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Economy

Reining in America’s Illegal Section 301 Duties

Oct 13 , 2020
  • Sourabh Gupta

    Senior Fellow, Institute for China-America Studies

As surely as night follows day, the Trump Administration’s Section 301 tariff measures against China has now been officially found to violate international trade law.

On September 15, an arbitral panel constituted under the World Trade Organization’s (WTO) dispute settlement system, ruled that the measures at issue – an additional 25% and an additional 10% duty ad valorem on approximately $34 billion and $200 billion worth of Chinese imports dating back to June 2018 and September 2018, respectively – were inconsistent with the U.S.’ treaty obligations as per the General Agreement on Tariffs and Trade (GATT)1994. Specifically, the Panel found that the additional duties contravened the first two articles of the GATT 1994, which embody the most basic principles of international trade law. As per the non-discrimination principle, the U.S. is not allowed to discriminate between trading partners. In principle, if one country is granted a special favor, such as a lower customs duty rate for one of their products (exceptions exist for preferential trade agreements), that favor must be extended to all other WTO members. This is known as “most-favored nation” (MFN) treatment. By unilaterally raising duties in ‘connection with importation’ from China, and with regard to China only, the Trump Administration had violated Article I:1 of the GATT 1994. With regard to the predictability principle, the U.S. is required to bind its market opening commitments and transparently notify these bindings to its trading partners. These bindings amount to ceilings on customs duty rates. By unilaterally imposing additional 25% and 10% duties, and thereby breaching its notified ceilings, the Trump Administration’s Section 301 tariffs had violated Articles II:1(a) and II:1(b) of the GATT 1994.

The WTO arbitral panel ruling has been long in the making. The Trump Administration’s illegal duties stem from its March 2018 Section 301 investigation of China’s technology transfer, intellectual property rights and innovation policies and practices. That investigation had found that Beijing unfairly engages in “unreasonable” coercive practices, which has the effect of pressuring U.S. companies to transfer technologies on non-market terms as a condition for entry into the Chinese market. An “unreasonable” foreign trade practice, as per the U.S.’ Section 301 standard, can simply be one that is unfair “while not necessarily in violation of … the international legal rights of the United States”. This may be a sufficient basis for unilateral tariff measures in the U.S.’ view but it is an entirely insufficient – and now found to be an illegal – basis for measures in the eyes of the WTO.

At the time of China’s filing of a challenge at the WTO against the Section 301 duties in April 2018, there was ample awareness within the Trump Administration that its tariff measures were flatly illegal. In a speech at the National Press Club in May 2018, Commerce Secretary Wilbur Ross lamented that “the combination of MFN and bound tariff rates prevent[ed the U.S.] from having reciprocal tariffs”. In a testimony many years earlier to a Congressionally constituted commission, United States Trade Representative (USTR), Robert Lighthizer, too had acknowledged that with the coming into force of the GATT 1994, Washington had essentially forfeited its ability to use Section 301 to take effective action against China. Forced onto their back foot before the WTO, therefore, to justify its untenable tariff measures, the Trump Administration took recourse to legal legerdemain and argued that the measures were “legally justified because they were necessary to protect public morals within the meaning of Article XX(a) of the GATT 1994.” As per this reasoning, China’s policies and practices of using “coercion and subterfuge to steal or otherwise improperly acquire intellectual property” implicate public morals because “it violates prevailing U.S. standards of right and wrong as reflected in the state and federal laws of the U.S. … [as well as] the sense of right and wrong held by U.S. society [which would be] further offended if such fundamentally unfair policies and practices are left unchecked.”

This bewildering legal justification, needless to say, failed to pass muster. For one, instances that implicate ‘public morals’ in WTO jurisprudence have typically related to (a) money laundering, organized crime, and underage and pathological gambling, (b) the dissemination of audio-visual products and publications that contain morally objectionable content, and (c) harm to animal welfare. China’s supposedly “unreasonable” coercive practices against U.S. businesses implicate none of the above. Second, the groundwork for the Section 301 tariffs had been laid by USTR by way of two voluminous Section 301 investigative reports in 2018. In the over 250 pages plus of findings spread across these two reports, there is nary a reference to the words ‘public morals’! Finally, in the WTO arbitrators view, the Trump Administration had failed to identify and explain the relationship between the chosen measures - additional duties applied to a range of specified products - and the public morals objective being pursued by it. As they noted, “no evidence was provided that would demonstrate how the products it selected for additional duties treatment contribute to its public morals objective”.

The Trump Administration’s ‘public morals’ defense is not the only instance of its instrumental utilization of legal legerdemain to justify an untenable tariff measure. In March 2018, at the same time as the Section 301 findings was being released, the Trump Administration - citing the adverse impact of steel imports on the economic welfare of the industry which was in turn undermining U.S. “national security” - pressed into service GATT Article XXI’s security exceptions to impose a 25 percent tariff on a range of imported steel products. The tariff was promptly challenged by China at the WTO. The protectionist use of Article XXI to restore the capacity utilization of the domestic steel industry is clearly at odds with the text of the article, which requires that the ‘security exceptions’ be availed off only “in time of war or other emergency in international relations” and must touch upon the member state’s “essential security interests.” The panel ruling on this keenly awaited case is expected towards the end of the year. Judging by recent GATT Article XXI rulings in the Russia-Ukraine and Saudi Arabia-Qatar cases, the Trump Administration is likely to suffer the same dismal fate as with its ‘public morals’ defense in the Section 301 case.  

 

So where to from here?

 

In December 2019, the Trump Administration sabotaged the functioning of the WTO’s Appellate Body by blocking the formation of a quorum to hear appeals cases – in effect, ensuring that this Section 301 award is kicked into the long grass and the dispute settlement arm can no longer serve as a check on unilateral U.S. action. Even had the Appellate Body been operating normally and sustained the September 15th ruling striking down the tariffs, it is questionable if the U.S. would have adhered to the verdict. Washington has already racked up the largest number of Article 22.6 cases stemming from non-implementation of past WTO dispute settlement decisions. With a key stakeholder in the multilateral trading system willfully disregarding the very rules that it helped inscribe, the rules-bound order can only be worse off. The best that we can hope for is that a more internationally-minded Administration in 2021 re-commits America to the rules underpinning the global trading system, and withdraw its illegal Section 301 duties. 

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