Taken to the Cleaners
By Lauren Landsburg
A few days before his first State of the Union address in January 2018, President Donald Trump put his signature on two unusually large tariffs for products widely used by U.S. citizens—washing machines and photovoltaic cells used in solar panels. The President signed those new fees and restrictions into law with the full authorization and in compliance with a little-known clause in the international agreement called the GATT (General Agreement on Tariffs and Trade) Safeguard clause.
The immediate upshot will be surprisingly large price increases for ordinary consumers. Ordinary renters and homeowners, or most of the U.S. population, will have to pay a few extra hundred or thousand dollars, if they buy washing machines or install solar panels in the next three years. The increased costs will be borne by ordinary citizens, who will now be paying up to 50% more for buying home washing machines and up to 30% more for installing solar panels. Broad categories of goods are included. For example, for washing machines, included are all ordinary residential washers regardless of whether they are front or top loaders. Exempt from the tariff are only very small or stackable models designed for tight spaces such as apartment closet areas and extra-large or commercial, heavy-duty, coin-operated washers. Photovoltaic solar cells will be subject to the import fees and restrictions regardless of whether or not they are pre-installed in panels before they are imported or imported as separate cells.
Hold on! Why didn’t I know that if my aging washing machine fails in the next year, I’m now going to have to pay an extra 50% more for a nice new highly rated washer I’ve heard about from friends when mine bites the dust? Now it is not going to be just the $400-$600 I’ve saved for—plenty stiff!—but an extra 50% more. That is, it will suddenly cost $600-$900 for the same quality of washing machines I could have bought in early January of this year for less. And why didn’t my next door neighbors know that their planned extensions on their rooftop solar system as they have investigated and begun installing in the last few years are now going to cost them another 30%—over another $6,000 more—to move forward with extensions and improvements?
In the wake of that action, President Trump announced on March 1st that he is also planning imminently to act on the Commerce Department’s recommendation to levy a stiff tariff on imports of steel and aluminum—not on grounds based on the Safeguard clause but on the even more unusual grounds of national security. According to Reuters,
Trump said the duties of 25 percent on steel and 10 percent on aluminum would be formally announced next week although White House officials later said some details still needed to be ironed out.1
These tariffs will be levied on top of tariffs already in place for steel and aluminum. Prices for the steel and aluminum used to produce thousands of other products from frying pans to cars to apartment buildings will, of course, rise. The stock market tumbled within minutes of the announcement, reflecting the losses to the many firms that require those metals while they try to regroup. What other fallout will occur, and why?
What other goods have I taken for granted that will now be harder for me to buy?
And, what is this Safeguard clause? Evidently it’s not safeguarding my piles of dirty laundry, my ever-increasing electric bills, or the environment. Is it related to national security? Why invoke national security for steel yet instead something called a Safeguard clause for washing machines? Why invoke the Safeguard clause for high-tech photovoltaic cells?
The Safeguard Clause, a Company Harmed, and Increased Imports
The Safeguard clause—Article XIX of the GATT2—allows any member country such as the United States to impose immediate tariffs or import quotas on a good or service, even at extremely high rates, without having to demonstrate that a foreign country or business is engaged in any sort of anti-trade or anti-business practices such as dumping. The Safeguard clause is often referred to as the Escape Clause because it allows countries to escape from having to prove that they were harmed by someone other than themselves.
The only two proofs required by the Safeguard clause are that any one company can demonstrate that it has experienced harm, serious injury, or threat of serious injury, and that the country’s imports of goods generally related to that company’s production increased in the preceding year.
Regarding harm: Any kind of company or industry adversity constitutes harm. For example, if a company has had to reduce its employees or close a factory, by definition it has demonstrably experienced harm. The reason or from where that harm may have originated—be it local, national, or global—or even when it began—is not necessarily important in exercising the GATT’s Safeguard clause. The key finding to justify submitting a claim for immediate international redress via the GATT’s Safeguard clause is that imports in that industry or category of goods increased prior to a company’s experiencing harm.
