Leibowitz on Trade: Tariff War May End or Escalate

The U.S. and EU put aside their “legal briefcases,” noted U.S. Trade Representative Katherine Tai, and agreed to a five-year “cease fire” on the dispute over large civil aircraft, otherwise known as Boeing-Airbus. Retaliation and counter-retaliation on both sides led to billions of dollars worth of tariffs that stifled bilateral trade and made working together on larger issues difficult. 

The two sides also resolved to clean up the dispute over steel and aluminum tariffs that the U.S. imposed on European exports to the U.S. in 2018 and remain in effect. The EU slapped U.S. exports with retaliatory tariffs on a number of sectors and was about to double them effective June 1. The two sides called a halt for six months to enable a deal that would address the perceived “global overcapacity” in steel and aluminum. The European Commission was given six months to reach a deal. If no agreement with the U.S. was forthcoming by then, the doubling of tariffs would go into effect. 

As part of the U.S.-EU Summit, the two sides reaffirmed their intention to reach a deal by Dec. 1. Between now and then, negotiations will continue. The joint statement issued last week promised to address the global overcapacity issue.

Here’s my take on that: the notion of “global overcapacity” creates an issue that may never be resolved, giving domestic steel producers a perpetual argument that tariffs will be needed. Under current market conditions, with steel industry profits approaching or exceeding record levels, who would not raise an obstacle that could never be overcome? Spokesmen for the domestic steel industry predictably have said that tariffs against the EU should stay until there is a meaningful reduction of global overcapacity. That means indefinitely, as far as I can see.

Why is the issue of overcapacity so difficult to address? I see at least three reasons: (1) the major steel producing countries do not agree, and probably will never agree, on a definition of overcapacity (overproduction would be an easier term to agree on, but even that would be very difficult); (2) even if an agreed definition could be found, the major steel producing countries would have difficulty allocating responsibility for the overcapacity and determining which countries should cut production (just look at OPEC for an example of how hard it is); (3) tariffs are not the way to cut overproduction, because tariffs on steel and aluminum protect only the United States, and provide no real incentive for producing countries to cut their production; and (4) perpetual tariffs will bring more legal and political pressure to bear on governments to stop the perpetual escalation. 

Therefore, we are now in a dangerous situation. If the U.S. and the EU cannot agree on a solution whereby Section 232 tariffs are eliminated, more sectors on both sides will be harmed by further retaliatory tariffs that will not address global overcapacity.  The only solution is to stop the wheel of retaliation and counter-retaliation.

Perhaps perceiving this endless cycle, the Biden administration recently changed its position on companies’ ability to recover unlawfully paid tariffs. The immediate cause of the change in position does not currently involve steel and aluminum tariffs, but tariffs on China. However, it is quite possible that the new government approach to tariffs could affect the ability of importers to obtain refunds of Section 232 duties as well.

The government up to now has acknowledged that, if tariffs are ruled in court to be unlawful, importers who paid them may obtain refunds of those duties whether or not the payments were finally determined and the files closed by Customs (that process is referred to as “liquidation”). That eliminates the risk that importers will not have to file “protests” challenging the legality of tariffs. 

The government has now taken the position in a leading China tariffs case (HMTX v. United States, Court No. 20-177) that the Court of International Trade may not order refunds on Customs entries that have liquidated. Because of this change in position, plaintiffs have moved to enjoin liquidation of entries to keep refunds of unlawfully imposed tariffs available for refunds. The government opposed plaintiffs’ motion for a preliminary injunction; the motion was argued on Wednesday. Government attorneys argued that enjoining liquidation, which the plaintiffs asked the court to order, would place an undue burden on U.S. Customs and Border Protection. 

Perhaps I am oversimplifying here, but I don’t think so. The government wants to keep money that may not belong to it. Section 301 (China) tariffs or Section 232 (steel and aluminum) tariffs may be unlawful because the tariffs imposed did not meet statutory requirements; because the amount of the tariffs was increased contrary to statutory requirements; because an exclusion request was unlawfully denied; or because other irregularities of enforcement justify a refund of duties. All these questions have been raised in cases that are currently wending their way through the courts. 

If the government’s new theory is sustained, tariffs paid, even if they are illegal, could not be recovered by importers once entries have been liquidated by Customs. That means the government gets to keep money it is not entitled to. The outcome of the pending motion in the HTMX litigation may not go the government’s way, but there is currently no guarantee. 

Any company that pays duties that may be wrongfully collected should explore the impact of the new government position on non-refundability of duties. It might save some money.    

Lewis Leibowitz

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