Sí, se puede
But how it happens matters a lot
Apparently the tariffs on Canada and Mexico are back on. Perhaps. Mexico did just extradict 29 cartel leaders to the United States — apparently in contravention of Mexican law. (The Mexican authories have referred to the flights as “transfers,” not “extraditions.”) Surely that will count for something?
Actually, I have no idea. I will be utterly unsurprised if President Trump imposes the tariffs. I will be equally unsurprised if he backs down. The question I want to answer here is not why the Administration is doing this. Rather, the question that I want to answer is how.
Because the legal authority here matters. Not because of court challenges, but because private businesses have different recourses depending on the law.
TLDR: Current law allows the Trump Administration can raise tariffs to whatever it wants. But the law that it has chosen to use will maximize the pain for American companies unless Washington works out some creative workaround right quick.
This post is divided up as follows:
When, why, and how Congress gave up tariff-authority to the executive. The standard story states that it started when FDR wanted the ability to negotiate lower tariffs with other countries. The standard story is wrong.
The laws currently in effect. Congress could, of course, change all of these.
The big problem with the law being used to impose tariffs on Canada and Mexico. Of course, that problem appear to be a feature for the Trump administration, not a bug.
This wall is about to get a lot taller for Mexican exports
Why Congress gave up its power
Congress began giving its authority over tariffs to the executive branch with the Tariff Act of 1922. The reasons were twofold.
First, Congress wanted to let tariff rates adjust to changes in economic conditions without having to go back and write a brand-new law. So Section 315 of the law ordered the Tariff Commission to estimate the difference between the U.S. cost of production of various goods and what it cost to make them overseas. If that difference changed from year-to-year, then the law enjoined the President to alter tariffs by the same amount.1
Second, Congress wanted to give the President the right to retaliate against countries that discriminated against American exports. Section 316 therefore gave the President the authority to order the Tariff Commission to investigate foreign trade practices. If the Commission found that they were discriminatory, then the President could hike tariffs on that country by up to 50 percent, and even ban imports if the foreign government’s actions were sufficiently egregious.
But was this constitutional? I mean, come on. Congress was handing over to the executive right to alter tax rates, for crying out loud!
Well, in 1928, the Supreme Court ruled that this was indeed constitutional. In J.W. Hampton, Jr. & Co. v. United States, the Court said:
“Congress may feel itself unable conveniently to determine exactly when its exercise of the legislative power should become effective, because dependent on future conditions, and it may leave the determination of such time to the decision of an executive.”
“Congress may use executive officers in the application and enforcement of a policy declared in law by Congress, and authorize such officers, in the application of the congressional declaration, to enforce it by regulation equivalent to law.”
The above two actions were constitutional “because nothing involving the expediency or just operation of such legislation was left to the determination of the President; the legislative power was exercised when Congress declared that the suspension should take effect upon a named contingency.”
In other words, lawmaking was complicated. It was fine for Congress to lay down goals in the law and then hand over the details. In other words, the construction of the administrative state.
Yes, this happened in 1922. Under the Harding Administration. Not FDR. The GOP controlled both houses of Congress and the presidency. It was rock-ribbed conservative Republicans what delegated the power tax foreign trade to bureaucrats. And it was the severely conservative Taft Court what wrote the aforementioned decision declaring it all constitutional.
So when Congress decided that it wanted to lower trade barriers, but only if other countries also lowered theirs, then it was entirely natural to hand over more power over tariffs to the President. And when Congress decided that it wanted to give temporary trade relief for reasons beyond those in the ‘22 act, it was only natural to give those power over tariffs to the President as well.
The President’s tariff tool kit
And so we got a bunch of acts that gave the President unilateral set tariff levels as long as the executive branch follows a certain set of procedures. The Trade Act of 1930 kept the provisions of the 1922 act. The Reciprocal Trade Agreements Act of 1934 did likewise. The Trade Expansion Act of 1962 added a national security proviso.
But then came Richard Milhous Nixon. And so we now have to go back in time, to discuss the 1917 law (as amended in 1933 and 1941) which unintentionally gave the executive practically unlimited power over trade …
The Trading with the Enemy Act of 1917
In 1971, the United States faced a balance-of-payments crisis. With gold reserves hemorrhaging to pay for ballooning American imports, President Nixon issued Proclamation 4074, which imposed a 10% tariff surcharge on all imports. The proclamation originally cited the Tariff Act of 1930 and the Trade Expansion Act of 1962, but the President’s lawyers soon realized that those laws didn’t really authorize a general surcharge. So when importers inevitably sued, government lawyers argued that the authorization actually came from the Trading with the Enemy Act of 1917, specifically Section 5(b)(1)(B), on page 12,274 at this link. (The link shows the text with amendments made in 1933 to include national emergencies and in 1941 to include imports.)
