Will Trump Invoke National Security to Start a Trade War?

July 5, 2017 4:45 PM

The Trump administration's tough stance on trade includes consideration of the unusual strategy of labeling certain imports as a threat to national security and thus potentially subject to steep tariffs. In April 2017, the administration announced investigations into steel and aluminum as "critical elements of our manufacturing and defense industrial bases," instructing the Department of Commerce to expedite the examination of these sectors. A report on steel is expected in July, according to news stories.

Following are answers to some questions raised by the possibility of such an approach, derived from research by the Peterson Institute for International Economics. The conclusion of PIIE studies is that such measures would undermine the rules-based trading system, which has no clear guidance on whether import restrictions for national security reasons are justifiable. New restrictions would likely damage the US economy and lead to possible retaliation against US exports by trading partners. More troubling, other countries may seek to impose their own barriers under the banner of defending national security. New trade restrictions would hit Canada, Mexico, Germany, South Korea, and Japan more than China, which the Trump team has singled out for criticism on steel exports.

National Security Cases for Trade Are Rare

The United States has a long history of investigating goods that may be unfairly traded—either sold at unfairly low prices, referred to as "dumped," or subsidized by foreign governments. More than 400 active import restrictions are in place as of June 2017. Steel and iron account for more than half of all cases. But instead of pursuing traditional antidumping or countervailing duties, the Trump administration is studying whether to invoke more far reaching, and less commonly used, statutes of trade law: Section 232(b) of the Trade Expansion Act of 1962. Section 232 permits an investigation into whether imports "threaten to impair" US national security—see Hufbauer 2016 for legal details.

As Bown (2017) explains, Section 232 has been the least utilized of the major US trade laws. Only 14 investigations have been initiated since 1980 (see table below). The last Section 232 investigation was initiated in 2001 over iron ore and semifinished steel products. Only two such investigations resulted in trade restrictions: (1) In 1982 an investigation into crude oil resulted in an embargo imposed against Libya, and (2) in 1986 an investigation into metal cutting and forming machine tools resulted in voluntary export restraints. Government lawyers also cited Section 232(b) as one of the legal grounds for President Richard Nixon's 10 percent surcharge tariff imposed in 1971 (Hufbauer 2016).

United States' use of trade laws, 1980–2016
Number of: Antidumping
(Section 731)
Countervailing duties
(Section 701)
Global safeguards*
(Section 201)
National security*
(Section 232)
Investigations 1,379 631 31 14
     Self-initiated (i.e. by the US government) 6 6 4 3
Trade restrictions imposed 649 279 11 2
     As import tariff or quota 626 236 8 1
     As suspension agreements, voluntary export restraints, mixed 23 43 3 1
* The last investigations under Sections 201 and 232 were initiated in 2001.
Source: Bown 2017, table 1a.

The vast majority of trade enforcement cases are initiated by firms, workers, or trade associations, and not by the US government. The Trump administration, however is "self-initiating trade cases" —i.e., acting without receiving a request from a US business—with the goal of accelerating "the process of taking corrective action while allowing the Department of Commerce to shield American businesses from retaliation."

What Happens If Imports Are Found to Be a Threat?

If an adverse impact is determined, tariffs or quotas can be imposed by the president without consultations with Congress. The Section 232 statute places no limit on the nature of restrictions or the level of tariffs, if imposed (Hufbauer 2016).

What's at Stake If Section 232 Trade Barriers Are Imposed?

Unlike Trump's formal trade policy announcements thus far, the national security investigations could have an immediate impact. US manufacturers that rely on imports and affordable inputs to remain competitive would face higher costs—the US auto industry, a major user of steel, strongly expressed such concerns. New trade barriers under Section 232 could cover an additional 3 percent or more of US merchandise imports (Bown 2017).

China, a major contributor to the global steel glut, has been a professed target of the investigations. But a large share of US imports from China are already restricted because of  relatively high US antidumping and countervailing duties imposed after actions under other provisions of the law. Thus new trade restrictions would fall on other sources of steel like Canada, Mexico, Germany, South Korea, and Japan rather than China. The trade barriers on these countries could simply redistribute the sale of steel worldwide without affecting the overcapacity in the global market.

How Could US Trading Partners React?

US trading partners could bring a case to the World Trade Organization (WTO) to challenge new restrictions. But the justification for using the national security exception is difficult to refute and few challenges have been mounted against restrictions under this exception (Hufbauer 2016). The WTO could disapprove an action that is transparently protectionist rather than security-related. Trading partners, as an alternative strategy, could simply retaliate against US exports without waiting 18 months or more for the WTO to adjudicate a claim. For example, after the United States recently imposed new duties on softwood lumber imports from Canada, Canada threatened to restrict imports of packaging materials from Oregon and not allow transshipment of coal from Wyoming and Montana. As EU trade commissioner Cecilia Malmström cautioned, "We are a friend and an ally of the US and we think that we would be unjustifiably hit by this [generalized tariff on steel]…would have to see if that measure is in compliance with the World Trade Organization of course—and if it hits us like it could, we will of course retaliate." An additional risk is the possible emulation by other countries, unleashing new protectionism worldwide by invoking national security.

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