As a daily or monthly matter, companies expand and contract their workforces. Companies open and close their facilities or factories all the time. Companies do this for a variety of reasons. Being nimble and flexible in hiring and firing, and in constant expansion and contraction, is part of what surviving as a company is about.
Moreover, imports in any particular category of goods or services increase or decrease for a variety of reasons that reflect those ordinary competitive forces. Increases or decreases in imports may not have anything to do with any sort of foreigners’ self-serving, underhanded, anti-American trade practices designed to soak Americans. The underlying reason for increased imports could be that a foreign company came up with a better mousetrap—for example, a washer with features or a stylish look more desired by American consumers. The foreign company may have found ways to reduce its production costs, making its output more financially competitive and more appealing to American consumers. Or, it could be that the American company itself made poor guesses or simply changed its mind about how many workers to hire or how much new factory space to add on; or it may have decided that now is the time to invest in some newly available, labor-saving, high-tech equipment. It also might simply be buffeted by the tides of an improving economy, making workers more confident about asking for pay raises the company cannot afford to pay.
“When negotiating, one can put an economic spin on many purely political arguments. Arguments that are difficult to resolve—such as many arguments about causes in economics—are fair game in international politics.”
The concept of the GATT clause being called a Safeguard was a concession to the political reality that countries, throughout history, have claimed during international negotiations that they have urgent situations that do not meet the ordinary standards. Emergency measures on behalf of a failing company, much less a failing industry or a cyclically floundering economy, are easy for a country to take an indignant negotiating stance about in the international political arena. International negotiations that are politically motivated become entangled with economic frustrations by their very nature. When negotiating, one can put an economic spin on many purely political arguments. Arguments that are difficult to resolve—such as many arguments about causes in economics—are fair game in international politics.
To prevent the Safeguard clause from being overused on behalf of every company that goes under water and a mere coincidence of prior increased imports in the company’s product, the GATT valiantly requires some other proofs and standards, to which countries such as the United States have signed on. Those standards are the requirements for any imposed tariffs or import quotas to be temporary, to apply uniformly for all countries be they allies or foes, and for other countries to be compensated for their own inconvenience and harm. It is perhaps because of these additional standards that the Safeguard clause is sometimes viewed as raising a higher bar than other international justifications, such as claiming that a foreign country is engaging in dumping.
The Safeguard Clause Requires Tariffs to Be Temporary
Each of the tariffs signed into law by President Trump in January 2018 has a complex tariff schedule that starts very high and then declines over the next few years to zero. Why is that? Let’s look first at the tariff schedules.
For photovolataic cells: The “relief” will include a tariff of 30 percent in the first year, 25 percent in the second year, 20 percent in the third year, and 15 percent in the fourth year. Additionally, the first 2.5 gigawatts of imported solar cells will be exempt from the safeguard tariff in each of those four years.
For residential washing machines: For imports of large residential washers, the President approved applying a combination tariff and import quota for three years. The first 1.2 million units of imported washers will be assessed a tariff at the rate of 20% for the first year, 18% for the second year, and 16% for the third year. For all subsequent imports of finished washers, the tariff is 50% in the first year, 45% in the second year, and 40% in the third year, on finished washers or covered parts. The tariff on covered parts of all kinds is 50% the first year, 45% the second year, and 40% the third year.
The tariff in each case declines gradually over the course of a few years. Why is that? If a tariff is warranted, why not just proclaim a tariff that lasts permanently?
The GATT requires a country that exercises the Safeguard Clause to not impose long-term tariffs or import quotas. So, the wording of the GATT is summarized as:
Major guiding principles of the Agreement with respect to safeguard measures are that such measures must be temporary; that they may be imposed only when imports are found to cause or threaten serious injury to a competing domestic industry; that they be applied on a non-selective (i.e., most-favoured-nation, or “MFN”, basis; that they be progressively liberalized while in effect; and that the Member imposing them must pay compensation to the Members whose trade is affected.3
Note that the requirement for a Safeguard measure to be temporary is listed first and foremost.
If a country flouts the international agreements to which it has signed on, such as the GATT, it creates tensions and frictions with those with whom it has shaken hands since at least 1947. It also creates tensions and frictions with a large cohort of economists who, for all their other disagreements, agree about the widespread benefits and gains from free international trade. Those tensions or frictions may be in line with the country’s political goals. However, those tensions and frictions may not be in accord with fundamental economic principles.
