Rogue 301: Trump to Dust Off another Outdated US Trade Law?

Chad P. Bown (PIIE)

August 3, 2017 11:45 AM
Photo Credit: 
REUTERS/Carlos Barria

The Trump administration stands once again at the precipice of triggering another US trade law from the Cold War. This time, media reports indicate the administration may self-initiate an investigation under Section 301 of the US Trade Act of 1974, a law that allows the president to unilaterally impose tariffs on another country. This law was mostly deployed before an effective, internationally-agreed system to resolve disputes—namely the World Trade Organization (WTO)—existed. Trump will allegedly investigate whether China is unfairly stealing American companies’ trade secrets and using industrial policy to harm US interests.

While the administration has identified a legitimate policy problem, Trump’s proposed solution may only make matters worse. In what is now a Trump administration habit, use of an unadvised and obsolete US trade law is likely to shift attention away from a real and substantive concern—i.e., China’s actions—and toward Trump's own policies.

The original use of Section 301

Congress enacted Section 301 in the 1970s as a vehicle for US exporters seeking to open foreign markets. Importantly, American companies, industry associations, and their workers could each use it to ask the government to investigate whether trading partners were unfairly limiting US exports.

In a 1975 case, US egg producers summoned the Ford administration to investigate quotas shutting them out of the Canadian market. In 1976, the Florida Citrus Commission alleged that European tariffs discriminated against US orange juice. And in 1979, the Cigar Association of America demanded an inquiry into what was keeping its smokes out of Japan.

This law is conceptually different from the other US unfair trade statutes—such as antidumping and countervailing duties—that are designed to stop US imports. For a time, Section 301 was the main avenue for American companies and workers to push policymakers to expand export market opening opportunities abroad.

Between 1974 and today, the US government has conducted 122 such Section 301 investigations. Use of the law was particularly prevalent during the Reagan administration when 49 investigations took place. Yet even in its prime, Section 301 was used much less frequently than the other unfair trade statutes of antidumping and countervailing duties that have been deployed thousands of times.

And there has been only one new Section 301 investigation since 2001.

The 1980s: The Section 301 heyday

Section 301 became infamous when Washington began to “self-initiate” investigations in the mid-1980s. The Reagan administration—in which current US Trade Representative Robert Lighthizer served—would trigger cases without receiving formal requests from industry or labor unions that they were being harmed. Overall, the US government itself has filed roughly one third of all Section 301 investigations. This is in sharp contrast to all other US trade laws in which the government initiated less than 1 percent of the cases.

It was also common beginning in the Reagan era to claim that trading partners acted unfairly, even though the foreign trade policy under attack wasn’t necessarily regulated by any specific rules. Until 1995, the General Agreement on Tariffs and Trade (GATT) only covered trade in goods. Internationally-accepted norms for trade in services, government procurement, international investment, intellectual property rights (IPR) protection, or anti-competitiveness practices mostly did not yet exist.

One notorious Section 301 investigation involved Japanese semiconductors. There the main allegation was not that Tokyo had imposed illegal tariffs or quotas to restrict US trade, but that a much vaguer Japanese “protective structure” made it difficult for US semiconductor companies to compete. Overall, Japan—and its bilateral trade surplus—was a frequent Section 301 target during the Reagan era.

Another emerging theme was the Section 301 allegations that countries did not adequately protect the intellectual property—the trademarks, copyrights, or patents—being developed by American companies. Hollywood filed concerns with Thailand over its movies, and pharmaceutical companies worried about the inability of their medicines to penetrate markets in Brazil, India, or Pakistan. The American ideas and information industries used Section 301 to further their international commercial interests both there and in cases involving Portugal, Taiwan, South Korea, and China.

Section 301 and the establishment of the WTO

As the George H.W. Bush and Clinton administrations continued using Section 301, trading partners became increasingly unhappy with what became known as an “aggressively unilateral” US approach.

Consider the optics from the trading partner’s perspective.

The US government acted as police force (identifying the foreign government’s crime), prosecutor (making the legal arguments), jury (ruling on the evidence), and judge (sentencing the foreigner to US retaliatory punishment). And sometimes cases would involve issues without internationally agreed upon rules!

Nevertheless, simultaneous US policymaking initiatives at the time helped take some of the sting out of Section 301.