On July 8th, 1974, the Customs Court in New York struck down the surcharge. Regarding Trading with the Enemy, it wrote:
A finding that the President has the power under section 5(b) to impose whatever tariff rates he deems desirable simply by declaring a national emergency would not only render our trade agreements program nugatory, it would subvert the manifest Congressional intent to maintain control over its Constitutional powers to levy tariffs.
Nixon removed the surcharge on December 20th, 1971, but importers still wanted the charges refunded, so the case went on. On November 6th, 1975, the Court of Customs and Patent Appeals upheld the conclusion that neither the Tariff Act or the Trade Expansion Act gave President Nixon the power he sought.
But it did not agree about Trading with the Enemy. No, they said, it was clear that the 1917 law gave Nixon that power. Why? Well, the simple text of Section 5(b) was rather breathtakingly broad (boldfaced italics mine to indicate the relevant ‘33 and ‘41 amendments):
During the time of war or during any other period of national emergency declared by the President, the President may … investigate, regulate, direct and compel, nullify, void, prevent or prohibit, any acquisition holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which any foreign country or a national thereof has any interest.
SCOTUS had already ruled that Congress could effectively delegate tariff power if it named a contingency. Well, in 1933, Congress pretty deliberately called a presidential proclamation of a national emergency to be a contingency. And in 1941 it deliberately said that tariffs could be altered in such under such a contingency. Ipso facto, as they say.
However, lest those of you skeptical of executive power fall into despair, the Appeals Court in 1975 alao wrote these important words (italics in original):
Presidential actions must be judged in the light of what the President actually did, not in the light of what he could have done. To this we would add, “and not in the light of what he might do.”
In other words, the Appeals Court wasn’t writing a blank check. Nixon had a bonafide emergency on his hands. Future courts could, if they thought it logical, overturn future presidential actions.
Moreover, Congress in 1976 amended the Trading with the Enemy Act to make it clear that it applied only in wartime.2
So before we conclude that President Trump has unlimited power to do whatever he wants, let us look at the threee other ways in which Congress passed off its taxing power over international trade to the executive branch.
The Tariff Act of 1930, Section 338
The provisions of the 1922 law survived into the Tariff Act of 1930. Section 317 became Section 338 … and then everyone basically forgot about it. The Tariff Commission appears to have engaged in some investigations through the 1940s, but since it kept its “correspondence and complaints” secret and held no public hearings we don’t know for sure.3 We do know that U.S. government threatened its use on occasion (against Germany, Japan, and … France?) but it never pulled the trigger. After 1949, mentions of Section 338 disappear from the official record.
But the law remains on the books!4 And unlike later laws, it basically lets the President do whatever he wants. (Read it here.) So far the Administration hasn’t used it, possibly because invoking it would require the President to claim that the target is discriminating against American exports. No, I don’t think such legal niceties matter—what court is going to rule against a Presidential finding of fact?—but I can’t think of another reason. I’m kind of surprised that they haven’t dragged this out.
Unless maybe the beef with Canada and Mexico really is about cartels and fentanyl?
Trade Expansion Act of 1962, Section 232
This is the “national security” exemption. It can be used to justify anything. The problem, well, is that it’s slow. The law says that Secretary of Commerce needs to conduct an investigation and report within 270 days, in consultation with the Defense Department. In theory they could probably try cutting corners. I don’t know, get an intern and an A.I. to whomp something up in a day. In practice, however, Section 232(d) mandates a large list of questions that the report is supposed to answer. In addition, federal regulations lay out fairly onerous procedures.
In his first term, President Trump ran into trouble from trying to short-circuit procedures and inter-agency processes with far less bureaucratic oomph than this one. I doubt that they’ll try to short-circuit the 232 process. You can read all about that process at this link, which also contains copies of every past Section 232 investigation here. The end result is that the reports run about 200 pages (double-spaced) and take pretty close to nine months to finish.
The Trade Act of 1974, Sections 122 and 301
The Trade Act of 1974 gave the executive branch two more tools to set tariff policy.5
Section 122 passed in response to President Nixon’s aforementioned imposition of tariffs to address the growing trade deficit. It allows the President to impost tariff increases up to 15 percentage points in order to fix balance-of-payments problems. Moreover, it allows the President to impose import quotas—that is, numerical limits on the number of goods imported. Better still, “ if the President determines that the purposes of this section will best be served by action against one or more countries having large or persistent balance- of-payments surpluses, he may exempt all other countries from such action.” (Here is the text of the law.)
