National Security Archives - WITA

How ‘Economic Security’ is Re-shaping Presidential Power

Jackson House — Tue, 16 Jul 2024 15:12:49 +0000

The Biden administration’s recent decision to raise tariffs on Chinese goods ranging from electric vehicles and advanced batteries to medical equipment came as little surprise in an election year. The White House described the move as one that would create “good jobs in key sectors that are vital for America’s economic future and national security.” This latest development followed the Trump administration’s original imposition of tariffs on other products from China in an effort to stop Beijing’s theft of sensitive technologies and intellectual property. Now, several years on, it is clear that imposing tariffs was only one exercise of the executive branch’s foreign commercial power – and one of an increasing number of tools that the executive branch justifies by linking foreign commerce issues to U.S. security.

Indeed, officials from both the Trump and Biden administrations have invoked economic security as a reason for action across a wide range of policy issues. In addition to tariffs on goods from China and on steel and aluminum, take the proposed outbound investment screening mechanism, the Trump administration’s efforts to force a sale of TikTok, or the extensive new export controls, as obvious examples. The justifications reflect a broader conversation on security that is now pervasive in trade policy circles. Compare the U.S. Trade Representative’s Annual Report published in 2016 to the version published this March. The 2016 report mentioned security 25 times, frequently in the context of food security. The 2024 report mentioned security 129 times. And the 2024 Report added a section on “enhancing economic security,” just one example of the securitization of U.S. foreign affairs, especially in Washington’s relationship with Beijing.

In a forthcoming article, we argue that this linking of “foreign commerce” to “economic security” in U.S. policymaking has had the effect of dangerously, and often erroneously, intermingling authority that Congress has delegated to the executive branch with the president’s constitutional powers to oversee foreign affairs. The Constitution assigns plenary authority over taxes, tariffs, and commerce – including, explicitly, foreign commerce – to Congress. The Constitution assigns other kinds of foreign affairs powers, such as the role of commander-in-chief of the armed forces or the power to negotiate treaties, to the president. The executive branch’s authority over foreign commerce began as a statutory authority, but over time the executive, with some backing from the courts, has increasingly claimed that such authority has constitutional dimensions. Constitutional claims over the president’s non-commercial foreign affairs authority have begun to engulf understandings of Congress’s plenary authority over the regulation of commerce with foreign nations – from the perspective of both the executive branch as well as the courts.

Assertions of Executive Branch Power in Foreign Commerce

Officials from both the Biden and Trump administrations have advanced novel arguments before the courts asserting this point: foreign commerce is part of security, and therefore the president has his own constitutional foundations for action in the domain of commerce. In a case concerning the Trump administration’s tariffs on steel and aluminum, the government argued that “[t]he President’s coexistent constitutional foreign affairs and national security responsibilities compel the conclusion that Congress did not enact an unconstitutional statute.” In the context of a case about tariffs, this claim is extraordinary. The text of the Constitution expressly allocates the power to tax, as well as the power to regulate foreign commerce, to Congress exclusively. It makes no difference that the statute in question – Section 232 of the Trade Expansion Act of 1962 – invites the president to evaluate a threat to national security as a predicate to exercising purely delegated power to impose taxes. Such an exercise of delegated power does not open the door to his constitutional authority; rather, it draws on his expertise.

The idea that statutory interpretation – which, as the Supreme Court has emphasized, is the crux of nondelegation analysis – would be different because the president has constitutional authority over other kinds of foreign affairs issues represents a significant effort to expand extra-textual presidential foreign affairs powers into areas reserved to Congress. And this argument was not a one-off. Although courts have not embraced the executive branch’s most expansive arguments, they have usually upheld challenged action that the executive branch has defended in these terms. For example, in Transpacific Steel LLC v. United States, the government defended the president’s decision to impose additional tariffs under Section 232 after the statutory deadline for presidential action by arguing that the president has inherent authority to modify his actions “when the President is exercising powers that are quintessentially executive in nature” such as “foreign policy and national security.” Although the Federal Circuit did not embrace this expansive argument explicitly, it interpreted Section 232 to allow the president to modify his actions after the statutory deadline. In this way too, disputes over foreign commerce are coming to resemble those over national security, where the president (almost) always wins.

Congress Can Restore the Balance

Given that the courts usually have not been willing to course-correct in this area, it falls on Congress to restore the balance in its favor. And rightly so; the complex geopolitical problems of today may require more guidance from our elected leaders. Existing delegations to the executive branch – which, like Section 232 and Section 301 of the Trade Act of 1974, often date from the Cold War – are imperfect instruments for the set of geoeconomic challenges currently facing the United States. Congress should reconsider these authorities with attention to the domestic, economic, and foreign policy challenges of this century, not the last. To the extent “economic security” is a central element of U.S. foreign and domestic policy, the many constituencies in that policy space should press for Congress’s attention. Our article outlines three potential paths to serve that end.

First, we argue that Congress should amend a variety of statutes (such as Section 232 and Section 301) to sunset the president’s economic security actions after 90 or 180 days without the possibility of renewal unless Congress authorizes their extension. As the cases discussed above illustrate, the president has used his constitutional authority over foreign affairs to push the limits of broadly-worded delegations, and to deflect efforts to persuade courts to read such delegations narrowly for separation of powers reasons. A clear statutory withdrawal of tariff authority would blunt the president’s efforts, in effect, to constitutionalize control of foreign commerce and to wage trade war. It would still enable the president to act quickly in the face of an emergency, but without sacrificing Congress’s role. During the Trump administration, a number of bills were introduced that would have curtailed the president’s authorities in ways similar to those we propose, but none made it out of committee. Given the uncertainty created by this year’s presidential election – in which former President Trump has promised even more expansive uses of executive authority, including an across-the-board 10 percent tariff on imported products if reelected – Congress may be more disposed to enact such legislation in 2024, regardless of which candidate occupies the White House in 2025.

Second, Congress should prohibit the executive branch from relying on an international agreement it has negotiated as the legal basis under which any good or service is imported into the United States, exported from the United States, or regulated while in the United States, unless Congress has either explicitly authorized the agreement in advance or approved it after its conclusion. Trade agreements and their negotiations have increasingly become a flashpoint for tension between the executive branch and Congress. In recent decades, the executive branch has concluded hundreds of commercial agreements – often with significant geopolitical and foreign affairs implications – that were neither authorized nor approved by Congress. Congress should clarify and reform the executive branch’s trade agreement authorities by imposing bright-line rules via statute. While the executive branch might object that such a statute interferes with its constitutional authority to negotiate with foreign countries, our proposal is carefully drawn to limit only the domestic effects of agreements, not the president’s authority to negotiate the agreements in the first place – an approach that falls well within Congress’s plenary constitutional authority over commerce.

Third, and finally, Congress should eliminate the U.S. Court of Appeals for the Federal Circuit’s exclusive jurisdiction over appeals in most trade cases and transfer that jurisdiction to the U.S. Court of Appeals for the D.C. Circuit. At present, the Federal Circuit is the appellate court for final decisions from the U.S. Court of International Trade. In that role, it has been responsible for the decisions we discuss above upholding broad exercises of authority by the executive branch. But the Federal Circuit is primarily an intellectual property court. Indeed, one member of the court has estimated that intellectual property cases consume more than half the court’s docket and more than 80% of its time. Given that international trade law cases in federal court are primarily statutory interpretation and administrative law cases, the D.C. Circuit makes more sense as a forum for appeals. As the premier administrative law circuit in the country, running appeals through the D.C. Circuit would force the bar and the Court of International Trade to approach these administrative law cases in the same manner as other administrative law cases – and that would enhance review of the executive’s activities in a way that is currently lacking.

Judicial Review Without Chevron

A shift to the D.C. Circuit would be especially well-advised in light of the Supreme Court’s recent line of cases cutting back on administrative agencies’ authority. The most recent such decision is Loper Bright Enterprises v. Raimondo, which eliminates “Chevron deference.” Under the “Chevron doctrine,” courts deferred to an agency’s reasonable interpretation of an ambiguous statute. The Chevron framework applied generally, not specifically to trade statutes, but agencies administering trade statutes regularly relied on Chevron deference to defend their interpretations. Chevron’s demise leaves the scope of deference to agencies up to the federal courts to determine going forward.

The Supreme Court’s opinion suggests that lesser deference, such as when a court uses an agency interpretation as an aid in the court’s decision as to a statute’s correct interpretation, might continue to be appropriate. In trade cases, however, the government is almost sure to double down on its constitutional arguments, invoking “foreign affairs exceptionalism” – “the belief that legal issues arising from foreign relations are functionally, doctrinally, and even methodologically distinct from those arising in domestic policy” – to try to shield its interpretations of trade authorities from judicial review. The Federal Circuit’s record in trade cases suggests that it may be open to these arguments, creating special deference for trade statutes (over which, again, it often has exclusive jurisdiction), while other circuits develop a less deferential standard based on Loper Bright for other kinds of regulation.

