NAFTA in a Land of Uncertainty: A US Perspective

24 January 2017 Publication
Author(s): Marcos Carrasco Menchaca Alejandro N Gomez-Strozzi Andres Alvarez

Presidential Authority to Unilaterally Increase Tariffs on Mexican Imports

As noted in our previous alerts, trade among the U.S., Canada and Mexico will be significantly affected if President Trump carries out his campaign pledge to increase tariffs on imports from Mexico (at one point, promising to increase them by 35 percent), or to renegotiate or withdraw from NAFTA. While presidential authority over trade matters is broad, there are unique circumstances under which Trump proposes to increase tariffs on imports from Mexico, including the absence of war or hostilities between the countries; Mexico’s adherence to the multilaterally negotiated rules of NAFTA; and the existence of adequate trade dispute resolution mechanisms under NAFTA and the World Trade Organization agreements, all of which we believe render it unlikely that Trump will be able to take such action unilaterally.

This alert will explore the requirements and limits on a president’s authority to unilaterally increase tariffs on imports from Mexico under the complex tapestry of U.S. trade legislation, as well as the unique circumstances presented.

U.S. Balance-of-Payments Deficits

Under Section 122 of the Trade Act of 1974, the president could single-handedly impose a 15 percent increase in tariffs, temporary quotas or a combination of both, for up to 150 days, in order to deal with large and serious U.S. balance-of-payments deficits. However, the imposition of quotas, whether on a stand-alone basis or together with a tariff increase, depends on the existence of the necessary trade or monetary agreements permitting the imposition of quotas as a balance of payments measured. And, the use of quotas can only be exercised if the imbalance cannot be effectively addressed by the tariff increase. Other limitations would arise from the Section 122 requirement that the measures be applied “consistently with the principle of nondiscriminatory treatment” by the threat of retaliation by Mexico pursuant to World Trade Organization (WTO) complaints and by U.S. litigation challenging the existence of a “large and serious U.S. balance of payment deficit.”

National Security

Section 232(b) of the Trade Expansion Act of 1962 authorizes the president to negotiate agreements to limit or restrict imports, or to take such action and for such time as the president deems necessary to adjust imports of a specific product and its derivatives on the grounds of national security. The president could direct the Department of Commerce to initiate investigations, but the secretary of commerce would first have to find the “article is being imported into the U.S. in such quantities or under such circumstances as to impair the national security.”

There is little guidance regarding which facts would need to exist in order to establish an impairment of national security, but there is some indication that such facts would exist if it were found that permitting such imports is fostering dependence on unreliable or unsafe imports, or that it is fundamentally threatening the ability of U.S. domestic industry to satisfy national security needs. Section 232(b) places no limit on the nature of the restrictions or the amount of tariff increases that the president can pronounce, and in the past, it has been used to impose surcharges, as well as import fees on particular products.

In this case, therefore, limitations on the president would emanate primarily from the threat of retaliation by Mexico – either under the WTO complaint mechanism or its own antidumping/countervailing duty enforcement – and from resistance by the U.S. business community and consumers who would undoubtedly bear the lion’s share of costs that such retaliation would engender.

Unusual and Extraordinary Threats to National Security

The International Emergency Economic Powers Act (IEEPA) gives the president authority to impose economic sanctions on foreign countries when:

  • The threat is unusual and extraordinary;
  • The threat has its source in whole or substantial part outside the United States; and
  • The threat is to the national security, foreign policy or economy of the United States.

To exercise his authority, the president must first declare a national emergency under the National Emergencies Act. A new threat requires a new declaration of a national emergency.

Assuming these requirements are satisfied, the president’s authority is broad; he may investigate, regulate or prohibit any transactions in foreign exchange, transfers of credit or payments involving interest of any foreign country or a national thereof, and the importing or exporting of currency or securities. In addition, he may investigate, regulate, direct and compel, nullify, void, prevent or prohibit acquisitions, transfers and numerous other dealings involving property in which any foreign country or a national thereof has any interest. Arguably, the power to regulate would also allow the president to increase tariffs. But establishing the existence of the threshold requirements might prove difficult, and the president must in any event:

  • Consult with Congress before exercising any of the authorities granted;
  • Consult with Congress regularly so long as the authorities are exercised;
  • Immediately transmit to Congress a report specifying the circumstances that necessitate such exercise of authority (and why the circumstances meet the criteria for declaring an emergency), the authorities to be exercised and the actions to be taken;
  • Transmit reports to Congress every six months; and
  • Comply with the National Emergencies Act to the extent those requirements are supplemental to the IEEPA requirements.

