Trade Cases

Leibowitz on Trade: Reciprocal Trade Bill Would Expand President's Power Over Tariffs

Written by John Packard

Trade attorney and Steel Market Update contributor Lewis Leibowitz offers the following update on events in Washington:

A bill set for introduction today in the House of Representatives would, if enacted, fundamentally change the basics of U.S. policy on international trade. Rep. Sean Duffy (R-Wis.) will introduce the bill, which was drafted by the Trump administration.

Initially leaked last summer, the bill was originally titled the “Fair and Reciprocal Trade Act.” However, the unfortunate acronym required a change to the title and “Fair and” was removed.

Here is how the bill would work: First, the president would be given the authority to increase, by proclamation, tariffs on individual goods from a particular country if that country’s tariff on the same good is higher than the U.S. tariff. The president would not have to show any injury to a United States industry, impairment of the national security or any unfairness in the trade.

Second, the president could further increase the tariff if the other country increased its tariff in response to the U.S. increase in tariffs.

Third, the increased tariff would remain in effect until the tariff disparity was removed, or if the president decided that the tariff was “not in the economic or public interest of the United States.”

The first element would disconnect U.S. tariffs from the most-favored-nation principle because the president could impose, by proclamation, different tariffs on a particular good depending on the tariff the exporting country imposed on U.S. exports to that country. For example, the tariff on passenger cars entering the EU is 10 percent, while the tariff on passenger cars entering Japan is zero. The U.S. tariff is 2.5 percent. If the U.S. increased its tariff on European cars to 10 percent as the bill would permit, it could not increase the tariff on cars from all nations to that level.

The bill would not require a uniform increase, nor would it require a reduction in cases like Japan where the other country’s tariff was lower than ours.

The most-favored-nation principle was one of the first to be agreed to in the late 1940s when the postwar economic and trading system was developed. There are many good reasons for uniform tariffs, including the ease of administration of tariffs by the importing country and the lack of an incentive to deceive about the source of a particular product. The bill would make life in the trade world much more complicated for businesses and trade negotiators.

The unilateral increase in tariffs would obviously violate the most-favored-nation principle that is at the heart of the postwar global trading system, and would keep businesses guessing at the price of imported parts and raw materials.

The bill also raises serious constitutional questions. Tariffs are taxes and taxes are laws. (The second law passed by Congress was the Tariff Act of 1789.) The lawmaking authority under the United States Constitution is Congress, not the president.

I previously reported on a case currently before the Court of International Trade challenging the constitutionality of Section 232 of the Trade Expansion Act of 1962; that statute authorizes the president to take action if imports “threaten to impair” the national security. The plaintiffs in that case argue that the statute does not contain “intelligible” criteria restricting the president’s freedom of action and is therefore an unconstitutional delegation to the president of legislative power. The proposed Reciprocal Trade Act contains even fewer criteria—in essence, it hands over to the president the authority to impose new tariffs on any product, as long as the tariff of a foreign country is higher than the U.S. tariff on the same product. 

Members of Congress from both political parties have already criticized the bill. Sen. Chuck Grassley (R-Iowa), the new chairman of the Finance Committee, said, “We aren’t going to give [the president] any greater authority, we’ve already delegated too much.” Rep. Ron Kind (D-Wis.), a member of the House Ways & Means Committee, asked, “In what world would this be a good idea?” Ways and Means would consider the bill once it is introduced in the House.

A private sector commentator objected to the bill by arguing that it would “outsource” tariff levels to other countries, encouraging the president to mimic their “bad policies.” If the objective is to reduce global barriers to commerce, this may not be the best way to get there. That is why many of the key business trade associations, including the U.S. Chamber of Commerce, have announced their opposition to the bill. 

The key argument administration officials have made, led by presidential advisor Peter Navarro, is that the bill would give the president leverage to convince trading partners to reduce tariffs. This argument is not given much weight by conventional trade experts because it ignores how countries conduct tariff negotiations. Tariffs are not negotiated item by item. Automobile tariffs, for example, have been reduced over the years by countries “trading” tariff reductions on other products for autos. Back in the 1980s, Rep. Dick Gephardt unsuccessfully argued for a principle of “sectoral” reciprocity, but never for reciprocity on an item by item basis. Could such a radical change make sense? It would need a lot of discussion before most would be convinced; and delegating broad authority to the president to raise tariffs without congressional involvement would carry a huge risk.

The Reciprocal Trade Act will probably not pass in the current Congress, but it raises controversial issues about the appropriate limits of presidential authority in trade matters. President Trump has already stretched his power into new areas over the last two years. This debate will be important and consequential, in whichever direction it goes. The journey of this bill through Congress bears careful watching. 

Lewis Leibowitz

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