An early test of how the Federal Circuit will handle the Supreme Court’s new administrative law doctrines in these foreign commerce contexts is likely to come in HMTX Industries v. United States (in full disclosure, one of us has filed an amicus brief in HMTX in support of the challengers). That case asks whether Section 301 – which authorizes, and sometimes mandates the U.S. Trade Representative to take a variety of measures to counter unjustifiable, unreasonable, or discriminatory actions by foreign countries that burden U.S. commerce – allows the executive branch to increase the tariffs on products from China without the investigation usually required by the statute. The government asserts that a new investigation is unnecessary because these new tariffs address the tariffs China imposed on U.S. goods in response to the Trump administration’s Section 301 tariffs, which were designed to combat China’s intellectual property theft. Despite the Supreme Court’s recent change of direction with regard to agency authority, the government has continued to argue that the decision to expand the tariffs without a new investigation is subject to only limited review.

As “economic security” has become an organizing concept for U.S. foreign commerce policy, the executive branch has drawn on this blurry policy space to argue that statutory limits on its foreign commercial authority do not bind it. Instead, it has buttressed its delegated authority with claims of independent constitutional authority over commercial matters like tariffs. And unlike Founding Era courts, today’s judiciary has often accepted these claims. Clearly, some members of Congress have different views on how to address economic security concerns. Congress has grabbed some low-hanging fruit by enacting legislation that reclaims some of its authority over trade agreements and there are signs of bipartisan interest in other trade actions. But whether Congress will intervene to address the executive’s efforts to use economic security to expand its control over commerce remains to be seen.

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To read the full article published by Just Security, click here.

To read the authors’ original source paper, click here.

The post How ‘Economic Security’ is Re-shaping Presidential Power appeared first on WITA.

Revitalizing U.S. Trade Remedy Tools for an Era of Industrial Policy in an Interconnected World

Kate Wandsnider — Mon, 03 Jun 2024 21:20:38 +0000

Introduction and summary

There is a saying in sports that baseball is a game built for radio, while football is a game built for TV. Baseball moves slowly enough that in between pitches, the announcer can describe the intricacies of the game: the weather, the pitcher’s glove, or the mannerisms of the hitter. Football moves faster and can be enjoyed with far less explanation. The United States’ trade enforcement toolkit is similarly built for radio. Its tools—largely tariffs—are outdated and in need of an update for a contemporary audience: in this case, a modern, globally connected economy.

This is not to suggest that trade enforcement, or tariffs more broadly, are bad—or even a net negative. When used effectively, the country’s trade enforcement authorities are a bulwark against job losses and an important tool for industries to use when facing illegal or subsidized import competition. Indeed, smart, targeted tariffs—whether or not used as a trade remedy—can play an important role in reorienting and derisking global supply chains, or even catalyzing broad industrial decarbonization.

But too often, tariffs or other trade enforcement actions fail to achieve their greatest possible impact, not because policymakers are stubborn or foolish, but because the tools themselves offer little in terms of precision, timeliness, or collaboration. In fact, the process of requesting trade enforcement support, the process of affording that support, and the impact of trade remedies when provided has so often failed to meet the needs of workers and companies, that broad frustration with the country’s existing trade remedy authorities is one issue that seems to unite boardrooms and union halls alike.

Clearly an update is needed. And the timing is right too. If the Biden administration’s unprecedented investments in American industry are to reach their full transformational potential, then a reimagined trade enforcement toolkit is critical. Without it, potential benefits that could support the United States’ workers, its economy, and the economies of its partners and allies, as well as its vital interests and values, may go unrealized.

What is more, the out-of-date nature of the existing trade enforcement toolkit has placed the United States in a disadvantageous position vis-a-vis China and other authoritarian nonmarket economies, precisely at a time when global competition is increasing, and American businesses and workers are looking to the government for more effective support.

This report explores the challenges with the United States’ existing trade enforcement authorities, including their slowness, rigidity, and inability to coordinate with other industrial policy actions. The report then offers recommendations for modernization that would better enable the United States and its international partners to compete in an interconnected world defined by intense geo-economic competition, climate change, and supply chain integration. These include collecting duties on finished goods that include component parts subject to trade remedies; the development of a new authority to manage trade in critical sectors with nonmarket economies without the need to demonstrate injury; an option to provide alternative remedies to better serve the national interest or when traditional tariff protection is insufficient; and a new mechanism to tie tariff protection to commitments from industry to invest in long-term domestic competitiveness.

A new approach to industrial policy: Aligning investment with trade enforcement

The Biden administration has made unprecedent investments in rebuilding the American industrial base, as well as record use of the country’s existing trade authorities. It has updated Section 301 tariffs on Chinese goods to be far more strategic and precise. It has reoriented steel and aluminum tariffs to better address overcapacity and promote industrial decarbonization. And it has implemented more antidumping and countervailing duties (AD/CVD) actions than any administration in history. The Biden administration deserves credit for coupling targeted trade remedy protection with significant new investments in domestic productivity. Manufacturing construction has increased dramatically as a result. The American manufacturing sector is expanding, modernizing, and growing more competitive by the day—creating a foundation of domestic industrial competitiveness that will pay dividends for years to come. But the impact could be even larger, if one side of the investment-and-protection equation—the trade remedy tools themselves—were better equipped to handle the dynamics of a modern economy defined by intense competition, digitalization, and deep supply chain integration.

The notion that trade enforcement should be considered alongside industrial strategy may be a jarring proposition to trade practitioners who cut their teeth in an earlier era of laissez-faire globalization. Traditionalists will suggest that trade enforcement, which is sanctioned by the World Trade Organization, should be used purely to correct market distortions caused by dumped or subsidized products in the U.S. market. It should not, they argue, be used as a tool for strengthening U.S. industrial competitiveness either at home or abroad.

This is an outdated notion and a sentiment that has for too long ensured that enforcement actions remained only as strong as necessary to nurse an ailing sector back to some modicum of domestic stability—but certainly not strong enough to grow or outcompete foreign foes. It is also the embodiment of the neoliberal idea that price parity on its own is corrective of a market failure, that trade remedies are successful if a domestic industry can sell at a price point equal to that offered by subsidized imports. But this incomplete view of the market failure, and its correction, demonstrates a limited appreciation for how predatory imports injure an American industry and its workers. It does not account for whether domestic firms can compete successfully in markets outside the United States, where the vast majority of consumers live; whether the protection offered by trade remedies allows laid-off workers to be rehired or paid a fair wage; or whether damage to the social or economic fabric of communities that are home to firms affected by predatory import competition is adequately addressed.

And just as views on the so-called “Washington consensus” are being replaced by more affirmative approaches to industrial policy, so must policymakers consider better ways to implement trade remedies that go beyond antiquated notions of leveling the playing field. This will require both new trade policy authorities and a rethink of how existing authorities can be used to support the enduring competitiveness and well-being of the U.S. industrial base, as well as the supply chains and workers that power it.

The current trade enforcement toolkit

Any discussion of modernizing the United States’ trade enforcement toolkit must start with understanding the role of tariffs, given the centrality of tariffs to most trade enforcement actions. Not all tariffs support trade enforcement, and not all trade enforcement actions must involve tariffs—although most do. Tariffs have been used for centuries for different purposes. They can be used to help shield fledgling domestic producers from foreign competition—for example, what Alexander Hamilton called for in his famous “Report on the Subject of Manufactures.” Tariffs can also be used to compel a foreign government or foreign firm to change their ways, or they can be a source of revenue, as was historically the case in the United States. If a tariff is used to counteract the negative impact of subsidized or otherwise anti-competitive imports on U.S.-based producers, that action can be identified as “trade enforcement.”

What is a tariff?

A tariff is a tax levied on a domestic business for importing a product from abroad. It is paid by U.S. importers as a tax when their purchased product crosses the U.S. border. Although tariffs are imposed on foreign goods, the economic burden usually falls on domestic consumers because the additional cost of importing the tariffed product is commonly passed on in the form of higher prices.

The most common form of import tariff is an “ad valorem” tariff levied on a set percentage of the value of an imported good. The United States, for example, currently maintains a trade-weighted average import tariff rate of 2 percent on industrial goods. Other tariffs can be “specific” and levied as a fixed amount. The Tariff Act of 1789, for example, levied a 50-cent tariff per ton on goods imported on foreign ships, regardless of the value of the shipment. It is also possible to consider assessing a tariff based on some other aspect of an imported good. A tariff based on the carbon content of an imported product, for example, has been implemented by the European Union and considered by the U.S. Congress and is also the basis of ongoing negotiations toward a global arrangement on sustainable steel and aluminum.

In the United States, tariffs for the purposes of trade enforcement can be levied using several legal authorities. These include, among other authorities, Section 232 tariffs of the 1962 Trade Expansion Act, Section 201 and Section 301 of the 1974 Trade Act, and AD/CVD actions, which date to the 1930 Smoot-Hawley Act but were modified significantly by the Trade Agreements Act of 1979. Taken together, these authorities, with their different timelines, processes, and objectives, form the country’s trade enforcement toolkit.

Section 232 tariffs allow any federal department, agency head, or “interested party” to request that the U.S. Department of Commerce investigate the effects that specific imports have on U.S. national security; the Commerce Department may also self-initiate an investigation. This authority dates to the Trade Expansion Act of 1962 and allows the secretary of commerce, after consulting with the secretary of defense, other “appropriate officers of the United States,” and the public, if appropriate, to issue a report to the president advising on whether a specific product is being imported “in certain quantities or under such circumstances” to impair U.S. national security. If the Commerce Department determines that imports do impair U.S. national security, then the president, upon receipt of the report, has 90 days to 1) determine whether they concur with the Commerce Department’s findings, and 2) if so, determine the action, and the duration of the action, to be taken to address the national security threat.

