"Tariffs. I want tariffs. Bring me some tariffs!" -President Donald J. Trump.
The scene in August 2017 courtesy of Jonathan Swan: The Oval Office, during Gen. Kelly's first week as Chief of Staff. Kelly convened a meeting to discuss the Administration's plans to investigate China for stealing American intellectual property and technology. Kelly stood beside Trump, behind the Resolute desk. In front of the desk were U.S. Trade Representative Robert Lighthizer, senior trade adviser Peter Navarro, top economic adviser Gary Cohn, and Trump's former chief strategist Steve Bannon.
Trump, addressing Kelly, said, "John, you haven't been in a trade discussion before, so I want to share with you my views. For the last six months, this same group of geniuses comes in here all the time and I tell them, 'Tariffs. I want tariffs.' And what do they do? They bring me IP. I can't put a tariff on IP."
And now, almost seven months later...
STATE OF PLAY | Section 232:
April 19, 2017, the Department of Commerce led by Secretary Wilbur Ross initiated concurrent investigations under Section 232 of the Trade Expansion Act of 1962 to determine the effects of steel and aluminum imports on national security. Section 232, a seldom-used mechanism, enables the president to unilaterally impose tariffs or quotas if an affirmative finding is issued.
On February 16, 2018 Commerce released the findings of its investigations and submitted recommendations to the president. The investigation into steel found imports “threaten to impair national security” and recommended a series of options to address overcapacity and increase domestic steel production to approximately an 80 percent operating rate:
1. A global tariff of at least 24 percent on all steel imports from all countries, or
2. A tariff of at least 53 percent on all steel imports from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey, and Vietnam) with a quota by product on steel imports from all other countries equal to 100 percent of their 2017 exports to the U.S., or
3. A quota on all steel products from all countries equal to 63 percent of each country’s 2017 exports to the U.S.
Similarly, Commerce concluded aluminum imports impact national security and recommended:
1. A tariff of at least 7.7 percent on all aluminum exports from all countries, or
2. A tariff of 23.6 percent on all products from China, Hong Kong, Russia, Venezuela, and Vietnam. All other countries would be subject to quotas equal to 100 percent of their 2017 exports to the U.S., or
3. A quota on all imports from all countries equal to a maximum of 86.7 percent of their 2017 exports to the U.S.
While the Department of Defense issued a memo agreeing with Commerce’s conclusion that steel and aluminum imports impact national security, the memo cautioned against global quotas or tariffs that could adversely impact key allies. The memo proposed targeted tariffs limited to certain countries, rather than across-the-board remedies.
The debate over 232 further exacerbated internal divisions within the West Wing. Secretary Ross, U.S. Trade Representative Robert Lighthizer, and Trade Advisor (elevated last week to 'Assistant to the President') Peter Navarro led the charge in support of global tariffs. However, Defense Secretary Jim Mattis has been a vocal opponent of taking action under Section 232, and his concerns were echoed by the “free trade” contingent of the Administration (Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, National Security Advisor H.R. McMaster, and Secretary of State Rex Tillerson).
In a February 19 meeting, Republican Members of Congress also urged the president to exercise caution and warned about the consequences of potential retaliatory action. President Trump, however, has maintained steel and aluminum remedies would spur job creation in the U.S., and stated in a February 26 meeting with Governors, “Maybe it’ll cost a little bit more, but we’ll have jobs.”
As such, President Trump announced in a meeting with steel and aluminum executives on March 1 that he would impose tariffs higher than those recommended by the Commerce: 25 percent for steel and 10 percent for aluminum. President Trump maintains that he will follow through with the order later this week and Administration officials are working to ready the measure.
REMEDY AND RETALIATION:
While President Trump has repeatedly denounced Chinese trade practices and the forthcoming remedies appear to be aimed at curbing Chinese overproduction, sweeping action will have significant implications for the entire global trading system. With respect to steel specifically, the International Trade Administration recently concluded the U.S. imports most of its steel – 16 percent – from Canada, and imports 10 percent from South Korea and 9 percent from Mexico – key allies and countries with which the U.S. has ongoing trade negotiations. With respect to NAFTA negotiations, in particular, President Trump suggested this morning Canada and Mexico could be excluded from 232 action if “a new and fair NAFTA agreement is signed.” Nevertheless, sweeping action on steel imports likely will have a significant impact on trade relations and posturing by the U.S. in both ongoing and future negotiations.
As we look ahead, the trade remedies are all-but-certain to prompt complaints with the World Trade Organization (WTO), though it is unlikely the WTO will rule against the expected push by the U.S. for a national security exemption. However, notwithstanding a national security exemption, the consultation process, dispute settlement panel report, and likely appeals process at the WTO could take months – if not years – to reach a resolution.
On a more immediate basis, retaliatory action is likely from foreign counterparts. China’s Chief of the Treasury Remedy and Investigation Bureau recently warned, “If the final decision impacts China’s interests, China will certainly take necessary measures to protect its own rights.” China already is investigating whether to limit imports of U.S. sorghum and could consider restrictions on airplane manufacturing, soybeans, or other agriculture products. The E.U., meanwhile, has threatened potential retaliatory action on items such as Harley-Davidson motorcycles, Kentucky Bourbon, and agriculture products such as cheese, orange juice, tomatoes, and potatoes.
President Trump’s proposed action on 232 this week will mark a pivotal moment in the Trump Administration’s calls for “fair, reciprocal trade,” and could have significant implications for the U.S. and its trading relationships. The president’s decision on trade remedies sends an important signal regarding the influential players on trade in the White House, as it appears the “trade hawks” currently have the president’s ear. The president’s decision if carried out likely will set the stage for an aggressive trade agenda and will be telling with respect to how “America First” trade policy plays out on the global stage.
In the meantime, fears are growing on Capitol Hill that Trump’s tariffs could spark a global trade war and undermine progress Republican’s have made on their signature legislative achievement – tax reform – heading into a very challenging mid-term election environment. Both House Speaker Paul Ryan and Ways and Means Chairman Kevin Brady entered the fray today issuing statements strongly urging President Trump to reconsider his actions. While we won’t rule out a legislative counterpunch by Congress – the first challenge released just minutes ago here, there are procedural hurdles (veto-proof majorities in the House and Senate) as well as the potential for a tug-of-war to emerge over trade jurisdiction that will likely sour growing tensions at both ends of Pennsylvania Avenue.