One year ago, it seemed as if the Office of the United States Trade Representative (USTR) had hit its nadir with its globally mocked formula attempting to justify the Trump administration’s arbitrary and ultimately short-lived “Liberation Day” tariffs.
One year later, the USTR is outdoing itself.
In response to U.S. President Donald Trump’s demand for something that will justify import duties on most countries in the world—after the U.S. Supreme Court earlier this year struck down his first stab at global tariffs—the administration’s trade office has put together a doozy.
Plan B for Trump’s war on trade relies on Section 301 of the 1974 Trade Act, but the trade team has not managed to translate a 50-year-old statute meant to address specific and narrow instances of trade discrimination into a coherent or defensible template for raising trade barriers on most major economies. That may not spell a defeat in courts, as befell Trump’s prior tariff initiatives, but it has led to an avalanche of pushback against the administration’s approach.
It is easy to forget that Trump’s war on trade continues, since his war on Iran does as well, and both have the effect of raising prices for consumers and slowing economic growth. But the Trump administration’s trade agenda churns ahead, with public hearings this week and next on the new key element of his protectionist agenda. Which means that the weeks and months ahead will be critical for the future of the Trump administration’s trade policy.
Section 301 is the next big battlefield, because the temporary Band-Aid to keep tariffs in place—Section 122 of that same 1974 act—expires in July. That is why the two big administration efforts to advance trade actions under Section 301 are so important.
Section 301 has been used many times before to redress trade wrongs, unlike the International Emergency Economic Powers Act (IEEPA), which is what Trump tried to use last year before the Supreme Court nixed it. It is a tailored provision in U.S. trade law that allows the U.S. government to identify specific policies and practices in a trade partner that are unjustified, unreasonable, or discriminatory and that harm U.S. commerce.
China often fits that bill, and in fact, Section 301 tariffs on China from the first Trump administration remain in place. Even today, many trade groups and academic experts argue that the administration’s renewed Section 301 push should continue to focus on China’s state-dominated economy, which distorts industry and exports through subsidies, state aid, currency manipulation, and other measures.
The problem is that the road map the USTR has presented in the most important Section 301 investigation, looking into “excess capacity” in other nations, is neither targeted nor aimed solely at abusive trade partners. It is also not based on any defensible metric that would connect a foreign country’s trade practices to explicit harm to a specific U.S. industry.
Instead, the USTR argues that countries that produce more goods than they can consume domestically, and thus export the remainder, are by definition harming U.S. industries.
“The result of this overproduction is large or persistent goods trade surpluses, including the expansion of exports to the United States or to third countries that, in turn, export to the United States. This displaces existing U.S. domestic production or prevents investment and expansion in U.S. manufacturing production that otherwise would have been brought online,” the USTR wrote.
If that sounds like a war on the very idea of trade rather than on bad actors, that’s because it is.
“The notice’s definition of excess capacity, followed to its conclusion, is indistinguishable from a description of trade,” wrote several scholars from the American Enterprise Institute in public comments submitted to the USTR about this investigation. “Any country that exports anything satisfies this condition. … Taken seriously, that logic would treat trade itself, rather than foreign governments’ conduct, as the object of Section 301 scrutiny,” they concluded.
Trump’s trade team has two ways to tell when foreign countries are treating the United States badly, and both are terrible metrics. The first is how much of the country’s industrial plant is being utilized, and the second is whether it runs a trade surplus with the world, or perhaps just with the United States, or even a trade deficit with the United States. (“This can be the case even if a given economy might experience balanced trade or have an overall goods trade deficit with the United States or with the world,” the USTR expansively noted.)
The industrial utilization argument is very interesting. The USTR posits that relatively low levels of plant utilization, say between 70 percent and 75 percent of nameplate manufacturing capacity, are an indicator of discriminatory government trade policies—those governments are keeping zombie factories afloat. The USTR prefers utilization rates of 80 percent or higher, citing a single number it once cited referring to the U.S. steel industry in 2018, which was in turn based on random numbers plucked from a personal finance website.