Section 301 additionally empowered the United States Trade Representative (USTR) to investigate unfair trade practices. If the USTR determines that a foreign government is acting unfairly, then it — under the explicit guidance of the President — can impose tariffs or other trade sanctions.
The problem with Section 301 is that it is thoroughly bureaucratized. Actions need to be announced in the Federal Register. Studies need to be undertaken. In theory, the magnitude of the punishment has to roughly equal the damage to America from the foreign government’s actions. The good thing is that the USTR can exempt particular American firms from the tariffs if it thinks that they would unduly hurt that company’s business.
In other words, the President has three tools he can use to set tariffs wherever he wants to impose them. The problem is that two of those tools are slow — Section 122 and Section 301 — whereas Section 338 is untested.
The International Emergency Economic Powers Act of 1977
I hate than name. It’s too long. And I hate the acronym “eye-eepa” even more. So I’m gonna call it the Economic Powers Act.
Congress passed the Economic Powers Act in an attempt to weaken presidential power under Trading with the Enemy. First, it amended Trading with the Enemy to make it clear that it only applied in wartime, striking out national emergency. (The current text is Section 4305 at the link.) It basically gives the President the same powers as Trading with the Enemy but imposes six-month reporting requirements and allows Congress to terminate the emergency via a join resolution.6
And this is the legislation that President Trump is using to impose tariffs on Canada and Mexico.
The Rub
There’s always a rub.
NAFTA used to be a fairly integrated economic space, at least for manufacturers, despite the long waits and heavy paperwork needed to cross the border.
Tariff drawbacks allow exporters to reclaim duties paid on manufactured goods imported into the United States and later re-exported elsewhere. They are one of the many reasons why I am relatively sanguine about the tariffs effect on the United States. If 25% tariffs hit car parts every time they crossed the border, then manufacturing would shut down. Instead, they hit only on the last time the product is imported. Which is bad enough!
But the tariffs are coming under the Economic Powers Act. This is the first time that the act has been used to impose tariffs. Which has two very bad not good implications. First, there are no provisions for drawbacks. In fact, executive order 14,194 explicitly prohibits drawbacks: “No drawback shall be available with respect to the duties imposed pursuant to this order.”
Second, there is no established procedure to apply for exemptions. Under the Tariff Act, the Trade Expansion Act, or the Trade Act, an enterprise who’s operations are unduly impacted by tariff changes can apply for an exemption or derogation.
But none of that means that the tariffs are illegal. I will admit that I am surprised at the no-drawback provision vis-a-vis Canada and Mexico. I am very surprised that no regulations have been published to create an exclusion mechanism for American firms.
So there are two explanations. One is disorganization. That is certainly possible.
The second is that the administration is well aware that the first time around it gave out loads and loads of exemptions, reducing the impact of its trade barriers. That’s fine if your goal is to reduce the impact on American firms. But it’s not fine if your goal to restructure the global economy.
In other words, the Administration could be like the smoker who flushes the pack of cigarettes down the toilet before she goes to the party. They’re going to make as hard as possible on themselves.
No, I don’t really buy that either.
Contemporary observers chalked up the law’s “innovative features” to growing fights between raw materials producers—who wanted higher tariffs on their products—and the manufacturers who used those materials as intermediate goods. In effect, the law offered some insurance to manufacturers: if your costs get too out of line, then protection will be automatically extended to you. (See Abraham Berglund, “The Tariff Act of 1922,” The American Economic Review, Vol. 13, No. 1 (Mar., 1923), pp. 14-33.)
The 1976 amendments left in place past regulations issued under the authority of the Trading with the Enemy Act. That’s why the Cuban embargo remains in force.
A long time ago I read through the reports of the Tariff Commission so that other people didn’t have to. Should you want to, however, Cornell, Princeton, and Harvard have placed them all online here. The particular fact in the paragraph comes from page 43 of the 25th Annual Report of the Tariff Commission, published in 1941.
Caitlain Lewis, “Presidential Authority Over Trade: Imposing Tariffs And Duties,” Congressional Research Service report R44707 (2016).
Section 201 allows private enterprises (or unions) to ask the International Trade Commission (ITC) to investigate sudden import surges. If the ITC gives a positive report, then the President can impose relief measures. Section 201 isn’t relevant for our purposes, since the President can’t invoke it unilaterally or deviate from the ITC’s recommendations.
The termination power applies to emergencies declared under Trading with the Enemy under the National Emergencies Act of 1976. The current interpretation is that the President cannot veto a resolution to end an emergency, although that has not been tested in court.