Prior to January’s tariff actions by President Trump, the only previous time the Safeguard clause was invoked was by President George W. Bush, who, in March 2002, used the clause to levy a 30% tariff on steel imports. Countries around the world protested immediately with the World Trade Organization (the WTO), the international forum that coordinates the negotiations behind the GATT. The clamor was loud and the international response immediate. By some estimates, instead of U.S. jobs increasing, 200,000 jobs were lost. Within 20 months the tariff action was retracted. U.S. relations with its allies were abraded and torn. The Safeguard clause has not been dusted off again until now.
For U.S. importers of residential washers or photovoltaic cells there is a demonstrable simultaneous history of what could be interpreted as serious injury to domestic manufacturers. The International Trade Commission (the ITC) is the U.S. government organization tasked with investigating claims of harm by U.S. producers being seriously injured and making recommendations to U.S. Trade Representative (USTR) Robert Lighthizer, who responded:
“These cases were filed by American businesses and thoroughly litigated at the International Trade Commission over a period of several months…. The ITC found that U.S. producers had been seriously injured by imports and made several recommendations to the President. Upon receiving these recommendations, my staff and I conducted an exhaustive process which included opportunities to brief in person and through public comments, public hearings, and meetings with senior representatives. Based on this information, the Trade Policy Committee developed recommendations, which the President has accepted. The President’s action makes clear again that the Trump Administration will always defend American workers, farmers, ranchers, and businesses in this regard.4
The Safeguard Clause Requires Other Countries to be Compensated
A surprising element of the GATT’s Safeguard clause is that it requires compensation by the country invoking the Safeguard clause to any affected foreign countries. The ability to apply for compensation is a quite reassuring idea for those who agreed to include the Safeguard clause in the wording of the GATT.
This aspect of the Safeguard clause often surprises economists because it is so reasonable on economic grounds. If a country’s government arbitrarily imposes protectionist tariff duties or import quotas without demonstrating that any other specific country or foreign business initiated a problem, it makes sense that it should stand ready to compensate any other country that got caught up in the sidelines.
Here’s how it reads in the GATT:
In applying a safeguard measure, the Member must maintain a substantially equivalent level of concessions and other obligations with respect to affected exporting Members. To do so, any adequate means of trade compensation may be agreed with the affected Members. Absent such agreement, the affected exporting Members individually may suspend substantially equivalent concessions and other obligations.5
To any economist, this sounds like a reasonable remedy that might serve as a deterring incentive to imposing barriers to trade. Certainly, if a country wishes to exercise a Safeguard clause measure outside of the ordinary terms of economists’ usual recommendations within that country or the recommendations of the GATT, it is reasonable to compensate any affected outsiders. So, an outside country that is affected without ever being proven to have engaged in wrongdoing should be compensated or should have recourse to request being compensated.
But next, read the GATT’s fine print:
This latter right cannot be exercised during the first three years of application of a safeguard measure if the measure is taken based on an absolute increase in imports, and otherwise conforms to the provisions of the Agreement.6
So, according to the fine print, the WTO (World Trade Organization, investigating and enforcing the GATT) will not exercise or enforce for three years any compensations between countries.
Thus, it’s no coincidence that the tariffs and quotas for both washing machines and photovoltaic solar cells disappear after three or four years.
Countries affected by the recent U.S. tariff impositions against residential washers and solar cells have already filed for compensation with the WTO. Even if no action will be taken for at least three years, the sooner filed, the swifter the compensation may be enacted.
When Did These New Actions Get Started?
The two Safeguard tariff actions signed into law by President Trump on Monday, January 22, 2018 did not spring wholly formed that day as if by Athena springing from the head of Zeus. The formal process in each case was set in motion at least six months prior. In each case, they were recommended to the President after investigations that occurred during the preceding year.
Regarding residential washers: Whirlpool, headquartered in Michigan and with manufacturing plants located worldwide from Mexico to Italy to Turkey to South Africa, with U.S. factories mainly located in Ohio, petitioned the U.S. government for trade relief on May 31, 2017.
