International Trade Law Prof Blog

Mexico Fights Back

President Trump has continued to use tough rhetoric on trade with Mexico, saying at a rally in Phoenix on Tuesday that he will “probably” terminate NAFTA because he doesn’t think a deal can be made. Whether he really has the legal power to do that is a subject I’ll turn to next week, but for now, it’s important to remember one thing:

If Trump hits Mexico, Mexico will hit back, and it has tools to do so.

Hitting the U.S. in the Corn Belt

For example, Mexican legislators have introduced a measure that would use trade as a weapon against the U.S. The measure would reduce Mexican purchases of U.S. corn by 60 percent in the first year, 80 percent in the second year, and 100 percent in the third year.

In Mexico, corn imports from the U.S. are a hot-button issue. Many Mexicans blame NAFTA for the decline of domestic corn prices and the resulting economically-driven migration to the U.S. in the 1990s and 2000s (although economic analyses like this one and this one suggest that the story is more complex).

But even if shutting out U.S. corn would help the Mexican rural economy, it would devastate the Midwestern United States. Since Mexico is the second-largest market for U.S. corn, accounting for 25 percent of U.S. corn exports, the measure would have a substantial impact on U.S. agricultural imports. That threat would not be lost on Trump voters in the Corn Belt.

The measure may not pass, but its author, Mexican Senator Armando Ríos Piter, has made his point: Mexico is not a passive player in the renegotiation of NAFTA.

Remembering the Alamo, South of the Rio Grande

Ríos Piter, who plans to run for president of Mexico in the next election, has made another aggressive claim: The senator told the host of Boston’s NPR station that Mexico should consider making claims to land that changed hands in the Mexican American War. “What I said is that Mexico should be analyzing every treaty we have with the United States. The thing is: Why should we continue collaborating with the United States, with this administration especially?”

Getting Mexico to swallow a NAFTA deal that shifts the balance toward U.S. interests would not be simple. Mexican Economy Minister, Ildefonso Guajardo Villarreal, told CNN Money that Mexican officials could not accept a new NAFTA that is worse than the current deal because the government’s party does not have a majority of the multi-party Mexican Congress. Mexico’s Congress would have to approve of any changes made in the agreement, which would require a broad coalition among Mexican political interests in support of the new deal.

Mexican Nationalism on the Rise

Perhaps Trump doesn’t care and still hopes to “rip up” NAFTA, despite the pressure from agricultural interests. The current front-runner for in next year’s Mexican presidential election, Andrés Manuel López Obrador, might be just fine with that.

López Obrador, the former mayor of Mexico City, has been an outspoken opponent of NAFTA and all other measures to liberalize the Mexican economy. A chapter from his most recent book is titled, “Privatization, Synonym for Robbery.” That means the Mexican market for U.S. products might go away for a long time.

In another book responding to the election of Donald Trump, López Obrador describes the U.S. government by the Spanish idiom “lamp in the street, darkness in the home,” referring to one who appears good to the outside world but is revealed to be bad by his conduct in his own home or family.

Nationalism breeds nationalism and protectionism breeds protectionism. Despite its weaker economy (or perhaps because of it), Mexican politicians are unlikely to accept one-sided demands from the Trump Administration. The consequences of a trade and culture war with a neighbor with whom we share a 2,000-mile border could be costly to Trump supporters as well as opponents.   

Can the U.S. Protect National Security without Special Steel Tariffs?

Even if we assume that steel imports do threaten national security, do we really need the national security exception to protect the U.S. steel industry?

The national security exception is an extraordinary remedy that has been used only a few times in its history, and never in the WTO era. That’s because it could trigger a worldwide trade war with no established ground rules if countries start throwing up trade barriers on vague and unverifiable grounds of “national security.” 

But there are other trade remedies that are commonplace, WTO-approved, and don’t run the same risk of blowing up the consensus underlying the multilateral trading system. Could those conventional trade remedies protect the steel industry without having to open Pandora’s box by invoking the national security exception?

