Any Serious Congressional China Legislation Should Include Section 232 Reform



Inu Manak | Scott Lincicome | CATO Institute

According to various news reports, Congress is preparing a package of legislative updates to U.S. trade and economic policy in order to address China’s growing economic and geopolitical influence. The resulting “China Package” will, like the Strategic Competition Act of 2021, be a bipartisan effort that includes a mix of diplomatic and strategic policies seeking to bolster U.S. companies’ competitiveness and rein in perceived Chinese abuse. One area ripe for reform – yet unfortunately missing thus far from congressional discussions – is Section 232 of the Trade Expansion Act of 1962, which authorizes the president to impose tariffs on “national security” grounds. As we explained in a recent paper, President Donald Trump routinely abused Section 232 to impose tariffs on steel and aluminum, and threatened them on several other products – abuse that the vague and poorly-conceived law makes all too easy and that has harmed the U.S. economy, including vis a vis China.

Indeed, we count at least five reasons why Section 232 reform should be part of any China Package that Congress will ultimately consider:

The Geopolitics. One of the major lessons from the Trump administration’s use of Section 232 was that unilateralism rarely works. A primary goal of the steel and aluminum tariffs, for example, was to counter overcapacity, particularly in the Chinese steel industry, caused by government policies that untether domestic production from market fundamentals. Both Congress and the Biden administration share this goal, which U.S. Trade Representative Katherine Tai recently acknowledged in congressional testimony. However, Tai also claimed that tariffs imposed under Section 232 had been effective in curtailing steel overcapacity – a claim that, as we’ve noted, is belied by data showing both global and Chinese steel production continued to expand after the tariffs were imposed.

In fact, the tariffs have actually hurt U.S. efforts to rein in China’s behavior by offending close allies who were also subject to the measures, yet are necessary for any global solution to the global overcapacity problem. The European Union, for example, retaliated against U.S. exports after being hit with the metals tariffs, and is set to increase that retaliation on June 1st – even as Commerce Secretary Gina Raimondo recently acknowledged that “Europe of course is not a threat to American national security.” As long as these tensions (and others) persist, multilateral levers that have in the past altered Chinese policy will be less effective than they’d be without the tariffs (which Biden could eliminate with the stroke of a pen).

The Economics. Various studies and numerous current news reports show that the 232 tariffs hurt the U.S. manufacturing sector, making these companies less competitive globally (and versus Chinese competitors). As we’ve noted in a recent policy analysis:

[T]he tariffs caused higher steel prices that in turn hurt other U.S. manufacturers in terms of higher input costs, lower exports, and lost competitiveness at home and abroad; created an opaque, costly, and uncertain “exclusion” bureaucracy, under which more than 100,000 requests have been filed by U.S. manufacturers seeking relief; resulted in approximately 75,000 fewer manufacturing jobs than would have otherwise existed in the absence of the tariffs; depressed global demand for steel (thereby dampening prices); bred global market uncertainty, which hurt investment in manufacturing; and caused numerous U.S. trading partners to retaliate against American exporters.

In fact, existing 232 tariffs on steel and aluminum continue to threaten U.S. manufacturing recovery even as the situation with the pandemic has improved. Dozens of companies have told the Department of Commerce that this would happen through the exclusion process, so it is not like we had no idea that this would occur.

Data also show that the tariffs have not created a lean and thriving domestic industry— something the Trump administration itself admitted when it acted to expand the tariffs to steel and aluminum derivatives due to the industry’s failure to consistently meet the administration’s capacity utilization targets. As we explained, “the tariffs lead to price increases in steel and aluminum imports (as one would expect when you tax something), and this prompted industrial consumers to purchase ‘derivative’ products from abroad, which ended up hurting domestic derivative products producers and depressing domestic demand for the tariffed metals.”

By raising input costs, the Section 232 tariffs also have deterred domestic investment – another entirely predictable outcome. (If producing something in the United States becomes more expensive, investors will be less likely to invest in that industry.) The Section 232 actions and the president’s repeated threats to impose “national security” tariffs thereunder – threats that couldn’t be ruled out due to the law’s broad delegation of tariff power and its procedural ambiguity, as well as courts’ unwillingness to check Trump’s actions – also injected uncertainty into the market, further depressing investment. Few companies will be eager to invest billions of dollars in the United States if their supply chains are under constant threat of unchecked executive action – a chilling effect that academic research has since confirmed.

The Environment. President Biden has outlined ambitious goals on tackling climate change. But if the United States wants to become, as Democrats and Biden seem to argue, a global leader in wind towers, solar panels, electrical vehicles, and other products (to “beat China”!), manufacturers and potential investors will need both unrestricted access to key raw materials – particularly steel and aluminum – and certainty regarding their global supply chains. Reforming Section 232 would accomplish both goals. As the Environmental Technologies Trade Advisory Committee stated in a letter to former Commerce Secretary Wilbur Ross in 2019, “the U.S. environmental products and services industry relies on global supply chains and, most importantly, access to global markets. The Section 232 tariffs drive up our input costs and make the industries’ products less competitive globally.”

If congressional Democrats and President Biden are truly committed to boosting U.S. production and consumption of “green goods,” and countering China’s growing influence in these industries, then Section 232 reform is the obvious place to start.

The Alternatives. Even though good ol’ fashioned market discipline would be the best way to make U.S. steel companies leaner and more environmentally-friendly, reforming Section 232 would not amount to, as is often alleged, “unilateral disarmament” against China or other alleged trade scofflaws, because U.S. law contains numerous other ways to police Chinese imports. This includes, “trade remedy” (antidumping, countervailing duty, and safeguard) actions to restrict injurious imports, almost half of which already target iron and steel products (see Figure 1 below); sanctions and export controls; preferential trade agreements like the Comprehensive and Progressive Trans-Pacific Partnership (which was originally intended to counterbalance China in the Asia-Pacific Region); and World Trade Organization disputes and negotiations, which have proven somewhat effective in disciplining Chinese trade malfeasance.

Thus, to the extent that market discipline is unable to meet Congress’ China objectives, there are several other ways to address these issues – ways that, given Section 232’s inefficacy and abuse, would almost certainly produce better results.

The Politics. Finally, Section 232 reform makes some political sense for President Biden, who has faced criticism for abandoning his campaign promises to reverse Trump’s trade abuses, fix our alliances, and govern in a modest, bipartisan, and ethical way. By supporting Section 232 reform, Biden can neuter one of Trump’s favorite policies, join a bipartisan chorus of reformers (see, e.g., these two recent bills), and limit his own executive power, boosting the U.S. economy and healing relationships with close allies in the process.

Given these considerations, Section 232 reform should be part of any China Package that’s serious. It’s now up to Congress to show that it is.

To read the original blog by the CATO Institute, please click here