Regarding photovoltaic cells: Suniva, Inc., with facilities in Georgia and Michigan, petitioned the U.S. government for trade relief on May 17, 2017. The Suniva petition was soon joined by SolarWorld Americas, located in Hillsboro, Oregon.
Regarding steel and aluminum, tariff requests and tariff actions have been ongoing and increasing for many years. Requests for tariff actions in steel or aluminum were most recently initiated on April 20, 2017. Unlike most tariff requests, they were not initiated by any individual company. President Trump directed the Commerce Department to conduct expedited investigations into a large range of products, including aluminum, vehicles, aircraft, shipbuilding, and semiconductors. All of these particular investigations and products were described in April 2017 as critical elements of U.S. national security, based on Section 232 of the U.S. Trade Expansion Act of 1962.7
How Does the Safeguard Clause Differ from Accusations of Dumping?
The most common political justification for a nation’s imposing tariffs is that a foreign country is engaging in dumping—meaning that a foreign-based company is selling a product or service below cost in the domestic country. A well-known economic principle is that, while dumping may be initiated by a company without government help, a government may subsidize a company to engage in dumping for various political reasons. Dumping accusations abound and are symmetric: a U.S. company could equally well be accused of selling something overseas below cost.
Petitions for trade relief regarding dumping are filed either by individual companies or by industry associations with the Commerce Department or with the ITC. These two agencies, authorized by Congress—the official tariff decision maker in the United States per the U.S. Constitution—were created, authorized, and deputized to receive, investigate, and advise the President, usually through the U.S. Trade Representative, how to proceed. The Commerce Department takes the lead in investigating complaints about dumping or government subsidies resulting in dumping and makes recommendations of various antidumping and countervailing duty measures to the President. The ITC takes the lead in investigating whether a U.S. company was actually harmed—be it by dumping or under the Safeguard clause. The ITC also takes the lead in investigating violations of copyright, including intellectual property rights violations.
Petitions for trade relief have increased sharply in the past year, since President Trump’s inauguration. According to a recent Commerce Department press release:
From January 20, 2017, through February 9, 2018, the Commerce Department has initiated 94 antidumping and countervailing duty investigations—an 81 percent increase from the previous period. The Commerce Department currently maintains 424 AD and CVD orders which provide relief to American companies and industries impacted by unfair trade.8
Add to that the recent requests for protection under the Safeguard clause and national security.
Claims of dumping are specific to foreign industries or foreign nations. This is in contrast to appeals to the Safeguard clause, which are applied uniformly to all nations. Rubber bands and aluminum foil from China—note how China is specified—are two of the latest antidumping appeals to be filed. The ITC is already evaluating the claim of harm by a U.S. company that has recently argued that it is being harmed by rubber bands imported from China, forcing it to fire 150 employees. A decision is due by mid-March 2018. Commerce Secretary Wilbur Ross promises to snap into action. The ITC promises to wrap up its aluminum foil investigation by mid-April.
One can envision a foreign country’s container ships docking at U.S. shores and simply opening the containers, with products spilling out on U.S. soil free for the taking—literally dumped on our shores. Of course, the goods are not actually dumped and distributed for free. The accusation of dumping is simply that they are being sold at a price above zero but below the cost of producing and transporting them. How could a U.S. supplier compete with that?
Economists are skeptical of dumping on at least two grounds. First, why would a foreign company deliberately take a loss just to sell goods to Americans? The response is that it would like to keep the competition—American businesses—from producing that good and cutting into its lucrative market. Economists immediately counter that the foreign company will soon go out of business taking a loss year after year; to which the response is often, “They don’t take a loss because their government—their taxpayers—subsidize the company to do this.”
Unquestionably, governments, through their taxpayers, do subsidize both individual companies and entire industries, for a variety of reasons. So, the question of whether or not a company is engaging in dumping may require a lot of detailed delving into both facts and motives. Is a foreign company selling below cost? Why? Is there a government subsidy behind it?