Section 232 as Part of the Trade Remedies Toolkit

Under Section 232 of the Trade Expansion Act of 1962, Secretary of Commerce Wilbur Ross only has to determine whether steel “is being imported to the United States in such quantities or under such circumstances as to threaten to impair the national security.”

If he finds it is and President Trump agrees, the President need only “determine the nature and duration of the action that, in the judgment of the President, must be taken to adjust the imports of the article and its derivatives so that such imports will not threaten to impair the national security.”

Nothing there about invoking the exception only as a last resort when other trade remedies fail, at least not on the surface. Maybe there’s a bit of a limiter in requiring the President to determine the action that “must be taken” to adjust imports. Can it be argued that special Section 232 tariffs must be invoked if antidumping or countervailing duties or changes in Commerce calculations for nonmarket economies would do the trick?

In Commerce’s Section 232 investigation and elsewhere, steel producers have claimed several types of harm to its segment of the steel industry that result from imports. Can those harms be remedied without Section 232?

Harms Alleged and Possible Remedies

Harm: Other countries, especially China, are selling steel products in the U.S. at less than the cost of production or are illegally subsidizing their steel industries.

Remedy: Commerce has already placed anti-dumping tariffs or countervailing duties on specific Chinese steel products where the Department of Commerce has found that those products were sold in the U.S. below the cost of production or were illegally subsidized. According to the Department of Commerce website, there were 152 anti-dumping and countervailing duty orders  in place on steel from 32 countries as of April 19, 2017. 

Harm: Chinese producers are evading anti-dumping and countervailing duties.

In September, several steel producers filed a petition with Commerce alleging that Chinese hot and cold rolled steel producers have been sending their products through Vietnam to avoid the U.S. tariffs.

Remedy: Commerce opened an investigation of the matter in November. U.S. law allows Commerce to place anti-circumvention duties on products that are passed through a third country to avoid tariffs.  Section 781(b) of the Tariff Act of 1930 (as amended in 1988) allows Commerce to extend the tariffs to the passed-through articles if the processing or assembly in the third country is “minor or insignificant” and if the value of the merchandise produced in the original country (in this case, China) is “a significant portion of the total value of the merchandise exported to the United States.”

If Chinese producers subject to anti-dumping and countervailing duties are passing their products through Vietnam with no real value added just to avoid the trade remedies, Commerce has the power to extend the duties to include those products.

Harm: Massive global overcapacity in the steel industry, especially in China, exceeds the scope of harms that can be addressed though specific anti-dumping and countervailing duties, which can only be placed on specific products from specific countries.

Remedy: In 2002, President Bush imposed sweeping safeguards on most types of steel imports, on top of anti-dumping duties, under the authority of Section 201 of the Trade Act of 1974. Under the WTO Agreement on Safeguards and U.S. law, safeguards are exceptions to WTO obligations in cases where a recent flood of imports has threatened the domestic industry.

The 2002 steel safeguards ran into trouble with the WTO because they were imposed even on products where there had been no recent increase in imports, and because a few trading partners (Canada, Mexico, Israel and Jordan) were excepted.

The remedies permitted under Section 232 are not limited by thestatute, and national security measures are excepted from the GATT by Article XXI, although no one knows the scope of that exception.

Escalating the Steel Trade War

Would Section 232 tariffs start a trade war? Commerce Secretary Wilbur Ross told CNBC in March, “We are in a trade war. We have been for decades. The only difference is that our troops are finally coming to the rampart. We didn’t end up with a trade deficit accidentally.”

Well, the existence of 152 anti-dumping and countervailing duty orders on steel alone says the U.S. hasn’t exactly been sleeping on the issue. From a trade law standpoint, using Section 232 is more like an intercontinental ballistic missile launch.

Other countries will see it that way and respond with a firestorm of retaliatory duties, WTO challenges to the remedies or to Section 232 on its face, and measures to protect their own industries from U.S. competition on the basis of their own “national security.”