Furthermore, Congress may terminate the national emergency by concurrent resolution pursuant to the National Emergencies Act. And, as with the preceding trade remedy authorizations, the threat of unilateral retaliation or a WTO challenge by Mexico would serve as deterrents.

Wartime Authority

The Trading with the Enemy Act (TWEA), which was enacted in 1917 during World War I, prohibited all trade with an enemy or enemy ally unless licensed by the president. The TWEA delegated authority to the president to grant those licenses, but only during times of war. In 1933, during the Great Depression, the TWEA was amended and the president’s authority was expanded to any time of war or national emergency. This allowed President Franklin D. Roosevelt to declare a national emergency with respect to the domestic banking system, to regulate all forms of international commerce, and to freeze and seize foreign assets. Over time, however, Congress felt that presidents were abusing their national emergency authority and the Senate created the Special Committee on National Emergencies and Delegated Emergency Powers. This led to the passing of the National Emergencies Act in 1976. Under this act, every national emergency must be specifically identified, communicated to Congress and published in the Federal Register. The president is also subject to reporting requirements and providing Congressional oversight, while national emergencies will automatically terminate in one year unless renewed by the president. Lastly, Congress may terminate a national emergency by a joint resolution. Currently, Trump’s primary limitation to use the TWEA in order to increase the tariffs on imports from Mexico stems from its amendment in 1977 that limits its application to times of war. A further limitation may be its lack of specific authority of the president to raise tariffs.

Unfair Trade Practices

Section 301 of the Trade Act of 1974 could be a vehicle for a president’s unilateral action as it authorizes the U.S. Trade Representative (USTR), upon direction from the president, to respond to and sanction unfair trade practices; acts, policies or practices that are unreasonable, discriminatory, and burden or restrict U.S. commerce; or unreasonable acts (i.e., those that are unfair or inequitable). The responses may consist of additional duties, import restrictions on goods and services from the offending country, and withdrawal or suspension of preferential duty treatment, among others. But, because Section 301 is in the nature of a retaliatory measures provision, the primary limitation on the exercise of Section 301 action against Mexico by Trump would establish the existence of actual unfair trade practices by Mexico.

A further limitation would be the requirement that the USTR engage in parallel international dispute resolution efforts, commencing with a request for consultation with the foreign country and, if the consultations do not resolve the issues, the initiation of a formal dispute resolution under the applicable international agreement between the U.S. and such foreign country (which the USTR has previously interpreted to require it to initiate a WTO challenge). Such formal proceedings would have to be initiated before the close of the consultation period or 150 days after the consultation commences.

In preparation for consultations and dispute resolution proceedings, Section 301 also requires the USTR to seek information and advice from the appropriate private sector advisory committees. Presumably, such private sector consultations and the threat of unilateral retaliation, or a WTO challenge by Mexico, would also serve as deterrents to unilateral Section 301 action.

Because reliance on any of the aforementioned statutes could have significant legal and economic consequences, it is more likely that Trump will instead focus on increased use of established trade remedies.

For example, Trump could direct the Department of Commerce to initiate more investigations under the U.S. antidumping and countervailing duty (AD/CVD) laws to determine whether imported products are being sold at less than fair value or are benefiting from subsidies provided by Mexico. However, the antidumping/countervailing duty orders could not be unilaterally issued by Trump. Instead, based on the Department of Commerce’s determination of the margin of dumping or the amount of the subsidy, and the U.S. International Trade Commission’s (ITC) finding that the dumping or subsidies constitute a material injury (or the threat of the same) to U.S. industry (or is materially slowing the establishment of a particular industry in the U.S.), the ITC would issue the AD/CVD orders.

Trump could also seek enforcement of anti-circumvention of AD/CVD orders, initiate safeguard measures under Section 201 of the Trade Act of 1974, or seek exclusion under Section 337 of the Tariff Act of 1930 of products that violate intellectual property rights. But again, Trump could not unilaterally issue the necessary orders. The ITC would have to do so.

What to do?

We anticipate that concerned U.S. companies will want to remain vigilant. An example of this is engaging with industry trade groups and policy makers to provide input on the effects of increased tariffs and fees on revenue, as well as to evaluate – and challenge when appropriate – whether the requisite thresholds for proposed presidential action exist.

Gardere’s international trade group will continue to monitor developments in this area and work with clients to manage the associated risks.

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