Donald Trump’s attempts to impose a global tariff regime have been struck down twice by US courts. Will his third, and probably final, effort suffer the same fate?
Last week the US Court of International Trade deemed a 10 per cent across-the-board tariff on imports to the US, using Section 122 of the Trade Act, which relates to a balance of payments crisis that the US doesn’t have, illegal.
Those tariffs were Trump’s interim replacement for the “Liberation Day” or “reciprocal” tariffs that he announced, with much fanfare, in April last year. Those were declared illegal by the US Supreme Court in February.
Between them, the two decisions by the court could see more than $US200 billion ($277 billion) of tariff revenues collected illegally having to be refunded to US importers.
The Section 122 tariffs were only ever supposed to be a holding measure because there is a 150-day sunset clause in the legislation. They were supposed to enable the Trump administration to continue collecting tariff revenues while putting in place their permanent replacement.
That replacement, which the administration aims to have in place by late July, is another attempt to effect a global tariff regime, this time using legislation that has held up under court challenges in the past, Section 301 of the Trade Act.
The administration turned to Section 301 reluctantly because it involves detailed investigations of specific practices considered unfair or discriminatory to US companies. It requires individual investigations and public hearings, including submissions from the affected parties and consultations with the affected country. The hearings began in Washington last week.
It’s never been used for across-the-board global tariffs. Indeed, it has been used sparingly in the 50 years it has been on the statute books, with an average of less than three Section 301 actions a year.
Now, the administration has launched investigations of 16 of its biggest trading partners’ acts, policies and practices related to “structural excess capacity and production” in their manufacturing sectors.
It also has another set of investigations in train against a further 60 economies, including Australia’s, to determine whether they have failed to enforce bans on goods produced with forced labour. Those investigations cover more than 99 per cent of US imports and are transparently a mechanism for ensuring Trump’s tariffs have global coverage.
The Office of the US Trade Representative, which has initiated the investigations, has to determine whether the policies of the countries being investigated are unreasonable or discriminatory and “burden or restrict” US commerce.
The US Trade Representative, Jamieson Greer, has said the US “will no longer sacrifice its industrial base to other countries that may be exporting their problems with excess capacity and production to us” and that the investigations underscored Trump’s commitment to re-shoring supply chains and creating “good-paying” jobs for American workers.
“Across numerous sectors, many US trading partners are producing more goods than they can consume domestically. This over-production displaces existing US domestic production or prevents investment and expansion in US manufacturing production that would otherwise have been brought online.
“In many sectors, the United States has lost substantial domestic production capacity or has fallen worryingly behind foreign competitors,” he said in the statement announcing the investigations in March.
Those comments betray a lack of understanding of trade – by the administration official charged with overseeing trade and trade policies – and of the US economy, where manufacturing contributed less than 10 per cent to US GDP last year while services generated more than 75 per cent of GDP.
It also ignores the reality that the US is the world’s largest trading nation and has benefited immensely from the globalisation of trade.
With five per cent of the world’s population, the US has captured about 20 per cent of the world’s income. The Peterson Institute for International Economics has estimated that the expansion in world trade over the past half-century has made the US nearly 10 per cent richer than it would otherwise have been.
The concept of “comparative advantage” – countries that have natural advantages, such as resources, or scale advantages, or more efficient manufacturing or better technology or management – appears lost on Greer and an administration which sees a US trade deficit as a signal that the counterparty is cheating.
According to the administration, countries with factories operating at less than 80 per cent of their capacity are likely to have “structural excess capacity” and therefore trigger the definition it is using to implement Section 301 tariffs.
But if that’s the benchmark, the US fails its own test. According to US Federal Reserve Board data, US domestic capacity utilisation in March this year was 75.7 per cent, with the manufacturing sector operating at 75.3 per cent of capacity. The US average capacity utilisation rate over the past half-century has been about 79 per cent.
Among the 16 economies targeted for structural excess capacity are China, Taiwan, the European Union and Norway.
China’s industrial base, the focus of considerable discussion and angst because of its over-capacity (and a swelling tide of cheap exports), operated at an average of 74.4 per cent of its capacity last year – but, with a crackdown on over-capacity and excessive competition occurring, lifted the utilisation rate to 75.2 per cent in the December quarter.
While China is an obvious target (and one with a demonstrated ability to retaliate if the US adds to its existing tariffs), why Taiwan, the EU and Norway?
It is unfortunate that the Supreme Court based its ruling on tariffs on the language of the specific legislation, rather than the constitutionality of Trump’s attempt, without Congressional authority, to create a global tariff regime.
The EU’s capacity utilisation rate of around 78 per cent is higher than that of the US. Taiwan’s rate isn’t available, although production, and exports to the US, soared last year – because of the US demand for semiconductors and other artificial intelligence-related technologies. Norway’s “sin” is to export Atlantic salmon to meet US consumers’ demand and oil with qualities US oil doesn’t have.
Ireland and its pharmaceutical industry is another target.
More than 90 per cent of Ireland’s pharmaceutical companies are foreign-owned, most of them by US companies taking advantage of a favourable tax jurisdiction. Pfizer, Eli Lilly, Merck and Johnson & Johnson, among others, all have sizeable Irish operations.
Does a more competitive tax regime in a sector dominated by US companies constitute an unreasonable, unfair or discriminatory practice or “burden” US companies and restrict US commerce?
The “forced labour” heading the US is using to try to capture the rest of its trading partners targets countries that don’t have laws prohibiting imports of goods made with forced labour. The US does have such laws.
There are countries, like Australia, that try to screen products made with forced labour – we require companies to report on the risks of forced labour in their imported products – but don’t have legislation prohibiting it because of the complexity of identifying instances and of enforcement.
There is, however, widespread parliamentary support, including from the Albanese government, for a more formal ban on those imports and, if the Trump administration tries to use this technicality to apply tariffs, Australia and others could respond by passing some form of “best endeavours” legislation.
The Section 301 tariffs being proposed are an attempt to replicate the reciprocal tariffs that the Supreme Court deemed unlawful.
Whether it’s the excess capacity or forced labour, there is little precedent for the administration’s actions and, apart from China, few mentions of most of the countries targeted in America’s annual assessment of international trade barriers.
It is unfortunate that the Supreme Court based its ruling on tariffs on the language of the specific legislation, rather than the constitutionality of Trump’s attempt, without Congressional authority, to create a global tariff regime.
It is almost inevitable, however, that the Section 301 tariffs, if imposed, will also be challenged and that larger question of whether the power to impose such tariffs properly rests with Trump or Congress might well be tested.
So far, he’s 0 and 2 in the courts. Will a third strike mean the game is over?
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.