Although Section 232 does not specify any specific remedy, possibilities include raising tariffs on countries like China but not friendlier trade partners; raising worldwide tariffs above GATT schedule commitment levels; establishing hard import quotas; or pressuring China (using vulnerabilities like China’s tolerance of IP piracy) into signing a voluntary export restraint agreement.

Each of these remedies raises a host of thorny WTO compliance problems and potentially exposes U.S. industries outside of steel or even manufacturing to WTO retaliation sanctions by impacted countries.

The Constitutional Irony of Trump's Steel Imports Investigation

As a constitutional matter, it is ironic that President Trump proposes to use a national security exception to impose tariffs on steel imports, tariffs that would otherwise exceed U.S. trade commitments. It’s ironic because the national security exception was enacted by Congress in order to limit the President’s authority over trade and to preserve some measure of congressional control over “Commerce with foreign Nations.” President Trump’s proposed action would accomplish the opposite.

1954: The National Security Exception Is Born

The national security exception is now in Section 232 of the Trade Expansion Act of 1962, but the exception originally appeared in a 1954 statute that had modest goals amid constitutional rumblings about trade and Executive power.

The Trade Agreements Extension Act of 1954 was intended as a placeholder, a one-year extension of presidential trade authority pending further study of the new constitutional direction that the country had taken on trade since the 1930s.

In the Tariff Act of 1930 and the Trade Agreements Act of 1934, Congress granted the President authority to enter into reciprocal trade agreements, an authority that would have expired without the 1954 Act. Originally one paragraph, the 1954 Act purported only to extend the president’s authority “pending the completion of a thorough study of the overall tariff and international trade situation,” according to the Senate Report.  

The first part of that work had been completed with the submission in January of a report by the congressionally-created Commission on Foreign Economic Policy. The House and Senate demurred that the press of other legislative priorities had precluded them from holding hearings on the report and the 1954 Act was intended as a stopgap.

Neither the bill that passed the House nor any of the amendments offered on the House floor mentioned national security. Section 2 of the Act, the precursor to current Section 232, was introduced in the Senate on June 24, 1954, by Senator Stuart Symington, a Democrat from Missouri and previously the first Secretary of the Air Force.

On the floor, Senator Symington emphasized “the harsh realities of the world in which we live – the world in which we trade and do business.” His remarks presented the amendment as a limitation on presidential power to enter into trade agreements: His amendment, he said, “in effect would require testing tariff decreases against defense requirements.” He stated his belief that “it should be mandatory for the administration to make certain that no tariff should be reduced, whenever such reduction would threaten continued domestic production necessary to meet our projected defense requirements.”

An Era of Lingering Doubts About Presidential Trade Powers

Section 232 requires that the President make a study and report to Congress (as the Trump Administration is now doing), but it does not substantively cabin the President’s discretion to invoke the national security exception. As Trump has told the press, Section 232 lets him do pretty much whatever he wants if he finds a national security threat.

This would have troubled Senator George W. Malone of Nevada. During the floor debates, Senator Malone read a lengthy statement opposing the 1954 Act extending the President’s trade authority.

Senator Malone’s opposition was expressly based on separation of powers concerns. Opening his remarks, he said, “I am opposed to the extension of the act because the Constitution of the United States, in article I, section 8, specifically provides that the Congress shall have power to lay and collect duties, imposts, and excises – we call them tariffs – and to regulate the commerce of the United States with foreign nations.”

Senator Malone objected that Congress, in the 1934 Trade Agreements Act, “yielded these responsibilities to the executive branch.” He was troubled that the President had delegated those powers to the State Department (this was prior to the creation of the Office of the United States Trade Representative). The State Department, he said, “scatters and diffuses them among foreign nations” through the GATT, “which has never been approved by Congress, and which considers itself, in fact, a creature of the United Nations.”

