Shortly after the New Year began, in light of the positions taken by the candidates in the Presidential election campaign, our International Trade & National Security team conducted a webinar for clients and friends and reviewed both the import and export implications of the incoming administration.
In our import analysis, we focused our attention on those actions exclusively within the jurisdiction of the Executive Branch – actions that would not require Congressional approval or that were not subject to Congressional override. We suggested that one of the statutes that might be invoked to limit imports was section 232 of the Trade Expansion Act (19 USC § 1862). This statute, which has rarely been used, gives the President the authority to achieve the goals that he frequently articulated during the Presidential campaign. On April 20, 2017, the Secretary of Commerce invoked this statute to order the commencement of an investigation into imports of steel into the United States, and the President simultaneously issued a Memorandum directing that the investigation be conducted “expeditiously.” (Presidential Memorandum for the Secretary of Commerce, April 20, 2017, Sec. 3) We therefore thought it would be a helpful to focus on this statute, not simply to explain its elements, but more importantly, to get a sense of what outcomes can be expected from this provision of law.
What the statute provides
The statute authorizes certain interested governmental or private-sector parties, or the Secretary of Commerce himself (here the matter was self-initiated), to conduct an investigation into whether the importations of any article are adversely affecting the national security of the United States. The Commerce Department has 270 days to complete the investigation, but the Secretary said that because of the significant work already done in the steel unfair trade practices cases, he expected the report to be finished “a lot sooner than that.” (Transcript of Secretary Ross’ Press Conference, April 20, 2017, page 5, The White House) If the Secretary’s Report finds that the national security is being impaired by such imports, the Report is referred to the President, with the Secretary’s recommendation for action. Within 90 days from the date of the referral to the President, he must either note his concurrence or rejection of the Report. If he concurs, he must then determine the action to be taken and the duration of such action. If he determines to take action, he must do so within 15 days of the date by which he makes the determination to act, and shall notify the Congress within 30 days of the date of the determination to act, but it is a notice-requirement to the Congress only.
What is the likely outcome?
In Secretary Ross’ brief press conference announcing the institution of the investigation, he detailed several notable facts:
- Imported steel now constitutes 26 percent of domestic consumption – a significant level of import penetration by any standard
- In 2017, steel imports are up 19.6 percent in year-over-year comparisons
- The domestic steel industry is operating at only 71 percent of capacity
- The Commerce Department has already concluded, or is in the process of conducting, 177 investigations against allegedly unfairly traded imported steel products; so the antidumping and countervailing duty remedies – the most frequently invoked international unfair trade statutes – are not producing the desired effect of limiting import competition or protecting U.S. industry
- Excess production capacity in China alone is more than twice U.S. consumption
What are the available responses if the Secretary finds that the imports of steel imperil national security, and the President concurs?
The sole parallel national security investigation under section 232 of the Trade Expansion Act that is relevant here is the 1970’s-era investigation of petroleum products.
In that case, the Department concluded that imports of petroleum products impaired the national security of the United States and, as a result, the government adopted a system of licenses, designed to reduce levels of imported petroleum. It is likely that, should the Commerce Department find an impairment of national security in steel imports, a similar license program designed to limit the total volume of imports of steel would be established, probably coupled with an increase in tariffs or fees. Clearly, should an affirmative determination be made, the goal would be to increase production capacity in the United States, and a tariff assessment alone would not guarantee a reduction in import penetration; it would only guarantee an increase in federal revenues and in the landed cost of the imported goods, which is not the objective of the statute. A quota or licensing system, on the other hand, would achieve these statutory objectives.
How would such a program be administered?
Should the Secretary ultimately rule that imports are to be restricted, many will offer their views on how such a program should be administered; but the United States has significant experience in controlling the importation of certain goods into the United States, most notably in its now-largely-defunct system of textile quotas, and in its continuing quota programs on the importation of certain food products.
The first decision that the Commerce Department would have to make, should an affirmative finding be made, is whether licenses would be issued simply to limit import levels, or whether the licenses would be granted in return for the payment of a fee, and the amount of such a fee. A fee-based license would have a double effect – it would generate federal revenues, and it would increase the landed cost of the competing imported steel, thus permitting U.S. producers to raise prices and increase their own profitability. The second question would be whether such licenses would be transferrable. In the administration of textile quotas, a secondary market was created in quota rights, which allowed a company that had the right to import but had no immediate need for the product, to sell the import rights to a company that had the customer, but no import rights. Should an affirmative determination of national security impairment be made, we would expect a similar program here.
Why did the Commerce Department select such a rarely used Statute under which to proceed?
When the United States was admitted to the World Trade Organization, it voluntarily surrendered certain rights to unilateral action in trade matters, in favor of the larger benefits of WTO membership. Once it became a WTO member, there were limitations under which the United States – or any other WTO Member State – could restrict its trade with other WTO Member States. It could not unilaterally increase duties and it could not unilaterally impose license requirements (except as permitted under the WTO framework agreements). Therefore, without a clear justification for its actions, these responses would run a risk of potential WTO challenges by adversely affected Member States. However, there is a (fairly narrow) exception in the WTO Agreement (GATT 1947, Article XXI (b)(iii)) stating that nothing in the Agreement shall prevent a Contracting Party from taking any action that it considers necessary for the protection of its essential security interests during an “emergency in international relations”; so invoking the statute granting the President the power to restrict trade on the basis of protection of national security interests lays the diplomatic groundwork for the U.S. position that action taken under section 232 is excepted conduct under the WTO rules. In invoking section 232 of the Trade Expansion Act, the United States is probably signaling its intention to invoke an Article XXI defense, should there be any claim by a trading partner of a violation of WTO Undertakings.
What should we expect next?
The statute authorizes, but does not require, a public hearing, but the Secretary has said that his Department will hold “at least one and perhaps more public hearings,” and that they will invite “public commentary.” We therefore expect that a Federal Register Notice will soon be issued inviting comments; noticing a public hearing; and giving further details. We expect to follow this matter closely.
Client Alert 2017-119
