Trade Cases
Leibowitz on Trade: An Eventful Week in Congress (Maybe)
Written by Lewis Leibowitz
July 31, 2022
Two major pieces of legislation were in the news this week. On the merits, both are scaled back substantially from earlier versions. But they are still major initiatives.
The first has gone to President Biden for his signature, which is certain. That is the Chips for America Act, legislation that will provide substantial subsidies to expand US capacity in the production of semiconductor chips.
It is a vestige of the House-passed “America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act,” or America COMPETES Act, which would have done a lot more than support semiconductor chip production here at home. But most other provisions, including a trade title that would have extended the Trade Adjustment Assistance program, were stripped out due to Senate opposition to such a large bill.
The Senate had its own smaller version, called the “United States Innovation and Competition Act,” or USICA. A conference of House and Senate members convened but got nowhere. The Senate wrote and passed Chips for America, and the House approved it last week.
The Chips for America Act has three main divisions. The third division is about improving security for Supreme Court justices, which makes sense but is not part of the economic package. The other two divisions would (1) encourage development of more semiconductor manufacturing in the US ($52 billion over five years) and (2) jump-start research and development projects for rapid development of the next generation of chips in the US (about $100 billion).
This bill garnered considerable bipartisan support because it includes reform of government-funded R&D that was backed by a group of Republican senators led by Todd Young of Indiana.
The second bill that has cropped up is the product of a deal announced Wednesday by Senator Chuck Schumer, the Senate majority leader, and Senator Joe Manchin, Democrat from West Virginia. This deal, embodied in a bill dubbed the “Inflation Reduction Act,” is also a vestige of the “Build Back Better” agenda that failed to pass muster with Senator Manchin last December. The new package, with $370 billion in tax credits for a variety of green energy initiatives, furthers the administration’s climate change agenda, but on a reduced level from last year.
The Inflation Reduction part of the bill has two major features: First, the bill provides Medicare with the authority to negotiate prescription drug prices with pharmaceutical companies. As a first step, only ten spectacularly expensive drugs are included in this provision. But expect more drugs to be dragged in if it passes.
Another revenue-raising provision would impose a minimum 15% income tax on corporations, even if their taxes would fall below that level based on current law. This would raise income tax revenues from corporations that now pay less than 15%, without doing the ugly and divisive work of actually reforming the tax code. The controversial feature of the 2017 Trump tax bill capping state and local tax deductions is not part of the deal, according to preliminary reports.
The Inflation Adjustment Act has just been released, so its voyage toward becoming the law of the land is open to question. But Democrats are already crazy about it. They say it will provide them a boost in the approaching midterm elections. Much needs to be done before the bill becomes reality, though. For example, the only hope for IAA is the “reconciliation” process, by which budget-related legislation can bypass a filibuster and pass with 51 votes in the Senate. However, the deal with Senator Manchin contains an agreement, the details of which are shrouded in secrecy, about moving projects to promote increased production of fossil fuels. Those provision are not in IAA because they are not budget related. They could relax environmental laws and regulations that have been used in the past to delay development projects past the breaking point.
The merits of these bills are controversial, at least in part. The Chips Act is a latter-day version of “industrial policy,” where the government picks winners and losers and tries to put government’s thumb on the scales of free enterprise. That strategy has not had a very good track record in the past—Solyndra comes to mind. There is good reason to believe that the very real problems of government-funded research and development have not been fully solved.
That said, the US has a real problem with semiconductors. China’s capacity to produce them has exploded in the last decade or so. That growth has led to outsourcing of a large part of America’s semiconductor supply. You all have seen the impact on US manufacturing of many products, such as cars and trucks.
Moreover, the most capable high-end chips are made principally in Taiwan and South Korea. With Taiwan under increasing pressure from China, the prospect of losing access to the most advanced chips requires some attention. The government has an interest in increasing chip manufacturing for national security (defense readiness) purposes. For this reason, the Defense Department strongly urged passage of the Chips for America Act, and now it is certain that President Biden will sign it into law.
As for the Inflation Reduction Act, climate change is a priority. Instead of throwing unlimited amounts of money at the problem, Senator Manchin insisted that the effort be scaled back and not constitute an ill-disguised effort to reduce fossil fuel consumption by regulation while hoping (against the odds) that renewable energy would develop quickly enough to make up the difference. It won’t, and last year Senator Manchin refused, famously, to allow such a strategy to become law. The new bill provides incentives for renewable fuels, advanced nuclear technology and fossil fuels (such as by renewing leases on federal lands) while providing “guardrails” to discourage misallocation of government-supported resources (i.e., subsidies) for such purposes as stock buybacks.
The bill was, ironically, made possible by the bipartisan Chips for America Act. Once passed by the evenly divided Senate last week with sufficient Republican support to beat a filibuster, Senator Manchin was willing to deal with Schumer to make some headway on climate change and other issues.
Both these bills have provisions that are troubling to free-market conservatives. There are, despite the “guardrails,” many opportunities to abuse the subsidies. But several of the usual methods of abuse have been addressed in the legislation. For example, the “prevailing wage” provision of Democratic-proposed legislation was left out of the bill. Most importantly, Democrats have a chance to pass the Inflation Reduction Act without Republican support.
But a lot has to go right for Democrats if passage is to happen. It assumes Senator Kyrsten Sinema (D-Ariz.) supports it. That is a big if. All 50 Democrats must support the bill and avoid a filibuster under the “reconciliation” label. The Senate parliamentarian must rule that the bill meets the requirement of being budget related. That is a big if too. Major legislation has fallen victim to the Senate parliamentarian in the past.
The encouraging thing about these bills is that they are, by all appearances, moderate and less sweeping than many Democrats would prefer. There’s plenty to argue about in both bills, but Democrats must avoid the temptation to load up the Manchin bill – or it will die. And Republicans will sink this bill at their peril. It could pass under reconciliation, or, if it fails, Democrats will have an issue for November.
Republican Senator Mitch McConnell, the Senate minority leader, will have to handle this carefully.
Lewis Leibowitz
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Lewis Leibowitz
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