Senator Malone’s opposition was not just formal. In substance, his statement objected to a great number of what he viewed as the evils of the new era of trade agreements. His first objection was that, in his view, the Trade Agreements Act “retarded and weakened the nation’s defense potential.” He argued that “favoritism shown foreign producers of critical and strategic materials, minerals, and fuels” had “reduced the productive capacity of vital American defense industries, and … atrophied worker and professional skills in those industries.”

The next day, Senator Symington’s amendment was introduced, addressing at least the first of Senator Malone’s substantive concerns. Senator Malone’s separation-of-powers concerns were essentially ignored by the rest of the body.

Senator Malone lamented in 1954 that no court had ruled on the constitutionality of the new trade agreement process, and that remains true today: Only the Eleventh Circuit has been directly asked to rule on the constitutionality of modern congressional-executive agreements, and that court dismissed the issue as a non-justiciable political question. Rightly or wrongly, over the sixty-three years since Senator Malone voiced his lingering objections to the approach, the congressional-executive agreement has become the standard and accepted means of entering into trade agreements by the U.S.

The Irony of Grown-Up Section 232

So the precursor to Section 232 was enacted in a climate of lingering Senatorial doubt about the constitutionality of trade deals entered into by the President (instead of by Congress under the Commerce power) and approved by a simple act of Congress (instead of by two-thirds vote of the Senate as required of treaties). Section 2 of the 1954 Act was perhaps a last cursory nod in a generation of Senate acquiescence to surrendering both its Commerce Clause and its Treaty Clause powers to the President. In the early days of the Cold War, the one thing the Senate would do was to ensure that the President didn’t bargain away the country’s national security in exchange for a better trade deal. Section 2 (now Section 232) was designed to do that.

The irony of President Trump’s steel imports investigation is that his use of Section 232 would expand rather than constrain Presidential power in the trade realm. Unlike the GATT, which (as Senator Malone pointed out) had not been submitted for congressional approval in 1954, the trade obligations that Trump seeks to deviate from have been implemented into U.S. law by Congress. The Uruguay Round Agreements Act in 1994 approved the WTO Agreements (including the GATT) and made their obligations a part of U.S. domestic law. The NAFTA Implementation Act of 1993 did the same for NAFTA. Those acts were passed by both houses of Congress and were signed into law by the President like ordinary legislation. Now Trump wants to back out of them (or parts of them, at least). 

The Way Forward for a Nervous Congress

That’s not to say that President Trump’s proposed use of Section 232 to limit steel imports would be unconstitutional. Congress wrote Section 232 broadly and, aside from procedural requirements, gave the President broad discretion.

Not unconstitutional, but ironic. A statute originally passed to allow Congress to keep a bit of an eye on Presidential trade authority may now be used to derogate from trade obligations that Congress has implemented through legislation.

If the Administration’s trade agenda is making Members of Congress nervous, they should revisit Section 232 and other trade acts that give the President broad authority and consider articulating more intelligible principles for how that discretion may be used.

The Meaning and Mechanics of the Steel Imports Investigation

Last week, President Trump told The Wall Street Journal that he would make a decision “fairly soon” about whether to impose tariffs on steel imports based on national security concerns. In an interview, Trump said the decision would take time because “[y]ou can’t just walk in and say I’m going to do this. You have to do statutory studies. … It doesn’t go that quickly.”

By “statutory studies,” Trump presumably meant the investigation required by Section 232 of the Trade Expansion Act of 1962. It’s a very expansive statute, which has trade experts very worried.

Here’s why it matters and how it works.

Why Do Steel Tariffs Matter So Much?

It’s good news that Trump has begun to recognize that the rule of law precludes him from acting as CEO of USA, Inc. In the case of Section 232, however, the steps set out by Congress are largely procedural, not substantive. If Trump decides to play hardball on steel, the statute allows him to do so based merely on findings that steel imports weaken the economy, and that a weak economy threatens national security.

