Here's what the trade investigations Trump is doing are all about

Photo: Ron Sachs – Pool/ Getty Images

Over the last week, the Trump administration has made a flurry of announcements about trade.

Among the statements, Commerce Secretary Wilbur Ross told CNBC that this administration would be more about “enforcement” of trade deals.

And now we’re experiencing exactly what that means — that the government will “self-initiate” (a trade wonk term) trade enforcement cases against our trading partners. Often those cases are started by companies or industry groups.

It also means that the government will open trade investigations into specific industries or goods from other countries.

So far the Trump administration has opened trade investigations into three commodities: steel, softwood lumber, and aluminium. In true Trump fashion, the way some of those are being done is not particularly normal.

You see, when it comes to how the government conducts trade investigations, classifications matter. Self-initiated trade probes fall under four categories:

  1. Anti-dumping: Is a country or company illegally exporting more of a good than they’re supposed to?
  2. Countervailing duty: Is a trading partner government illegally giving an industry in their country a subsidy that gives it an advantage over competitors?
  3. Safeguard: Is there a sudden spike in the production of a good we should be worried about?
  4. National security: Is the importation of a good a threat to national security?

The investigation and adjudication of these matters falls under the International Trade Commission (ITC) — which consists of three Democrats and three Republicans — and the Commerce Department.

Most trade investigations, including the lumber case, fall into the first two of those categories. But the national security justification, which the administration is using for the steel and aluminium cases, is much less common and can have dangerous consequences.

Pick your poison

The softwood lumber case against Canada is a countervailing duty case. Canadian timber lands are state owned, which ultimately makes for cheaper lumber for timber companies, and so the US government is claiming Canada is giving its industry an unfair advantage.

The US has tried this argument against Canada before the World Trade Organisation a couple of times in the past and lost. Carl Grenier, a former executive vice-president (1999-2006) of the Free Trade Lumber Council and current professor at the University of Leval in Canada has sat through these negotiations before representing the Canadian lumber industry. He believes that these investigations only serve to raise the price of lumber, and that “only thing they [the timber industry] want is more money.”

“That’s why they keep coming back even though we’ve beaten them every time,” he told Business Insider. “It never seems to die.”

Countervailing duty cases are supposed to take 315 days according to WTO regulations, but the last time we looked into lumber, under President George H.W. Bush, it took four years.

And there are some people in the US who have a problem with the commerce department’s move, like the National Association of Homebuilders. After Ross announced the investigation they put out a memo talking about the impact of a counterveiling duty probe on housing construction.

“If the 20 per cent lumber duty remains in effect throughout 2017, NAHB estimates this will result in the loss of nearly $US500 million in wages and salaries for U.S. workers, $US350 million in taxes and other revenue for the governments in the U.S. and more than 8,200 full-time U.S. jobs,” according to Granger MacDonald, chairman of the National Association of Home Builders. “Lumber prices have already jumped 22 per cent since the beginning of the year, largely in anticipation of new tariffs, adding nearly $US3,600 to the price of a new single-family home.”

So there’s that.

The ‘nuclear option’

The steel and aluminium cases are different. They are being done in the name of national security, under an article of the Trade Expansion Act of 1962. Here’s how that works:

“The [Commerce] Secretary’s report to the President, prepared within 270 days of initiation, focuses on whether the importation of the article in question is in such quantities or under such circumstances as to threaten to impair the national security. The President can concur or not with the Secretary’s recommendations, and take action to ‘adjust the imports of an article and its derivatives’ or other non-trade related actions as deemed necessary.”

Ross told CNBC that the Trump administration decided to probe aluminium as a matter of national security because “we’re down to two smelters in the whole country. Importers are now 55% of the total aluminium market here and many critical things such as the very high purity aluminium that we need for aerospace, we only have one producer. That’s not a good formula.”

(Of course, one could argue that really expensive aluminium is also “not a good formula,” but we’ll just leave that right where it is.)

Trump’s reasoning in signing the memorandum to have Ross investigate steel followed much of the same reasoning.

Now, the fact that the Trump administration is investigating this as a national security threat has wide ranging implications.

Most self-initiated investigations are about anti-dumping or countervailing duties. All that stuff is handled by bureaucrats. Plus, the World Trade Organisation has pretty clear guidelines for how to proceed with those investigations.

National security on the other hand — that’s where the White House can get involved, and where officials can get creative, according to Chad P. Bown, a senior fellow at The Peterson Institute for International Economics.

“Because there are no clearly accepted guidelines, the justification for use of the national security exception is also difficult to refute,” he wrote in a recent piece. “It can, therefore, be easily abused. New import restrictions arising under that area of US law really are akin to the ‘nuclear option’ — their use really puts the entire system of international trade law at risk. “

Now why is this the nuclear option? Because these probes are initiated by the government, they give other countries a reason to retaliate in a way they would not be able to against private trade groups. Further, Brown wrote that usually the government is not as good as defending its case as industry groups and companies are.

“This weakens a 70-year-old US commitment to promote the international rule of law and encourages others to engage in tit-for-tat retaliation. China did this repeatedly between 2009 and 2011, harming US exports and workers in sectors as diverse as poultry, autos, and steel,” he said.

Once that kind of activity is set in motion, it takes a lot of careful diplomacy to end it, and so far this administration hasn’t shown that it can be careful about much of anything.

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