Section 201 safeguards date to the 1974 Trade Act, which enables the president to provide temporary relief to a U.S. industry facing a surge of deleterious import competition by giving that industry time to make a “positive adjustment” that would enable it to compete more effectively in the future. Section 201 safeguards are enacted following an investigation by the U.S. International Trade Commission (USITC) into whether a particular industry is being seriously injured or threatened with serious injury, and, if so, whether an increase in imports is a “substantial cause” of that injury. If the USITC decides that an industry is being seriously injured or faces serious injury, then it makes recommendations to facilitate that industry’s positive adjustment to that competition. Recommendations may include the imposition of tariffs, a tariff-rate quota on the product, adjustment assistance, and/or trade negotiations to alleviate the injury or threat of injury. The president then must decide which, if any, of the USITC’s recommendations to implement. Import relief can last up to four years and be extended one or more times thereafter, but only up to a maximum of eight years.

Section 301 actions date to the same 1974 law and allow the administration to impose trade sanctions on foreign countries that violate U.S. trade agreements or engage in acts that are “unjustifiable” or “unreasonable” and burden U.S. commerce, defined to include goods, services, and investment. The U.S. trade representative (USTR) may initiate a Section 301 case after an investigation into the practices of a foreign government is requested by “any interested person” or after it “self-initiate[s]” its own investigation. A Section 301 committee is then formed to conduct public hearings, review evidence, and make recommendations regarding potential actions to remedy a foreign trade practice. Section 301 actions terminate automatically after four years, unless the USTR receives a request for continuation and conducts a review of the case.

AD/CVD is the most common trade enforcement action, the most current version of which dates to the Trade Agreements Act of 1979, but which first were introduced in an earlier version in the 1930 Tariff Act, commonly known as the Smoot-Hawley Act. They were designed to level the playing field for U.S. manufacturers by providing relief to industries that were “materially injured,” or threatened with injury, due to the sale of imported products at less than fair value, usually because the foreign producer benefits from subsidies from its home government. They were also designed to be “quasi-judicial” and removed from the fickle whims of political leadership. In most cases, AD/CVD actions begin following a petition to both the Commerce Department’s International Trade Administration (ITA) and the USITC, although it is possible for the ITA to self-initiate AD/CVD actions.

The ITA then assesses petitions, determines whether (and, if so, the amount of) dumping that has occurred, and if any illegal subsidies were provided to enable the dumping of product in the U.S. market. Concurrently, the USITC determines whether the U.S. industry in question has been “materially injured or is threatened with material injury.” If dumping has caused material injury, then the ITA determines the duty rate, usually assessed on a per-company basis, to offset the price difference between the imported good and a similar product produced in the United States.

A few additional tools are used less frequently but nonetheless are available to levy import tariffs in support of U.S. industry. Section 337 of the 1930 Tariff Act allows the USITC to investigate claims regarding intellectual property rights infringement, which can result in an exclusion order that directs U.S. Customs and Border Protection (CBP) officials to stop infringing imports from entering the United States. Section 338 of the same 1930 law allows the president to levy “new or additional duties” on imports from countries that have discriminated against U.S. commerce relative to the commerce of other countries.

In 2019, the Trump administration also threatened to raise tariffs in an effort to compel the Mexican government to limit the flow of migrants from Central America to the United States, citing the authority offered the president by the International Emergency Economic Powers Act (IEEPA) of 1979. IEEPA provides the president broad authority to regulate a variety of economic transactions that involve a foreign entity following a declaration of national emergency, but it is typically used in instances of economic sanctions, rather than to impose tariffs.

Challenges with the existing trade enforcement toolkit

Each of these authorities dates to the 1960s or 1970s—and, despite modest updates through legislation and executive action, each has remained largely unchanged for nearly half a century. Herein lies the problem: The world has changed a lot since the presidencies of John F. Kennedy, Gerald Ford, and Jimmy Carter (the presidents who signed the authorities noted here into law), but the trade enforcement toolkit has not. This has placed American workers and American producers at a disadvantage, as the tools meant to protect them from the predatory trade practices of others have not kept pace with the modern economy.

Put simply, the lack of more modern trade enforcement authorities restricts policymakers to waging a modern, 21st-century great-power economic competition with the equivalent of Vietnam-era technology. And it hamstrings the government’s ability to safeguard the country’s vital interest, which unfettered globalization has put at risk. Sharper tools are needed to counter unfair trade practices in an era of both intense global competition and unprecedented global economic integration. This is particularly true in sectors where the United States, its partners, and its allies have a strategic interest in nurturing critical industries, avoiding harmful dependencies, and empowering workers. Several challenges, discussed below, deserve attention.

Trade enforcement tools move too slowly for the modern economy

An obvious problem with the existing toolkit is that it moves too slowly to meet the needs of highly innovative sectors such as semiconductors, artificial intelligence (AI), or software development—sectors that will likely drive the global economy forward in the decades ahead.

The slowness of the trade enforcement tools is a function of many factors, meaning the solution is nuanced and varied. The statutory procedures associated with the different trade enforcement authorities are cumbersome and lengthy, often taking several months to complete. But in some high-tech sectors, even a few months of damaging market losses can severely weaken a domestic industry—and a few years of sustained losses can lead to permanent destruction.

Across almost all industries today, manufacturing can be scaled quicker and products distributed faster than when the United States’ trade enforcement tools were created. The solar industry provides a useful example. Despite U.S. national labs inventing most of the solar technologies deployed around the world, the United States produces only about 2 percent of the world’s solar panels—and that is with AD/CVD duties on Chinese-made solar panels in place since 2011 and Section 201 safeguards on solar imports since 2018.

The reality is that China’s willingness to weaponize its productive capacity, and its overcapacity in key sectors, is aided by the fact that the United States’ trade tools are not equipped to respond fast enough to counter its aggressive actions. As a result, China has been able to use export subsidies and other nonmarket practices to take advantage of the mobility and openness of the global trading system to maintain and even grow its market dominance, particularly in sectors such as steel, solar power, and electric vehicles, where the Chinese government has a strategic interest in controlling global supply chains.

And it has often done so despite the trade enforcement efforts of the United States, because in many instances, by the time the United States’ trade tools took effect, the damage was already done. Chinese firms had already gained significant market share, and, in some cases, U.S. producers (and producers in other market-based trading partners) were forced permanently out of the market. The delay in responding allowed China to reach economies of scale that U.S. producers simply could not compete with on level terms. Indeed, this strategy has been so successful for China that similar attempts by Chinese firms to capture market share in other strategic sectors will likely find similar success, unless the United States can effectively modernize its trade remedy tools.

In addition to the time associated with reviewing requests for trade remedy support, both AD/CVD and Section 201 actions primarily offer protection only when petitioners demonstrate damage or injury—which itself adds more time to the process. One could argue that this is the economic equivalent of making a patient bleed on the hospital floor before agreeing to help them. It is also deeply discordant with the modern economy. In most supply chains, purchasing contracts are frequently signed well in advance of delivery. As a result, by the time AD/CVD or Section 201 safeguards are adjudicated and take effect, supply chains have often hardened, making it difficult for domestic producers to regain lost market share and empowering import constituencies to cry foul about uncertainty and market disruptions.

Trade enforcement tools were created at a time when domestic alternatives existed

In 1979, when the modern version of AD/CVD authorities were established, the U.S. economy accounted for more than one-quarter of the world’s economy, and its manufacturers produced nearly seven times as much product as those in China. If the U.S. government responded to an AD/CVD petition with duties on imports, there were likely several domestic suppliers that both stood to benefit and could meet an increase in demand.

Today, the economic landscape is far different. U.S. manufacturers accounted for just 15 percent of global output in 2023. And, in many industries, there is a significant amount of concentration, with just a few remaining U.S. producers. A domestic manufacturer, for example, that competes only in the United States by selling to clients that have unique technology requirements is often unprepared, or even unable, to scale quickly enough to meet the demands of a broader market, even if a trade remedy action offers them that opportunity.

Building new factories or even a new production line is also expensive and typically requires financing, particularly for small- and medium-sized manufacturers. Scaling to meet expected demand increases thus requires a belief in the long-term viability of an industry or customer base—on behalf of both the manufacturer itself and the bank or financial institution that could finance its expansion. Yet the long-term viability of demand is called into question by the very need for AD/CVD protection.

Somewhat paradoxically, industry concentration has made this situation worse. If, for example, the new market opportunity created by trade remedy support were filled by 10 domestic suppliers, each company could roughly expect to capture 10 percent of the new demand. Much of this additional demand could likely be met by each firm increasing its utilization rate at its existing facilities. If, on the other hand, only one domestic company existed in the market, that company might expect to capture 100 percent of the new opportunity, although some of the market gap would likely be filled by imports from elsewhere.