Beginning in 1986, Washington was actively engaging key partners in constructive and cooperative trade negotiations. The United States had helped kick off the GATT’s Uruguay Round of negotiations and was continuing formal talks even when it was actively utilizing Section 301.

Ultimately the Uruguay Round negotiations concluded in 1994 with the establishment of the WTO.

The result of the negotiations was transformative. The United States had pushed for and achieved a radical remake of the international trading system into its rules-based (and litigious) image. The WTO brought in new norms benefiting emerging American commercial interests, including trade in services and the IPR enforcement that was critical to the pharmaceutical, entertainment, and information technology industries seeking to recoup their considerable investments in research and development.

But equally important, Washington pushed for a new dispute settlement system that would obviate its need for rogue action under Section 301. Unlike what had been the case under the toothless GATT system that it had abhorred, a US administration would be able to pursue any trade dispute against any country it desired.

And not only did the new rules cover America’s newly emerging export interests beyond goods, but if the United States won its legal arguments in its offensive cases—which typically it did over the next 20 years—Washington could be authorized by the WTO to retaliate in order to get trading partners to remove harmful trade barriers.

Not surprisingly, Section 301 fell into disuse. The increasingly effective and internationally accepted WTO dispute settlement system meant that Washington could use a better approach to pursue its grievances. Before the brief revival of an IPR investigation of Ukraine in 2013, the last formal Section 301 investigation took place in 2001.

Why 2017 is not 1986

It is important to reinforce just how different today is from the 1980s, a period in which some may view Washington’s use of Section 301 as an example in which the ends (establishing the WTO) justified the means (aggressive unilateralism).

One difference is that the China of today is not the Japan of the 1980s. Tokyo and Washington share a very different long-term political and military relationship than the one Trump currently confronts with Beijing.

A second important consideration is that the Trump administration currently has no carrot to offer. It is not engaged in any constructive negotiations analogous to the 1980s Uruguay Round. And something in that vein is needed if the Trump administration hopes to ultimately facilitate a new and enforceable long-term trade deal with China that would address legitimate American grievances.

The pitfalls of Trump using Section 301 today

A decision to trigger Section 301 today is problematic because it would provide additional fuel to the already simmering argument that the Trump administration is undoing the American commitment to rules-based trade and decades of work to establish international cooperation.

First was the threat of imposing trade barriers against allies under its self-initiated national security (Section 232) investigations into steel and aluminum. In that case, attention shifted off the China overcapacity problem and onto the Trump protectionism problem. Resurrecting Section 301 is a potential replay.

But triggering a Section 301 investigation also raises the question: What is preventing the administration from bringing its concerns with China to formal dispute settlement at the WTO instead?

The 1980s argument was that the trade agreements at the time were not adequate to address the China issues. Indeed, many of today’s concerns were not then covered by any trade rules, let alone agreements with China. Furthermore, 1980s dispute settlement procedures ranged from weak to nonexistent.

But the administration has not made the case that those conditions are relevant today. The WTO has disciplines covering services trade, the protection of intellectual property rights, and some basic investment protections. While USTR Lighthizer has made clear his general skepticism regarding the WTO, its dispute settlement system—while far from perfect—has proven remarkably effective when used.

Furthermore, a Trump strategy involving unilateral action like the Section 301 use of the 1980s will be difficult to defend today. Global attention will shift from what China is alleged to be doing wrong; instead, the world will focus on Trump’s own failure to follow the US-designed and internationally agreed-upon rules.

Employing Section 301 today would thus entail serious risks, especially if the investigation were to result in tariff retaliation against China. And now that there is a functioning rules-based trading system—unlike in the 1980s—there is much more to lose. A Trump decision to operate outside of the rules will spur China to follow suit.

Beijing’s current approach has been to challenge its grievance with American trade policy at the WTO. At the WTO, China frequently loses. If Trump acts unilaterally, what is to stop Chinese policymakers from enacting their own unilateral Section 301 process? This will surely be abusive and less transparent than the status quo, and will lead to retaliation that hurts other US exporters.

The fallout from Trump’s rogue use of yet another outdated US trade law would be considerable.

Comments

Bob Vastine

Excellent review of sec. 301 genesis, context, history and state of play regarding re-use.

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