Economists are skeptical of dumping arguments on a second ground as well. Why would it be so bad for American citizens to be able to buy goods cheaply? If a foreign government wants to tax its own citizens to subsidize U.S. consumers, who are we to look that gift horse in the mouth? Every single person in the United States is a consumer. We all eat, we all buy clothes, we all wash our laundry and dishes and faces, we all breathe, we all live in an apartment or house, we all try to stay warm and safe, we all listen to music or read or do other entertainment or enrichments when we can, we all try to thrive as well as survive. We also all use rubber bands and aluminum foil. We are all consumers first. If some foreign government wants to give us a boon, which might even keep us from having to use our own taxpayer money to help our own poorest citizens buy inexpensive goods or have more choices, we ought to say, “Yes, thank you!”
Nevertheless, dumping is one of dozens of historical rationales that have persisted in international law as justifiable causes for a country’s legally—via the GATT agreements—claiming it is imposing tariffs.
Economists since the late 1700s have argued against tariffs. Nations’ governments—including our U.S. government—have signed agreements such as the GATT with international organizations precisely to bind ourselves from getting carried away, causing harm to our own citizens or precipitating international trade wars that harm our own citizens because of political sparring.
The U.S. Constitution gives most matters of tariffs and import quotas to Congress, but gives the President broad powers to act in the event of war or national security. Congress has further expanded and supported the President’s powers in a variety of ways, including in the event of threats to national security. In the Trade Expansion Act of 1962, Congress ceded additional powers over trade to the President, allowing and in Section 232 even requiring the President to impose tariffs or take other trade actions in the face of a national security threat if any head of a department or agency recommends such action.
The GATT’s Safeguard clause has strict time limits and an agreement for international compensation. Trade actions in the event of threats to national security have no such limitations. In addition, discussions and investigations under Section 232 may take place in secret, unlike the transparent process required by the GATT for the Safeguard clause or for debates about dumping.
The last time Section 232 was used was by President Ronald Reagan in 1986, who used the threat of even stronger trade actions to negotiate with Japan and Taiwan to limit their own production of machine tools for 5 years, while the United States revitalized its own flagging machine tool industry. President George H. W. Bush subsequently renegotiated the plan to make it last through 1993.
President Trump technically has until mid-April to act on the recent recommendations of Commerce Secretary Wilbur Ross, but may have moved more quickly based on an increase in international tensions and hostilities. Neither the World Trade Organization nor any individual foreign country will have an easy time arguing that a nation cannot engage in actions it deems necessary to safeguard its national security. In the event of a claimed threat to national security, the President can act as the sole negotiator, engaging in international trade restrictions and making agreements at will with foreign leaders.
The arguments economists make against tariffs are often to no avail. It’s often tilting at windmills, like Don Quixote. Economists know that when we impose tariffs or import quotes, our consumers and taxpayers pay more, the economy grows more slowly, and companies are kept in business that may be better off failing so as to not soak up the economy’s valuable resources. Economists agree that some of those who reap the rewards are usually the owners or stockholders of the companies who initiated the protests; or perhaps even more commonly the rewards are reaped by the lobbyists and lawyers and government agencies because the owners petition the government clamoring for relief and asking intermediaries to intervene. Trade wars—retaliation amongst countries as each country acts on its own behalf either out of indignation, self-protection, or with intent to beggar its neighbor—are historically the most common result. The Safeguard clause is yet one more cloak hiding political actions behind a facade of economics. National security is an even stronger claim for using tariffs as negotiating positions. We can expect these claims for political legitimacy to be used even more in the years to come, now that we are becoming more practiced in exercising them.
See “Trump to impose steep tariffs on steel, aluminum; stokes trade war fears”, by Steve Holland, Ginger Gibson. Reuters, March 1, 2018.
See “President Trump Approves Relief for U.S. Washing Machine and Solar Cell Manufacturers”. U.S. Trade Representative (USTR) press release, January 2018.
U.S. Department of Commerce Initiates Antidumping Duty and Countervailing Duty Investigations of Imports of Large Diameter Welded Pipe from Canada, Greece, China, India, Korea, and Turkey. Commerce Department Press Release, Feb. 13, 2018.