Leibowitz on Trade: Section 301, China, and Should the Tariffs Stay or Go?

What’s the Biden administration to do? The decisions are not easy, especially since important stakeholders within the administration have differing views on the matter.

I’d like to start with the law on the subject, then get into the policy options. Section 301 authorizes the US Trade Representative (USTR) to impose trade restrictions to address acts and practices of foreign governments that violate trade agreements they have with the US, or that engage in “unjustifiable” or “unreasonable” acts that burden US commerce.

The USTR in 2017 launched an investigation into China’s acts and practices regarding technology transfer, theft of trade secrets, and similar acts and policies. China denied any wrongdoing. In June 2018, USTR issued its report on the investigation. Not surprisingly, transgressions were found.

USTR, which Congress authorized to act in these cases, imposed tariffs in four stages. Of $503 billion in imports from China in 2017, USTR imposed 25% tariffs on $34 billion in trade value of US imports from China (List One), effective July 6, 2018. The following month, USTR imposed 25% tariffs on $16 billion in additional trade value.

The month after that USTR imposed tariffs of 25% on $200 billion in trade value (List Three tariffs). And finally, the agency imposed tariffs on $126 billion in trade value in September 2019 (the “List 4A” tariffs). Those tariffs were at first 15% and were subsequently cut in half to 7.5% because of agreements with China (the “Phase One” agreements) in early 2020.

By September 2019, USTR had imposed tariffs on about 75% of imports from China by value. Imports from China have not moved much. After increasing 8% in 2018, imports declined in 2019 to $454 billion, about 16%. The pandemic year of 2020 saw a further decline to $435 billion, but in 2021 they grew 15% to $501 billion, virtually the same as 2017. There is reason to believe that the tariffs have not cost China very much.

The USTR review process began with a notice in May asking for industries that benefit from the China List One and List Two tariffs to file a request to continue them on or before July 5 for List One and on August 23 for List Two. One request from an industry that benefited from the tariffs is sufficient to trigger a review of the tariffs and possibly to extend them.

As of Sunday, 147 comments had been filed on the List One docket and 18 on the List Two docket. It appears that there will be at least one request for continuation on both lists. USTR will then review the options and decide on which tariffs to keep and which to remove. There is no hard deadline for when such a decision must be made. There will be a further opportunity to make comments regarding the tariffs in general and on particular products.

The List Three and List 4A tariffs will also be subject to similar four-year reviews, but USTR has not issued notices about those lists yet.

Assuming, as appears certain, that industries benefiting from the Section 301 tariffs will ask them to be continued, the review process will include both legal and policy issues.

The tariffs on China contribute to the highest inflation in 40 years, but there will be disagreement about how much inflation will be dampened by reducing or eliminating the tariffs.

Treasury Secretary Janet Yellen and USTR Katherine Tai take contrary positions on the relative importance of addressing inflation and maintaining leverage on China by maintaining the tariffs and other restrictions on China. Secretary of Commerce Gina Raimondo has discussed a middle ground, removing tariffs that most affect consumers’ cost of living while maintaining tariffs on strategically important products such as semiconductors. The chip shortage continues, and Secretary Raimondo predicts it will be with us until 2024 or beyond.

Industries that benefit from reduced international competition usually support tariffs. They are helped by reduced competition. But consumers of these products are hurt by inflation and reduced competition. Balancing those interests is difficult—where you stand depends on where you sit.

Inflation didn’t exist to speak of in 2018. The wisdom of keeping inflationary tariffs therefore is a new issue. The “leverage” that USTR Tai wants to maintain on China suggests that the tariffs are a bargaining chip. And trade negotiators always prefer to trade for something. The import values from China suggest that the Chinese are not terribly concerned about the tariffs. But the Chinese government clearly wants them gone.

There are mixed messages from the Biden administration, suggesting differences of opinion. But when President Biden decides, the Cabinet will surely close ranks.

How this decision comes out depends on Biden and how his advisors present the various considerations. An issue like this could be settled in the middle—keep some tariffs, remove some, and perhaps reduce some. Substantially increasing the tariffs does not seem likely, at least based on publicly reported discussions. Tariffs on products most affecting the consumer price index could be removed because of their impact on inflation. Tariffs on other products, such as semiconductors, could be maintained to encourage more production in the United States, or at least outside China.

The most advanced semiconductors are produced chiefly in Taiwan, an issue that has defense and national security implications – especially following the Russian invasion of Ukraine and the increased prospect of military action elsewhere as well. More commonly used semiconductors are produced in China. Legislation encouraging production in the US is pending in Congress. But increased production in the United States depends on other factors, such as raw materials, that are beyond the effective control of Congress. Far better to beef up other sources than to cede more competitive control to China.

Industries will no doubt clamor for special attention, an impulse that the administration should approach with caution. The economy depends on competition, which economists sometimes refer to as “creative destruction.” When politicians decry the government “picking winners and losers,” this is what they mean.

Domestic issues like guns and abortion rights have taken certain stage for now. But these important economic and international issues will resurface.

Lewis Leibowitz

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