This could be a potentially lucrative prospect for the company, but such a large increase in demand would almost certainly necessitate a much larger build-out of its productive capacity. In some cases, the firm might require financing to double or even triple its manufacturing capacity—a rate of growth that can be difficult for firms to achieve quickly. What is more, if this type of expansion requires a large loan, that usually comes with higher costs for the borrower (in this case, the manufacturer), which now must carry a heavier debt burden than may be advisable in a market defined by tariff uncertainty and predatory trade practices.

This suggests that if policymakers want domestic producers to scale up in order to both meet expected demand created by a trade enforcement action and fend off future competition from subsidized imports, then simply relying on traditional means of financing a firm’s expansion may be unwise. Instead, it may be necessary for the government to play a more active role in helping domestic producers faced with predatory import competition to scale, modernize, or both.

Trade enforcement does not align with industrial policy

One of the great frustrations for policymakers is that the existing trade enforcement toolkit operates roughly of its own volition rather than as a meaningful part of a larger strategy to build U.S. industrial competitiveness. Thus, coordination with industry that could have helped align trade enforcement support with the country’s strategic ambitions never happened.

In the solar industry, AD/CVD duties on Chinese solar panels would have been more effective if they were administered alongside a plan to retool, rebuild, and reenergize solar manufacturing in the United States. Instead, the lack of federal investment in the decade before the Inflation Reduction Act (IRA), and a market characterized by dramatically falling prices, meant that U.S. industry continued to lose market share, even with AD/CVD duties in place to protect them. The Biden administration’s investments through the IRA demonstrate that this sort of alignment is possible, but the passage of the IRA and the administration’s decisions on solar tariffs—through AD/CVD orders, Section 201 safeguards, and Section 301 tariffs—all occurred concurrently rather than as a cohesive national strategy.

This sort of industrial policy coupled with managed trade may seem radical to those schooled in the neoliberal tradition, but it is far from uncommon. As the Congressional Research Service recently wrote, “Few, if any, nations completely practice free trade.” Most intervene in their domestic market to varying degrees by providing subsidies to support manufacturing or by restricting imports. In fact, when competing against a long-term, strategic, nonmarket rival—as the United States is with China—a proactive strategy to build and maintain productive capacity at a level supportive of U.S. economic and national security will almost certainly require this sort of approach.

Trade enforcement is not designed to make U.S. production more competitive

As a corollary, trade enforcement is simply not designed to increase the competitiveness of U.S. manufacturing. It assumes, on the contrary, that U.S.-based producers require only a level playing field, as measured by price parity, to win in the domestic market.

This is because trade enforcement actions are not meant to fix structural problems that make U.S. manufacturers uncompetitive or vulnerable to import competition—subsidized or not. In fact, the revenue collected by CBP through various trade enforcement actions is deposited into the U.S. Treasury. It is not invested in a systematic or strategic way to increase the capacity of U.S. manufacturers, enhance productivity, or otherwise improve their ability to compete. None of it is used to retrain workers or provide a long-term comparative advantage that would enable U.S. producers to expand and grow into the future.

Too often, this means that industries in need of trade enforcement protection become addicted to it, unable to reorient themselves to compete going forward without the federal investment required to make future trade enforcement unnecessary. Trade remedy protection also does not require anything of the companies that request it: It does not require them to expand or modernize their factories, hire workers, pay a fair wage, train their employees, or do anything else that would place an industry in a more competitive position going forward.

Trade enforcement tools are not designed for integrated global supply chains

The trade enforcement tools available to the U.S. government today are constructed based on a simplistic bilateral view of trade; that is, a product made in one country is entirely of that country. This is absurd. Given the global market’s emphasis on comparative advantage and specialization, almost all traded products now contain parts or materials made in supply chains that include dozens of different countries.

The semiconductor industry provides a great example. There remains significant concern regarding China’s willingness to subsidize its legacy chip manufacturers and then flood the U.S. and other global markets with such low-cost chips that domestic production becomes nonviable. One solution would be for the United States to use its trade enforcement toolkit to place tariffs or duties on Chinese-made legacy chips. Several different authorities could be used for this purpose. China’s intent to dump legacy chips in the U.S. market is well-known (allowing AD/CVD duties); there would be a surge of import competition (suggesting potential Section 201 safeguards); and there is clearly a national security concern (allowing for potential Section 232 tariffs). But most legacy chips are imported not as chips themselves, but rather as a component part in a finished good.

Thus, the United States could not tariff legacy chips from China without needing to tariff all the electronic products that utilize legacy chips, many of which are produced in factories outside China and many of which support manufacturing in the United States. A similar situation exists in the electric vehicle industry, where there is growing concern that Chinese producers will build factories in Mexico and use United States-Mexico-Canada Agreement rules to import into the United States either tariff-free or with a small tariff, rather than face the much higher tariff rates announced as a result of the Biden administration’s Section 301 review.

This highlights a further challenge: The existing trade enforcement toolkit is often unable to consider the impact of trade protection on downstream industries. The law prohibits officials reviewing AD/CVD petitions from even considering the impact on consumers or other downstream industries. And, when there are downstream impacts, the tools simply do not exist to lessen short-term economic disruptions or support an industry’s efforts to more speedily claw back lost market share.

Even if a single, small, or relatively uncompetitive U.S. manufacturer files an AD/CVD petition, and it is not opposed by 50 percent of the industry, the procedures outlined in the Commerce Department’s AD/CVD authorities are the same. If a foreign firm receives subsidies that allow it to sell into the U.S. market below fair market value, duties are applied to make imports from that country more expensive. This is the case regardless of whether the firm requesting trade enforcement protection can scale its production to meet higher domestic demand.

Certainly, supporting domestic industries in the face of predatory or subsidized imports, particularly when those practices have already resulted in calculable damages, often requires some short-term pain. But it is counterintuitive that the government cannot even consider how long it would take the firm requesting trade remedy protection to recapture lost market share—and what steps it could take to make the transition easier, faster, and less disruptive to consumers and the country’s broader industrial base.

A 2021 AD/CVD investigation into the dumping of chassis into the U.S. market by Chinese firm China International Marine Containers (CIMC) provides a good example. CIMC is the world’s largest chassis manufacturer. The Commerce Department’s investigation resulted in a duty rate of more than 220 percent: a 177.05 percent antidumping duty and a 44.32 percent countervailing duty. Yet the five American chassis manufacturers that requested AD/CVD protection admittedly were not ready to meet the dramatic increase in demand that could be expected from a drop-off in imports from CIMC. The result was a steep increase in chassis prices precisely at a time when supply chain bottlenecks were already raising prices for consumers across a range of other products. Could the tariffs have been announced but delayed, allowing industry the time necessary to scale its capacity? Could AD/CVD protection have been contingent on an investment plan from U.S. chassis manufacturers to ensure their ability to meet domestic demand once the tariffs were imposed? Could the U.S. government have provided seed funding to build out chassis production capacity to speed this transition?

AD/CVD has no national interest determination

The chassis case further demonstrates another challenge with the United States’ trade enforcement toolkit: Its most used trade enforcement authority, AD/CVD, lacks a national or public interest determination. It does not have to be this way. In Europe, policymakers can determine whether dumping has occurred, whether that dumping has caused damage to domestic manufacturers, and whether those damages justify tariff protections. In most cases, tariff protections are justified, but for certain goods, they might not be. In 2006, when Europe faced a flood of imports of cheap Chinese-made shoes, it was able to calibrate its trade enforcement measure in a far more targeted manner than the United States, determining that children’s shoes should be excluded from any tariff to ensure that their prices remain low.

A mechanism that would acknowledge the negative impact of predatory imports on a domestic industry and yet still allow duty-free importation of those products would be controversial—and ripe for political manipulation. Yet there could be cases where a tariff-based remedy is not the right response, particularly in industries where predatory imports take advantage of an existing market failure rather than causing it. In this situation, a different, alternative remedy might be more desirable and could better serve the national interest ,while limiting negative downstream impacts on consumers and other industrial sectors.

Trade enforcement is based exclusively on price

The existing trade enforcement toolkit is designed entirely around the idea that price is the determining factor in consumers’ choice. This is often far too simplistic in today’s high-tech economy. It is increasingly the case that access to data is a driving force in differentiating one company’s product, and its capabilities, from another. In this situation, price parity may be irrelevant, as giving away the product for free in order to capture the valuable data on consumer behavior that comes with its use may be more profitable. Would raising the cost of a Chinese-made product to that of a domestic alternative be wise if such action still afforded the Chinese firm access to the data of millions of American consumers? And what if those data then allow for the product to learn faster and eventually enjoy capabilities that the U.S.-made product cannot match, as could be the case with AI-powered products of the future?

Trade enforcement does not promote U.S. values and cannot value inaction

Related to the idea that the U.S. government’s trade enforcement toolkit is based solely on price is the fact that it is too often unable to adequately account for—and address—situations where important values are at stake. If a country lacks environmental regulations or has weak worker health and safety requirements, isn’t that a form of subsidy in that it allows for cheaper production? If a country has lax climate targets or fails to push its manufacturers to decarbonize, that should be considered a subsidy to be addressed by U.S. AD/CVD action. The same is true about manufacturing destinations with lower wages, recognizing that prevailing wages in different markets are notoriously difficult to equate given differences in cost of living.