However, that is bad news for any economy whose manufacturing sector has plant utilization rates in the mid-70-percent range, since it indicates a deliberate government intent to promote discriminatory trade practices. The U.S. industrial capacity utilization rate has been below 80 percent for the last two decades. But that, says the USTR, is not evidence of discriminatory trade behavior as it is in every other country, but rather “further evidence that U.S. industry is not operating at its full competitive potential.”
Critics of the latest protectionist push are not amused by the sophistry of the capacity argument.
“This is an alarming methodological oversight for U.S. government investigations that could affect hundreds of billions of dollars in annual trade and result in billions more in unilateral taxes on covered imports,” scholars from the Cato Institute wrote in submissions to the USTR.
The other smoking gun of abusive trade practices, according to the USTR, is a country’s trade balance, whether it is a surplus, or balanced, or a deficit with the United States. “The result of this overproduction is large or persistent goods trade surpluses, including the expansion of exports to the United States or to third countries that, in turn, export to the United States,” notes the USTR.
Germany, the largest economy in the 27-nation European Union, which is a target of this Section 301 probe, thinks that is a silly argument. Making a valiant effort to explain the 19th-century principles behind global trade and comparative advantage, the German Chamber of Industry and Commerce noted that the country’s trade surplus with the United States, like that of the European Union as a whole, is because it makes things that American and global consumers want to buy.
“European—and specifically German—industrial output has evolved in response to historic global demand patterns, consistent with the principles of comparative advantage and gains from trade,” the chamber wrote in its submissions to the USTR.
German exports are not fueled by wild state subsidies; “rather, Germany’s industrial capacity is the result of market competition, as German companies strive to meet consumer demands from all over the world,” it said.
Singapore, another trade-reliant country targeted by the latest investigation, also had some thoughts.
“As a small country with no natural resources, Singapore and its economy are necessarily externally oriented and trade dependent,” the government of Singapore began its submission to the USTR. “To the extent that Singapore has a trade surplus with other nations, it is a result of the market-driven outcomes of Singapore’s geography and open economy, rather than non-market-oriented government interventions.”
More to the point, Singapore pointed out, the tiny country has run a trade deficit with the United States for more than 20 years. What harm to U.S. commerce is the USTR talking about?
Between the low levels of industrial utilization and certain bilateral trade surpluses, the United States itself seems to be a major offender in global trade, according to the USTR’s own definitions.
“The United States may therefore itself exhibit excess capacity under such standards through its own bilateral and global surpluses in select services and energy products,” wrote a pair of scholars at the Council on Foreign Relations in a blog post. “It also opens up the possibility that U.S. trading partners could take actions to restrict imports of American services or energy products for similar reasons using vague definitions to justify those measures.”
The language in the Section 301 statute is fairly clear, and it is meant to address country-specific trade distortions with a thorough investigation, not become a catch-all backstop for an administration determined to raise import duties under any pretext. What Section 301 is not meant to target are the normal workings of market economies that make more of some things than others, and sell the things they make the most of, or make better.
Section 301 needs to prove a concrete link between foreign government policies and concrete harms to specific U.S. industries and workers.
“[O]therwise USTR would merely be cherry-picking disparate, unrelated statistics to reverse-engineer new U.S. trade restrictions,” said Cato in its written submission.
Given how sloppy the Trump administration’s rationales are for the next round of tariffs, and how far they differ from the statutory requirements of Section 301, is there a chance that these tariffs, too, could face a serious legal challenge, like the ones that killed Trump’s IEEPA tariffs?
“We filed these in the hopes of a court challenge, but I think the chances of victory are low—maybe below 10 percent—unless they do something like fail to offer notice-and-comment before imposing tariffs or imposing insanely high ones,” said Scott Lincicome, the vice president of economics and trade at the Cato Institute.
“But the statute is terribly broad and discretionary, so I don’t see much of a challenge, unlike with IEEPA. I hope I am wrong.”
