.

The Law Office of Lewis E. Leibowitz

1400 16th Street, N.W.
Suite 350
Washington, D.C. 20036

Phone: (202) 776-1142
Fax: (202) 861-2924
Cell: (202) 250-1551