The Commerce Department’s AD/CVD investigations are designed to uncover and value the subsidies offered by a foreign firm’s home government that allows it to dump product in the U.S. market. But what if the lack of something is providing the space for foreign producers to manufacture at a cost below what is possible in the United States?

During Jair Bolsonaro’s presidency in Brazil, for example, deforestation rates skyrocketed, as his administration greatly favored the interests of agribusiness over Indigenous rights and the environment. Cattle ranging accounted for 80 percent of this deforestation. Could the United States have used its existing trade enforcement toolkit to levy tariffs on Brazilian beef either through AD/CVD, since allowing cattle rangers to use this land may be viewed as a subsidy, or through Section 301 tariffs, designed to compel Brazil to stop clearing so many hectares of forest? Such actions may have had an important effect, given that Brazil is the world’s largest beef exporter and the United States its second-largest export destination.

Trade enforcement is hard to align with others

The latter is a good example, too, of the challenge associated with aligning trade enforcement actions with other international partners, often limiting their impact. In the case of potential tariffs on Brazilian beef, tariff pressure would likely have only been effective if restrictions on Brazilian exports were coordinated closely with others—in this case, China, since it is by far the largest buyer of Brazilian beef. Chinese steel is another example. China has found willing buyers for its subsidized, and thus overly cheap, steel in Southeast Asia, the Middle East, and Africa—locations where U.S. steel producers have long stopped being competitive suppliers. To stop China from dumping its steel in the world market, the United States would need to coordinate trade enforcement actions with these markets, along with Korea, Japan, Europe, Canada, and other major consumers of steel.

Modernizing the trade enforcement toolkit

In recent years, some in Congress have sought to make tweaks to AD/CVD authorities. The bipartisan Leveling the Playing Field 2.0 Act, introduced by Sens. Sherrod Brown (D-OH) and Todd Young (R-IN)—an update to the Leveling the Playing Field Act that was passed into law in 2015—would, for example, establish the new concept of “successive investigations,” providing the Commerce Department an ability to address repeat offenders in a faster manner; it would also allow AD/CVD duties on entities that receive Chinese government subsidies but operate in a third-country market. In addition, the Commerce Department recently updated its regulations and procedures related to AD/CVD cases, codifying the idea that noncollection of fees, fines, and other penalties is subject to countervailable duties.

The Leveling the Playing Field 2.0 Act and the recent Commerce Department rulemaking are both admirable, but other, more significant updates should be considered as well.

Options for Congress

Extend AD/CVD duties to products that include materials or component parts subject to existing AD/CVD orders

Given the world’s highly integrated supply chains, most imported products are not wholly manufactured in their market of embarkation; rather, most include materials or component parts produced in multiple places before final assembly and shipment to the United States. Congress should consider authorizing CBP officials to assess AD/CVD duties on finished goods that are known to include component parts subject to existing AD/CVD orders, regardless of whether the imported good is itself subject to a trade remedy action. This would ensure that shipments of finished goods are not vehicles for the duty-free import of products that would otherwise be subject to duties. It would also greatly enhance the value of AD/CVD actions for American manufacturers and their workers, particularly in upstream industries.

This calls to mind the 19th-century doctrine of “continuous voyage,” which justified the seizure of ships and their cargo destined for neutral ports if the cargo was thought to ultimately be destined for an enemy combatant. Today, however, instead of considering the final consumer of the shipment, CBP officials should consider the supply chain inputs that went into a product before shipment to the United States. Such a practice would, for instance, be helpful in addressing the potential for China to dump legacy semiconductors in the U.S. market through the export of cheap consumer goods. It would also ensure that actions taken to alleviate the import pressure from China’s steel and aluminum overcapacity would be more robust, as products using Chinese steel would be subject to the same AD/CVD actions as a shipment of steel directly from China.

Section 307 of the Tariff Act of 1930 already prohibits the importation of any product that was mined, produced, or manufactured wholly or in part using forced labor, meaning that CBP officials have experience parsing the supply chains of imported goods. The Commerce Department is likewise empowered to extend AD/CVD duties to imports deemed to have circumvented existing AD/CVD orders by transshipping through a third-country port—or by whether the product was deemed to have been only minimally modified before being shipped to the United States—indicating that the law already envisions some appreciation for how goods are moved in the global economy.

Applying AD/CVD orders to finished goods that would otherwise enter the country duty-free, but which include inputs subject to AD/CVD orders would require the Commerce Department to help CBP officials target shipments through the sharing of supply chain expertise. Both the Commerce Department and the Department of Homeland Security have developed new supply chain offices and are quickly developing the level of expertise needed for such a task. But in both cases, additional funding from Congress would support this capability and ensure that targeting is accurate and strategic.

Expand Section 232 authorities to enable tariff protection for industries where imports pose an economic security concern

Section 232 authority allows the president to take action to address the national security concerns raised by imports of certain products. Congress should consider expanding this authority to include the economic security concerns. Such a change would still require an investigation led by the secretary of commerce, in consultation with other parts of the U.S. government, thereby ensuring a transparent statement of why such actions are necessary. Given the interconnected nature of trade in today’s economy, the secretary of commerce’s recommendations should include efforts to minimize deleterious impacts on supply chains, particularly in the economies of key trading partners.

If the United States is serious about rebuilding its industrial sector around key, strategic goods, then a modified Section 232 authority would provide extra safeguards against predatory trade practices that could affect sectors of national significance. Sectors such as semiconductors, advanced batteries, electric vehicles, and quantum computing would be prime candidates to utilize an expanded Section 232 authority.

Given the delicate nature of economic security-based tariff protection, Congress could include in its amendment of the statute a requirement that any executive action to increase or decrease tariffs based on economic security concerns withstand a 30-day congressional review period. It may even make sense to consider tying increased tariff protection to a requisite investment in domestic manufacturing capacity—perhaps using the generated tariff revenue for this purpose).

Tie tariff protection to industry investment in competitiveness

Trade remedy protection can be a lifeline that keeps local factories operating, but without any requirement to invest in long-term competitiveness, that is rarely enough to hire back workers, modernize production processes, or take other steps that could alleviate the threat of subsidized import competition over the long term. In some situations, this is made more challenging, because the firms that benefit from trade enforcement actions are not equipped to scale at a rate necessary to meet domestic demand for their products. Trade enforcement petitions should thus require the petitioner to state clearly how trade protection will enable them to grow in the United States as well as the time needed to meet expected changes in demand. Note that Section 201 safeguard requests do require the petitioner to offer a plan for readjustment to import competition, but this is unenforceable and rarely survives for long even if safeguards are implemented.

Moreover, tariff protection should be contingent on the recipient firm or firms’ commitment to paying their workers a fair wage; commitment to expand and grow in domestic communities by hiring new workers, or hiring back previously laid-off workers; and commitment to train their workforce to better compete in the competitive job market of the future. This sort of conditionality is likely to raise eyebrows for those who believe trade remedies should address only the immediate price difference between subsidized imports and a domestically produced alternative. But it is a more fulsome response that recognizes that price parity does not, on its own, rehire workers, rebuild communities, or prepare firms to compete in the future.

If, for example, it is expected to take several years for an industry to increase U.S. production long enough to fulfill expected orders—as was the case with chassis manufacturers in 2021—then the law ought to allow for a delay in the imposition of duties for a period of time necessary to minimize any harmful impacts on downstream industries and consumers. In the case of AD/CVD duties, it may be beneficial to change the annual adjustment of duties based on a combination of the domestic industry’s recovery and the actual amount of dumping or subsidization—rather than only considering changes in the level of subsidies provided to a foreign firm.

Develop a new trade authority that enables tariffs in critical sectors to manage trade with nonmarket economies without having to demonstrate injury or the threat of injury

Congress should create a new trade policy authority that enables the president to proactively manage trade in specific, critical sectors between the United States and its nonmarket competitors without the need to prove injury or potential injury. There are parts of the U.S.-China trade relationship, for example, that need to be controlled in a way that supports American economic security and derisks supply chains. Sectors such as AI, quantum computing, biotech, and semiconductors are so critical to the future that it behooves the administration to act proactively to ensure enduring American leadership. Such new authorities should include provisions that allow Congress to limit the president’s actions or provide it the ability to reverse course.

Enable the president to provide alternative remedies when AD/CVD duties are deemed harmful to the national interest

It is wise to have civil servants review nothing but facts and to remain removed from political pressure when determining duty rates. Yet, in many instances, providing a trade enforcement benefit to one industry results in a cost being paid by others—consumers, alternative industries, or trading partners. Congress should thus afford the president the ability to override AD/CVD duties if they deem those duties to run counter to the national interest and instead offer an alternative remedy that achieves the same effect, while minimizing downstream impacts on the broader economy. Such an authority should be prescribed clearly in law with specific benchmarks and processes, including an opportunity for Congress to override the president’s decision within a set period of time.