Section 232 also allows Trump to implement any number of trade remedies to inhibit steel imports if the Secretary’s report finds a threat or impairment of national security. Although such trade restrictions by the U.S. could be subject to challenge in the WTO, there is no precedent for interpreting Article XXI of the GATT, which allows countries to implement trade restrictions on national security grounds. WTO members have always just held their breath and hoped that countries won’t start undermining the basic principles of free trade based on some bare recitation of “national security.”

If Trump starts down that road, it’s highly likely that other countries will retaliate. They could restrict imports of U.S. products that compete with their domestic industries, also citing “national security.” If such a trade war starts, who will decide what’s a “legitimate” threat to national security and what’s mere economic protectionism?

The use of laws like Section 232 that appear to equate economic competition with a national security threat could, if taken to extremes, spell the beginning of the end of the multilateral trading system.

What Are the Standards for Determining Effects on National Security under Section 232?

Section 232 (b)(1) provides that the Secretary of Commerce must investigate “to determine the effects on the national security of imports” that are the subject of a motion either by the Secretary, another department or agency head, or an “interested party.”  

 The statute doesn’t provide any substantive standards as to what constitutes a threat to national security, but the Commerce regulations give some criteria for the Secretary’s evaluation. The regulations direct the Secretary, in his investigation, to consider the quantity of the article imported; the domestic production needed for national defense; domestic production capacity; domestic availability of raw materials and human resources; and growth requirements for domestic industry.

What’s the Relationship Between Economic Competition and National Security under Section 232?

More worrisome for those who fear an opening of Pandora’s Box of trade restrictions justified on “national security” grounds, Section 232(d) requires the President and the Secretary to “recognize the close relation of the economic welfare of the nation to our national security, and … take into consideration the impact of foreign competition on the economic welfare of individual domestic industries ….”

The regulations also require the Secretary to consider the link between national economic strength and national security. This includes weighing the economic impact of foreign competition; the loss of jobs, government revenues, or production capacity due to trade; or “[a]ny other relevant factors that are causing or will cause a weakening of our national economy.”

Neither the statute nor the regulations provide any standard guiding the Secretary’s application of these factors to his analysis of trade impacts and their effects on national security. This leaves the door wide open for justifying trade restrictions on products with localized labor or production impacts of the type that Trump promised on the campaign trail to reverse.

What Are the Steps in the Investigation of Steel Tariffs?

The White House announced the launch of the Secretary’s investigation of steel imports in a Presidential Memorandum dated April 20, 2017. The statute requires the Secretary to consult with the Secretary of Defense and other “appropriate officers of the United States.”

Under the statute, the Secretary is entitled but not required to hold public hearings to solicit additional information and advice. Commerce held a public hearing on this investigation on June 23, 2017, and received public comments through June 26, 2017.

The Secretary must make a report to the President within 270 days of initiating the investigation. The report must advise the President if the Secretary finds that the quantity or circumstances of steel trade “threaten to impair the national security.” All non-classified sections of the report have to be published in the Federal Register.

What Are the President’s Options?

Pretty much anything. The statute allows the President to “determine the nature and duration of the action that, in the judgment of the President, must be taken to adjust the imports of the article and its derivatives so that such imports will not threaten to impair the national security.”

The statute contemplates that the President’s action might include an agreement with trading partners for the U.S. to limit imports (a quota of some kind) or for the trading partner to limit exports (a voluntary restraint agreement).  But nothing in the statute limits the President to that remedy, or any other. The barn door is wide open.

How Long Will This Take?

Secretary Ross has nine months (270 days) from April 20 to make his report, which gives him until January 15, 2018. President Trump will have 90 days from the date he receives the report, or no later than April 15, 2018, to determine whether to take action.

If the President concurs with the report and decides to take any action, he must implement that action within 15 days from his determination (no later than April 30, 2018). He must inform Congress of his reasons for taking action (or not taking action, if he so chooses) within 30 days from his determination (no later than May 15, 2018).

Of course, either the Secretary or the President may act more quickly as long as they have followed the procedures set out in the statute. Stay tuned.