In the past seven to ten days, President Trump’s Section 301 tariffs on China, his aluminum tariff on Canada, his Commerce Department’s treatment of US importers, and his personal involvement in the TikTok sale have all generated trade setbacks or criticism.
The weekly trade report with L.C.
Here’s a round-up of administration trade setbacks:
- China just won a suit at the World Trade Organization (WTO) against some of the Section 301 tariffs directed against its exports;
- The threat of retaliation by Canada forced the Trump administration to beat an inglorious retreat from the aluminum tariff it imposed on its northern neighbor despite the USMCA;
- A US importer has challenged the Section 301 tariffs on imports from China in a lawsuit filed at the US Court of International Trade;
- The president is being criticized for intervening on behalf of several favored American companies in the TikTok dispute.
It’s unlikely, however, that these setbacks will receive much attention from the public, given its greater concern now with a Supreme Court vacancy and the continued harm done to the US economy and personal well-being by the Wuhan virus.
But “Global trade is rebounding much more quickly this year than it did after the 2008 financial crisis, lifting parts of the world economy and defying predictions the pandemic could send globalization into permanent retreat,” the September 20th Wall Street Journal reports. Will the rising tide lift US boats as well?
It’s not a sure thing. President Trump’s trade wars are not receiving favorable reviews from either the Federal Reserve or Fox Business:
Tariffs intended to boost the U.S. manufacturing sector have instead led to job losses and higher prices for businesses, according to a recent Federal Reserve report.
The report linked retaliatory tariffs issued in 2018 and 2019 with a 1.4 percent reduction in manufacturing employment and a 4.1 percent increase in costs for producers that more than offset the positive effects. It’s the “first comprehensive estimates of the effect of the recent tariffs on the U.S. manufacturing sector,” according to the Fed.
WTO panel ruling
Meanwhile at the WTO, that organization’s dispute settlement panel declared that US Section 301 tariffs on China violate WTO rules. It recommended “that the US bring its measures into conformity with its obligations” under WTO agreements.
That is unlikely to happen. US Trade Representative Robert Lighthizer immediately rejected the decision. The Trump administration is likely to file an appeal or simply ignore the decision.
The ruling isn’t expected to have an immediate real-world impact on US-China trade, but the impact on the WTO may be significant.
For the US, the case supports US allegations that the WTO is incapable of reining in China’s trade abuses and hampers Washington’s ability to act on its own. That allegation is central to the US effort to weaken the WTO.
The case goes back to the creation of the WTO. Before then, the US used Section 301 often in unilateral protectionist actions. But after WTO’s establishment — which the US supported as a restraint on protectionism — it agreed to use the law only in conjunction with the WTO. It neglected to do so in this case.
The panel itself noted that it is “very much aware of the wider context in which the WTO system currently operates, which is one reflecting a range of unprecedented global trade tensions.”
Dispute not settled by trade deal
The US never challenged China’s retaliatory tariffs at the WTO, as it did the retaliatory tariffs imposed by some trading partners in response to the US Section 232 steel and aluminum tariffs. Instead, the US claimed that the tariff dispute had been subsumed and, somehow, settled by the US-China Phase One Trade Agreement. Beijing disagrees with that claim, and it did not withdraw its WTO challenge to Section 301 when the Phase One agreement was concluded.
It filed the case against Section 301 in April 2018 and then amended it to apply specifically to the Section 301 “List 1” 25% tariffs on $34 billion in Chinese exports announced in June 2018 and the “List 2” 10% (later raised to 25%) tariffs against $200 billion in Chinese exports announced in September 2018. Subsequently, China subsequently filed two other WTO complaints against Section 301 tariffs, including List 4A.
In its filing, China argued that the tariffs were discriminatory and broke WTO Most Favored Nation (MFN) rules. These require that all WTO members be treated alike and not singled out for discrimination.