Opportunities available for the Biden administration in current law

Use the Section 301 investigation into Chinese commercial shipbuilding requested by the United Steelworkers to demonstrate the viability of nontariff remedies

On March 12, 2024, the United Steelworkers (USW) and other labor organizations filed a Section 301 petition, requesting that the USTR open an investigation into Chinese commercial shipbuilding. The petition is highly innovative in that it does not request tariffs on Chinese-made ships, but rather suggests that fees be imposed on vessels built in China that dock at U.S. ports—and that the proceeds be used to establish a domestic shipbuilding industry revitalization fund. During a speech to the USW on April 17, President Joe Biden called on the USTR to accept the petition and begin an investigation. The administration should take the opportunity to use its Section 301 investigation to demonstrate the viability of using nontariff actions as an appropriate trade remedy, as well as of rebuilding a domestic industry’s capacity to produce an appropriate objective rather than viewing price parity between domestically produced goods and subsidized imports as the only goal.

Allow projections of damages and other evidence to be used in assessing the need for tariff protection rather than actual damages

In many fast-moving sectors, waiting to calculate the economic damages of unfair or illegal import competition means waiting too long to take any action that could meet the needs of domestic producers. The administration should allow an industry to file a petition for AD/CVD or Section 201 protection to use economic models or projections of damages, or other forms of evidence to demonstrate the threat of injury they face. Agencies would need to weigh the rigor of the projection as part of their findings, which could be challenging, but this is a better option than allowing an industry to wither before any protection can be offered.

Update rules that govern ‘standing’ to enable component part manufacturers to bring AD/CVD cases against finished products entering the U.S. market

If a finished good manufactured abroad is dumped in the U.S. market, it is likely that it includes minimal, and often zero, U.S. content. The product’s presence in the U.S. market thus “injures” both its direct competitor in the United States and that domestic firm’s entire supply chain. And since most U.S. manufacturers source some product from fellow U.S. manufacturers as part of their supply chains, the impact of dumping goes well beyond the direct U.S.-based competitor. These smaller supply chain firms ought to have the ability to petition the U.S. government for trade enforcement assistance in this scenario.

Develop a mechanism to coordinate trade enforcement action with trading partners

One of the key challenges of unilateral trade enforcement is that while one’s domestic market may be spared from dumped imports, those same dumped imports likely land in a different market once blocked from the United States. This ultimately hurts the United States’ ability to export in the affected sectors and hurts U.S. partners and allies, whose industries often feel the brunt of unfair import competition, usually without the same trade policy authorities available in the United States. What is needed is a mechanism to coordinate trade enforcement actions, perhaps using entities such as the U.S.-EU Trade and Technology Council or the Indo-Pacific Economic Framework for Prosperity to align trade enforcement actions whenever possible.

Use AD/CVD authorities to advance a pro-climate and pro-worker agenda

AD/CVD authorities have always been used when addressing subsidies provided to a foreign manufacturer by their home government. But it is equally true that often, support comes in the form of not requiring certain actions or looking the other way at a practice that would be unacceptable in other markets. The Biden administration ought to bring an AD/CVD case against products made in markets with lax labor, environmental, or climate laws, which by not requiring a foreign manufacturer to make necessary improvements to their practices allows them to produce at a cost below what would otherwise be the case.

Self-initiate a Section 232 review of the national security risk posed by carbon-intensive imports

The U.S. Department of Defense has long noted the national security implications of climate change, so the link between importing carbon-intensive products and national security ought to be obvious and well established. The Commerce Department should thus self-initiate a Section 232 investigation into the importation of carbon-intensive products in key industries. For example, if the Commerce Department reviewed the national security implications of imports of aluminum, cement, electricity, fertilizers, hydrogen, and iron and steel, the result could be duties that mirror those associated with the European Union’s carbon border adjustment or could provide the authority needed to expand the potential Global Arrangement on Sustainable Steel and Aluminum to other sectors, enabling the provision of market access in select sectors on the basis of carbon intensity.

Importantly, if the United States were to strengthen its trade remedy tools in the manner described in this report, it should expect and accept that its trading partners will follow suit. In a world defined by interconnected supply chains and intense geo-economic competition, such reciprocal actions taken by U.S. trading partners would be a net positive for the nation, as they would further isolate products produced illegally, or those unfairly subsidized to compete in the global market. And if the United States’ trading partners matched their updates to trade enforcement regimes with the scale of investment that the Biden administration has made in rebuilding the United States’ industrial base, it would go a long way toward speeding the transition to a cleaner, more resilient, and fairer trade system.

Conclusion

For the first time in several generations, the United States has begun to implement an industrial policy. The results have been impressive, with more than $860 billion of new private sector investment having flowed into American manufacturing—the effects of which will be felt for decades to come in the form of greater economic resilience and national security. But along with a broader commitment to industrial policy and a rethink of how trade can support workers and the environment must come a modernization of how the United States uses its trade enforcement tools. Trade enforcement alone will not dramatically rebuild the U.S. industrial base. But when paired effectively with other trade policy measures, a strong, calibrated, and appropriate trade enforcement agenda can—and should—add another positive stimulant to the Biden administration’s reindustrialization agenda. This is why getting these issues right is so important.

To read the full report as it is published on the Center for American Progress’ website, click here.

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Onshoring Semiconductor Production: National Security Versus Economic Efficiency

Thomas Nielsen — Wed, 17 Apr 2024 21:09:57 +0000

Policymakers are increasingly concerned by the U.S.’s dependence on Taiwanese semiconductors. Is onshoring their production to the U.S.—a goal of the CHIPS and Science Act—a practical path forward?

Semiconductors—commonly known as microchips, chips, or integrated circuits—enable modern life. Those small devices make everything from computers, smartphones, microwaves, and cars to advanced weaponry work. A car, for instance, needs as many as 3,000 semiconductors while one Javelin anti-tank missile requires more than 250 chips. As artificial intelligence (AI) and quantum computing continue to advance, the global demand for semiconductors will only increase, while power will accrue to those countries that can develop, produce, and harness the most advanced chips.

Currently, however, none of the world’s most advanced chips are produced in the United States; Taiwanese companies dominate the market. U.S. policymakers, worried that the United States would lose access to semiconductors during a conflict with China over Taiwan, have turned to industrial policy to address this issue. Such an approach, however, comes with the inherent trade-off of maximizing economic efficiency versus bolstering national security and resilience.

State of Play

Despite the critical importance of semiconductors, the United States remains highly dependent on imports to meet domestic demand—especially from Taiwan. Although U.S. companies design the most advanced chips, they are entirely or largely “fabless,” meaning that they contract out production. According to U.S. International Trade Commission estimates, 44.2 percent of U.S. imports of the most sophisticated logic chips (the “brains” of devices that process information) are manufactured in Taiwan. But even that understates Taiwan’s dominance of the global semiconductor market: 60 percent of all semiconductors and more than 90 percent of the most advanced chips are manufactured in Taiwan.

The supply chain for semiconductors is a model of efficiency, with companies hyper-specializing in one area and leaving other parts to their peers. Although semiconductors were invented in the United States—at one point it produced nearly 40 percent of the world’s chips—U.S. companies decided to focus on chip design, which has the highest margins, and outsource actual production. Foundries such as Taiwan Semiconductor Manufacturing Company (TSMC), which dominates semiconductor manufacturing, produce chips designed by firms such as Apple, Intel, Nvidia, and Qualcomm. Once a chip is made, it is typically sent to Southeast Asia for assembly, testing, and packaging. Chips are then shipped to factories around the world.

This process, an archetype of globalization, has allowed each participant to focus on their respective comparative advantage, driving down costs and enabling the industry’s blistering rate of innovation. At the same time, however, this industry, which is vital to the global economy and to national security, has become heavily reliant on one manufacturing hub, Taiwan, which has raised anxieties in the United States regarding the fragility of the supply chain.

Rising Concerns

With China exerting more pressure on Taiwan and questions growing about whether Chinese leader Xi Jinping will use military force against the island, the United States is increasingly focused on the implications of a conflict for the global economy. Bloomberg, for instance, estimates that a war between the United States and China over Taiwan could shave as much as $10 trillion off of global gross domestic product. The economic devastation that a conflict would bring is driven above all by the reality that such a war would likely entail a prolonged halt in the production and shipment of chips, which would make it difficult for companies to produce much of anything.

The argument for establishing semiconductor manufacturing capacity outside Taiwan and in the United States, however, extends beyond the growing possibility of war. Taiwan’s susceptibility to earthquakes and typhoons carries heightened risks for supply chain disruptions. Manufacturing semiconductors also requires vast amounts of water, which Taiwan has been forced to ration during droughts, raising the possibility that semiconductor manufacturing could be impacted during an extended drought.

To guard against the possibility of such a disruption and enhance supply chain resiliency, the United States has poured resources into rebuilding its long-dormant domestic semiconductor manufacturing industry. There is no guarantee, however, that industrial policy along these lines will work, as it could drive up prices and reduce innovation.

Made in America

Recognizing the United States’ vulnerability to semiconductor supply chain disruptions, in 2022 Congress passed and President Joe Biden signed into law the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, which will deliver $280 billion in federal subsidies over ten years to increase domestic semiconductor capacity, of which some $39 billion will go to building and expanding fabrication plants (or fabs) in the United States. To that end, the Biden administration has awarded $8.5 billion to Intel, $6.6 billion to TSMC, and $6.4 billion to Samsung. The recipients of these grants have vowed to invest billions more in the United States, with the goal of producing two nanometer or more advanced chips, which support AI and high-performance computing. The United States has set a goal of producing 20 percent of the world’s leading-edge chips by the end of the decade.

At What Cost?

The push to build resiliency in the semiconductor industry could result in higher costs and less innovation. TSMC founder Morris Chang has cautioned that U.S. efforts “will be a very expensive exercise in futility.” He has estimated that shifting production to the United States could double the cost of chips and warned that “when the cost goes up, the pervasiveness of chips will either stop or slow down considerably.” Chang pointed to TSMC’s fab in Oregon, where he claimed chips cost 50 percent more than those made in Taiwan. If companies like TSMC have to spend more on production, they will likely pass those costs on to their customers, which will then pass the costs to the consumer. This means pricier phones, computers, and AI-related applications.

In addition, the CHIPS Act alone is likely not enough to guarantee success. TSMC’s annual capital expenditures are nearly as much as the entire sum in the CHIPS Act dedicated to boosting U.S. manufacturing. TSMC benefits from an ecosystem of critical suppliers that has grown around it in Taiwan, which lowers its costs and allows it to quickly repair and upgrade equipment. Such a network, however, does not currently exist in the United States. Taiwan’s undervalued currency, the New Taiwan Dollar (NTD), also enables Taiwan to offer more competitive exports. Some have pointed to the perceived mismatch between the United States’ workforce and that of Taiwan in terms of compensation expectations, training level, and work ethic. To address those shortcomings, the United States could find itself having to spend billions more to keep a nascent semiconductor manufacturing industry afloat. Indeed, Intel CEO Pat Gelsinger has alluded to just this, commenting, “I don’t think CHIPS 1 is the end of what we need to do to rebuild the industry.” Secretary of Commerce Gina Raimondo seems to agree, stating, “I suspect there will have to be… continued investment.”

U.S. efforts to reshore semiconductor manufacturing could also threaten Taiwan’s crown jewel, the “silicon shield” that some believe deters China by raising the costs to Beijing of military action. In addition, China has used U.S. onshoring efforts as an opportunity to sow distrust of the United States in Taiwan by pushing the narrative that the United States is looking to hollow out and then abandon the island. The U.S. focus on onshoring because of perceived risk over Taiwan has also prompted other businesses to reevaluate their investment plans and presence in Taiwan, which could make Taiwan more vulnerable to Chinese pressure. If Taiwan becomes less economically competitive and more susceptible to Chinese coercion while Taiwanese people grow skeptical of U.S. intentions, the U.S.-Taiwan partnership could grow strained.

Do Alternatives Exist?

If onshoring proves to be too expensive or difficult, one alternative that would still increase resilience is to friendshore production in places like Japan, South Korea, and Malaysia. Each of those countries has experience with semiconductor manufacturing or testing and packaging and offers lower costs than production in the United States. In the event of a conflict over Taiwan, those countries would still likely be able to produce and ship chips.

If policymakers conclude that Taiwan is truly irreplaceable to the global semiconductor supply chain and that it is nearly impossible to meaningfully reduce reliance on chips manufactured in Taiwan, that will provide an added incentive to safeguard Taiwan’s security. An alternative, or supplemental, approach could therefore be to make explicit that the United States will come to Taiwan’s defense or to invest greater resources in bolstering Taiwan’s own military capabilities. After all, if the effort to onshore semiconductor manufacturing is largely a product of fears of a conflict over Taiwan, then reducing the likelihood of such a conflict by bolstering deterrence would directly address such concerns.

Alternatively, policymakers could turn to coercive diplomacy if they deem that relocating the bulk of semiconductor manufacturing is a strategic imperative but the CHIPS Act is insufficient. Such an approach could entail threatening to withhold critical manufacturing equipment or refusing to service existing equipment at Taiwan’s foundries unless they shifted more production to the United States. Doing so, however, would fundamentally damage U.S.-Taiwan relations and make Taiwan far more vulnerable to Chinese pressure.

Finally, the United States could seek to supplement the CHIPS Act by pursuing legislation or regulatory changes that incentivize companies to procure domestically manufactured chips. While the CHIPS Act seeks to ensure a supply of chips made in the United States, as of now there is no guarantee customers will demand that a certain percentage of their chips be made in the United States. The United States could offer tax breaks to those companies that source chips made in the United States or require that chips used in national security applications be made in the United States.

To read the full article post as it appears on the Council on Foreign Relations (CFR) website, click here.

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Jobs, National Security, and the Future of Trade

Brooke Woodworth — Mon, 08 Jan 2024 17:51:43 +0000

Key Takeaways
As world commerce adapts to geopolitical disruption, trade flows are shifting and trade blocs are playing a more prominent role. A BCG analysis outlines the changes and presents strategies to help companies navigate this new normal.

Global trade growth is forecast to grow at 2.8% per year through 2032—less than the 3.1% annual increase forecast for global GDP over the same period.
Intra-regional trade in North America is forecast to grow by $466 billion, due to a combination of the US Mexico Canada Agreement and new US industrial policies.
Southeast Asia and India stand to benefit from slowing trade between China and the West. ASEAN global trade will grow by $1.2 trillion and India’s will expand by over $390 billion.
To stay competitive, companies should strengthen their geopolitical decision-making to help withstand supply chain disruptions, enhance their ability to respond to price volatility and inflation, adopt “fractal innovation,” and turbo-charge their risk and cybersecurity capabilities.

As the global economy adjusts to persistent economic and geopolitical pressures and disruptions, the familiar routes that defined the world trade map are being redrawn and trade blocs are playing a greater role. In addition, overall global trade is growing at a slower rate than the world economy, a fundamental shift away from the trend of trade-led globalism that has been prevalent since the end of the Cold War. World trade in goods is forecast to grow at 2.8% per year, on average, through 2032, compared with an estimated 3.1% growth rate for global GDP in the same period, according to a new BCG analysis.

Stronghold North America

The United States, Canada, and Mexico will benefit from the US Mexico Canada Agreement (USMCA), as US trade with its neighbors is forecast to grow by $466 billion in the coming decade. Faced with a combination of economic pressure and national security concerns, the Biden administration has adopted a new focus on industrial policies with a more protectionist bent, such as the Infrastructure Investment and Jobs Act (IIJA), CHIPS Act, and the Inflation Reduction Act (IRA). The result is a more influential regional manufacturing footprint with direct investment into strategic industries.

China Trade Dynamics

Persistent trade tensions and growing trade barriers are continuing to impact trade between China and the West. The projected fall-off in US-China trade is one of the most significant developments in the updated global trade map, with 2032 trade value forecast to fall $197 billion from its 2022 level. This is more than three times the $63 billion contraction forecast one year ago in a similar BCG analysis. The change is due to China’s slowing GDP growth in 2022, combined with other factors. China’s trade with the EU will continue to grow, but more slowly than the global average.

ASEAN Trade Growth

Southeast Asian nations are among the biggest winners in the new world trade order. Cumulative ASEAN trade is forecast to grow $1.2 trillion in the next ten years due to the region’s emergence as a key destination for companies seeking to decrease their dependence on China for manufacturing by adopting a “China + 1” diversification strategy. ASEAN is an attractive China alternative because of its young and dynamic population, economic diversity, and generally neutral stance among geopolitical blocs.

India Ignition

Like the ASEAN nations, India is benefiting from a low-cost structure and capable workforce to rise as a major domestic market and “China + 1” destination for global manufacturing. India’s large market and particular strength in industries such as chemicals, consumer electronics, and pharmaceuticals are attractive for companies seeking to diversify their global footprint. Expanding trade connectivity, as evidenced by new and under-negotiation trade agreements, are helping to increase India’s projected external trade in the next ten years by $393 billion, including $180 billion with the US and EU and $124 billion with China.

Russia Trade Divergence

The break in Russia’s trade with the EU and the US caused by the war in Ukraine and the resulting sanctions and reduced European dependence on Russian energy will influence Russia’s trading profile at least so long as the stalemate in Ukraine continues. These conditions have not led to the elimination of Russian trade, but rather its redirection elsewhere. For example, much of the trade with the EU has shifted to Russia’s fellow BRICs countries: Brazil, China, India, and South Africa. While Russia’s trade with the EU in 2032 will fall by $222 billion, compared with 2022, its trade with China and India will grow by $134 billion and $26 billion, respectively.

Multiple Challenges Are Inhibiting Trade Growth

The cooler trade climate is part of a reordering of the world trade map that is taking shape in the wake of the recent twin shocks of the pandemic and the Ukraine war, accompanied by a rise in trade protectionism and a falloff in globalization sentiment. A variety of factors are contributing to reshoring of manufacturing around the world, with a predictable dampening effect on global trade. These include:

Industrial policy. A leading element is the rise of national policies designed to support domestic industry and job creation. Policies such as the United States’ Inflation Reduction Act (IRA), with its “Buy American” incentives, reflect governments prioritizing national interests over multilateral, rules-based organizations, such as the World Trade Organization. Similar policies can be seen in the European Union and other parts of the world.
Labor economics. Companies in some regions are taking advantage of capable, low-cost labor as well as the availability of new technologies that have enabled them to reshore or near-shore manufacturing operations. For example, the cost gap between US and Chinese labor has narrowed as labor costs in China have risen on a relative basis, while locations such as Mexico, Southeast Asia, India, and Latin America have become competitive with China on labor costs.
Supply chain stability. Faced with risks of disruption and overreliance on extended and brittle supply chains, companies are seeking to diversify their global manufacturing and sourcing networks by moving to markets with lower geopolitical risk, reliable infrastructure and, in some cases, proximity to end-markets.
Environmental factors. Global and domestic pressure on industry to decarbonize operations has led companies to focus on geographies with clean energy supplies, reduce carbon footprints, and increase overall sustainability. Policies such as the EU’s Green Deal are incentivizing European companies to use more low-carbon energy sources by locating manufacturing closer to home.