Lighthizer’s response
Lighthizer released a blunt response the day the ruling was released. He said:
This panel report confirms what the Trump Administration has been saying for four years: The WTO is completely inadequate to stop China’s harmful technology practices. Although the panel did not dispute the extensive evidence submitted by the US of intellectual property theft by China, its decision shows that the WTO provides no remedy for such misconduct. The US must be allowed to defend itself against unfair trade practices, and the Trump Administration will not let China use the WTO to take advantage of American[s]…. It is important to note that this report has no effect on the historic Phase One Agreement… which includes new, enforceable commitments by China to prevent the theft of American technology.
President Trump then weighed in with his usual hyperbole, saying that “The WTO… was created to suck money and jobs out of the US to the benefit of China and other countries – that’s… my opinion… whether it was created or it just turned out to be that way.”
Some Republicans: Don’t leave WTO
The administration’s position — that the ruling showed the shortcomings of the WTO with regard to China and that the Section 301 tariffs don’t violate the rules — was supported by several congressional Republicans. They stressed, however, that it isn’t a reason to consider withdrawing from the institution.
The US use of Section 301 to impose measures against another WTO member without getting WTO authorization breaks the rules. To understand why, it is important to know why the US largely stopped using Section 301 soon after the WTO was formed. One of the first-ever complaints filed at the WTO came from the EU against measures the US had taken under Section 301, and the result was a panel decision that was looked on favorably by both sides. The US “won” because the panel did not rule Section 301 to be WTO-illegal. Thus it didn’t recommend repealing the law. And the EU “won” because the WTO did rule that action taken under 301 must be done through the WTO, as the US had itself vowed to do as part of the Uruguay Round Agreements Act.
Section 301 under attack from US importers
US importers of vinyl tiles sued the government at the Court of International Trade (CIT) in New York over the Section 301 tariffs imposed on goods in List 3 and List 4A.
HMTX Industries and its subsidiary Halstead and Metroflor Corp., makers and importers of vinyl tile, claimed in a September 10th filing that the government erred in imposing tariffs on Chinese goods. According to the US plaintiffs, “The suit challenges the List 3 and List 4 tariffs as without statutory basis, because they were prosecuted in an untimely fashion and without statutory authorization. The suit also challenges USTR’s various procedural failings in seeking comment on and otherwise promulgating the Lists.”
This week a flurry of lawsuits based on the same claims were filed by about 60 companies, presumably to be consolidated into a single case.
Primarily, the suit targets the tariffs imposed on List 3 goods worth about $200 billion a year, which were first set at 10% and then raised to 25%. As the plaintiffs state, they “have asked the CIT to declare List 3 duties unlawful, refund any duties paid under List 3, and enjoin the US Government from imposing List 3 duties against them in the future.” If plaintiffs win, it will have repercussions for the array of Section 301 tariffs imposed on imports from China.
Clock has run out on some suits
Law firms immediately began soliciting other importers of Chinese goods to join this case or file similar ones. The List 3 suits are due by September 21, 2020 because of a two-year statute of limitations. Challenges to List 4A tariffs have until August 20, 2021. The clock, however, has run out on List 1 and 2 suits.
The plaintiffs claim that Section 301 of the 1974 Trade Act does not provide for escalating an ongoing trade war and that the tariffs were imposed for retaliation, whereas they should have been targeted at responding to the harms to US technology and intellectual property identified in USTR’s Section 301 report. Plaintiffs say that the tariffs on Lists 1 and 2 goods might have met the requirements of the law, since it requires that any trade measures, other than limited modifications to already imposed measures, must be taken within a year of the initiation of a Section 301 investigation. But the tariffs on Lists 3 and 4A were not imposed “within that window” and were thus imposed without authorization. They thus reflect the administration’s engagement in an “open-ended trade war” going beyond targeting the misbehavior identified in the Section 301 report.
Plaintiffs allege that USTR also violated the 1946 Administrative Procedure Act by not providing sufficient opportunity for public comment, not properly assessing the increased burden on US commerce that the report alleged is due to Chinese practices, and not putting forward facts necessary to support the report’s conclusions.
Despite interest in the case, the plaintiffs are given low odds of winning.
White House forced to retreat on Canadian aluminum tariffs
The White House retreated in a public and humiliating way from the Section 232 tariff it had levied on Canadian non-alloyed, unwrought aluminum just a month ago. It did so with the excuse that what had been a surge of imports from Canada has begun to “normalize.” But the real reason was to avert politically punishing Canadian counter-tariffs that would have severely damaged Trump and Republican legislators’ election prospects in November.
The Canadian counter-tariffs were set to be unveiled on September 16th, targeting about $2.7 billion in US aluminum product exports. But just hours before the announcement, USTR preempted the announcement by unexpectedly rescinding the US tariffs, retroactive to September 1st.
The US claimed it had reached a managed trade agreement with Canada over maximum aluminum exports to the US, but Canada denied that any such deal had been reached. Canada’s Deputy Prime Minister, Chrystia Freeland, was blunt: “This is not a negotiated deal between the US and Canada. We have not negotiated an agreement with the US on quotas. What has happened today is that the US has chosen to unilaterally lift its tariffs on Canadian aluminum exports.” More diplomatically, she added, “This was a day where common sense prevailed.”
GAO faults Commerce’s Section 232 tariff exclusion process
As though the previous rebukes weren’t enough for the week, the Government Accountability Office (GAO) on September 15th released its review of the Commerce Department’s process for granting or denying requests to exclude products from the Section 232 steel and aluminum tariffs.
The report found multiple faults with the process and made three main recommendations. Commerce said it agreed with the recommendations and claimed that they were in line with what the department was already doing to improve its procedures. The GAO report said that “Commerce rejected thousands of… tariff exclusion requests because companies made errors in their applications. It also did not decide most of the requests within its established deadlines, which created a backlog of almost 30,000 undecided requests. These issues delay relief for companies and increase work for the agency.”
Administration’s TikTok intervention criticized
Lastly, on September 19th, President Trump approved yet another deal worked out for the sale of some of Chinese video-app TikTok’s operations to Oracle and Walmart.
Oracle Corp. agreed to host the app’s US data on secure systems in the US, taking a 12.5% stake in the new company TikTok Global, and Walmart will have a role in financing the new company and perhaps its e-commerce with a 7.5% stake. TikTok’s owner ByteDance will maintain majority ownership. “I approved the deal in concept,” the President said.
It doesn’t appear that Beijing will want to stop the deal. ByteDance will not only still control a majority of TikTok, it will maintain control over its algorithm, which China recently placed under export controls.
It can plausibly be argued that TikTok and Tencent-owned WeChat, whose US operations the administration is closing down, both pose a security threat. As the Commerce Department explained this week: “Each collects vast swaths of data from users, including network activity, location data, and browsing and search histories. Each is an active participant in China’s civil-military fusion and is subject to mandatory cooperation with the [Chinese Communist] intelligence services. This combination results in the use of WeChat and TikTok creating unacceptable risks to our national security.”
Concerns over TikTok keeping algorithm
Outside analysts concur that TikTok in particular gains access to enormous amounts of data from user devices outside of what the app itself collects. It is subject to the Chinese laws that require all Chinese companies to cooperate with and provide data to the government when asked.
Some also consider it an unacceptable security risk to allow TikTok to maintain control of its underlying algorithm.
But US business representatives and others express discomfort with the government’s direct intervention into business decisions – such as the government skewing the transaction in favor of Oracle, a company with close ties to Trump, whose top officials are Trump donors. The president’s comment that he was disappointed the TikTok sale wouldn’t result in direct payments to the US Treasury was a vexing admission of the president’s misunderstanding of the relationship of the government to the private sector.
But things became even more controversial when it appeared that the kickback the president was seeking had been arranged. TikTok Global has, the president said, agreed to donate $5 billion to a new fund for “patriotic education” that he has decided to set up through a new “1776 Commission.” As one analyst tweeted, “So government regulatory approval of transactions can be used to extract money from corporations to be used for social causes? Interesting precedent this sets. The Democrats are going to be intrigued to hear about it.”
Actually, Democrats have long been using court settlements and taxes to fund their favorite activist groups and non-profits. The practice should stop on both sides.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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