As Cooperation Cools, Regional Trade Blocs Rise

A characteristic of the new world trade order will be the growing prominence of trade blocs—especially North America, the EU, ASEAN countries, and potentially the BRICs—as production moves closer to end markets. Blocs are attractive for countries seeking to limit geopolitical friction by trading with entities seen as “friendly” partners, especially where trade agreements exist, such as the EU, USMCA, Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Regional Comprehensive Economic Partnership, and EU-Vietnam Free Trade Agreement.

Under the Biden administration, the US has adopted new industrial policies, with legislation that encourages direct investment in strategic industries such as semiconductors, domestic manufacturing, renewable energy production, and electric vehicle infrastructure and battery technology.

Combined with the USMCA, the net effect of these industrial policies is to pull investment back to the US—especially for industries deemed critical to national security, like computer chips. Trade between the US and Mexico stands to grow by an impressive $300 billion over the coming decade. The Inflation Reduction Act, for example, goes beyond familiar “Buy American” incentives to encompass a “Buy North American” approach, such as extending the $7,500 credit for electric vehicles with powertrains or battery technology made in the US, Canada, or Mexico.

Among the biggest impacts of increasing emphasis on resilience through diversification of global markets and supply chains will be a continued fall-off in trade between China and the United States, as companies seek trading partners and manufacturing locations to rebalance their global risk exposure.

As the world’s leading exporter of manufactured goods, China itself is resilient. Trade that stops flowing between China and the West will simply move elsewhere. Notable beneficiaries of reduced US concentration in China will be the ASEAN countries and India as many companies move manufacturing to these economies, both to reduce global supply chain risks and to access new markets. As a result, trade between ASEAN and China will grow a remarkable $616 billion in the coming decade—and trade between ASEAN and both the US and Japan will increase by more than $200 billion. India is forecast to achieve 6.3% average annual trade growth, partly because of this rebalancing of China trade.

“No-Regrets” Moves to Improve Preparedness and Competitiveness

As trade frictions grow and trust in multilateralism weakens, the global market is becoming more fragmented. The more cooperative trade environment that enabled companies to build global supply chains in recent decades is quickly being replaced by a more uncertain world characterized by a mix of smaller regional and local supply chains. In the short term, companies should take several steps to adapt.

Strengthen geopolitical decision-making capability to enable supply chains to withstand disruptions. Companies can improve resilience by investing in digital tools, such as artificial intelligence, to enable agile decision-making and adaptability. Companies can also take steps such as building buffer inventories of essential commodities, prequalifying alternative suppliers, and planning contingencies for at-risk supply inputs.
Enhance ability to respond to price volatility and inflation. Strategies can include building resilient pricing, such as by sensing demand shifts earlier and developing dynamic pricing capabilities, strengthening customer relationships and contracting flexibility, and exploring new monetization models, including “as-a-service” models and outcome-based pricing.
Become more flexible and adaptable by adopting “fractal innovation.” To help meet the challenges of a fragmenting global trading landscape, companies can address differentiated needs of local customers by adopting a “customer-in” approach and embracing a new way of designing products—something we call fractal innovation.
Turbo-charge risk and cybersecurity capabilities. Companies should identify security gaps, prioritize security projects and tools, and consider approaches such as a cyber tool health index, zero-based budgeting, and cyber risk quantification to develop a custom cybersecurity roadmap.

Forces that have had a dampening effect on global trade in recent years will continue to be a factor in the world economy and corporate decision-making. Companies that rely on global supply chains must recognize that the challenges afflicting global trade are here to stay, and should continue to diversify their networks and build resilience.

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The WTO’s National Security ‘Thin Ice’ Moment Could Shatter Reform Talks

Sat, 07 Jan 2023 18:00:24 +0000

The already-beleaguered World Trade Organization dispute settlement system suffered new blows in December when multiple panels found that U.S. actions were not justified on national security grounds, including U.S. tariffs on steel.

The United States wasted no time in rejecting the findings, with U.S. Trade Representative Katherine Tai commenting that the WTO was “on very, very thin ice,” prompting angry reactions in Europe. The cases have made the critical work of restoring a consensus on WTO reform considerably more difficult.

While reactions to the panel decision and its aftermath have focused on the Biden administration’s rejection and what it portends for the WTO, that reaction would have been the same regardless of the product and circumstances, and every U.S. president since Truman would have done the same. Any effort to move beyond this new crisis needs to start with recognizing that fact and accepting that bringing such damaging and shortsighted cases should be avoided in the future.

From the outset of the WTO’s predecessor, the 1947 General Agreement on Tariffs and Trade (GATT), the United States has been clear in its position that a party to the GATT and WTO may judge for itself when its national security interests justify raising tariffs or otherwise disregarding multilateral trade rules. Trade experts should not be second-guessing such decisions. The United States was not alone in taking this position; at various times, many other members have agreed, including some who would later challenge the U.S. steel tariffs such as the European Union and Norway.

This position was minimally disruptive to the trading system because of a strong norm that national security was to be invoked only rarely, and because creative trade diplomacy contained the fallout when it was. That norm was broken during the Trump years, not only when he initiated several national security investigations ranging from steel to autos, but when others, including China and Russia, increasingly restricted trade in the name of national security.

In response, WTO parties began to litigate the fundamental question of whether national security decisions could be reviewed. This was a lose-lose proposition since a clear finding for the U.S. position could open the door for abuse. And a finding against the U.S. position would almost certainly be disregarded, to the detriment of the system’s credibility.

But even more fundamentally, the decision to bring the case was pointless. The same relief — the right to raise tariffs on U.S. goods — was available without touching this third-rail issue. When a WTO member fails to implement an adverse decision, the member bringing a case is permitted to raise duties on the losing party’s goods. But the U.S. has in the past acknowledged that others may retaliate against national security measures and it was willing to litigate the amount. That solution was likely available here and would have spared the fallout from having the WTO second guess a member’s national security decisions. That this solution was not pursued was a failure of diplomacy, and only reinforced the U.S. concern that the system has encouraged litigation over negotiation.

The national security decisions could not have come at a worse time for the WTO. WTO members have been discussing reforms that might lead to the restoration of the organization’s dispute settlement system to full functionality. The Trump administration hobbled the system by blocking appointments to its appellate body, acting on long-standing, bipartisan U.S. concerns that the body was overreaching its authority and making law. The path to restoring the WTO’s dispute settlement function lies in assuring the United States that the system can be trusted to respect its limits and that attempts by members to push beyond those limits through litigation will be rejected. The decision to bring the national security cases and the outcome of those cases is the opposite of reassuring.

While these cases have complicated the path toward restoring the dispute settlement system, the effort must continue. For all its flaws, the system has played an important role in resolving and containing disputes. One need look no further than the trade wars unleashed by the Trump administration to see the value in a system that heads off escalating tit-for-tat duties between countries insisting on their own rectitude. And the system lends credibility to the multilateral rules that are the embodiment of international economic cooperation, and which our allies continue to insist serve as the baseline for our trade relations, even as we respond to new security and economic challenges that may require deviating from free-trade orthodoxy.

Some in the United States may conclude from the national security decisions that the dispute settlement system should not be revived. But as the U.S. response illustrates in the clearest terms, a functioning dispute settlement system would not prevent the United States and its allies from going outside the system to take actions necessary to address China’s predatory targeting of key sectors, nor would it prevent the United States from addressing climate change or strengthening U.S. manufacturing.

The WTO has no army. It has no black helicopters. Dispute outcomes are not U.S. law. The U.S. and others always can choose whether to comply, understanding that the complainant may raise duties on their goods if they do not — an option available in any event. But the system limits that retaliation to the impact of the inconsistent measure, avoiding cascading retaliation cycles. And the system brings stability to the vast majority of commercial transactions not implicated by the new challenges facing the global community.

Some U.S. trading partners may likewise conclude from the U.S. reaction to the national security decisions that the United States has no interest in multilateral rules or enforcement mechanisms. But any U.S. administration would have done the same, even during the decades when the United States was at the forefront of promoting the multilateral trading system. The outcomes should instead serve as a wake-up call that WTO members need to exercise greater restraint in litigating. Similar restraint must be directly built into the WTO enforcement mechanism itself so that it buttresses support for the system, rather than undermines it, for example, by codifying the past practice of limiting national security litigation to cover only the amount of retaliatory measures.

Bruce Hirsh is principal at Tailwind Global Strategies. He previously served in senior positions at the Office of the U.S. Trade Representative and the Senate Finance Committee.

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