By James R. Holbein, Braumiller Law Group PLLC
Use of Tariffs to Resolve a Crisis. The Trump Administration has demonstrated a willingness to apply new tariffs to goods entering the U.S. as a viable tactic under its America First strategy to achieve greater fairness in its dealings with other countries. The application of tariffs is authorized under a number of standard legal procedures, such as trade remedy investigations to mitigate dumping of goods at less than fair value into the U.S. market or eliminating the unfair price advantages of government subsidies, and use of section 301 duties to respond to unfair trade practices by other countries. However, the broad-brush use of tariffs to coerce our trading partners to make concessions in non-trade areas to resolve a domestic crisis is relatively new.
IEEPA and Tariffs. As analyzed in my recent article Presidential Authority to Unilaterally Raise Tariffs, the power to collect customs duties is conferred on Congress by the Constitution. The President can only negotiate tariffs under specific legislative authority delegated by Congress to the Executive. The threat to impose tariffs being used by the Trump Administration is predicated on the International Emergency Economic Powers Act (IEEPA). This delegation of Congressional authority extends to economic crises and has been used to impose sanctions on a number of countries in the past. The Trump Administration has cleverly used this legislation, which has never been used previously to levy tariffs, to respond to the immigration and fentanyl crises at our borders that were declared in the January 20th Executive Orders.
USMCA Tariffs. Currently, under the terms of the Trump negotiated U.S-Mexico-Canada Agreement (USMCA), continental trade flows without imposition of tariffs for virtually all goods, except those under AD/CVD orders and some other minor exceptions. While the USMCA prohibits the imposition of new duties in the currently duty-free trade environment, the use of IEEPA to impose tariffs to alleviate a crisis arguably falls under the national security exception in the USMCA. The Executive Orders issued since January 20 to levy 25% tariffs on our closest allies and largest trading partners, Canada and Mexico, are a very heavy-handed diplomatic approach that obtained little in the way of new resources or diminished flows of immigrants or drugs.
America First Strategy. The rhetoric coming from the America First program is apparently predicated on a “we win, you lose” view of international relations that flies in the face of decades of implementation of trade agreements based on mutual, reciprocal and balanced concessions to achieve a “win-win” mutually beneficial economic system. Under the free trade environment with Canada since 1989 and Mexico since 1994, trade in North America has grown from less than $300 billion in 1993 to more than $1.5 trillion in 2023.
Tariffs as a Tactical Tool. The current tactical use of the threat of across-the-board tariff increases to achieve a U.S. “win” on one aspect of our relationship by forcing our allies and trading partners to “lose” and do what we want is unlikely to achieve long term success with our allies. They have seen this tactic before in the prior administration for steel and aluminum trade, a threat of tariff increases followed by a relatively modest agreement to resolve the crisis and then the threat is removed. The integration among our economies is crucial for the success of U.S. manufacturing. Diminishing the mutual respect and common interests of our continental trade zone for short term political gains is simply not a good policy. North American trade agreements have eliminated many trade barriers, integrated many sectors of our manufacturing, increased investment flows, increased employment in manufacturing, agriculture and services and led to a substantially more cooperative relationship in other international organizations. This has real economic value that is potentially diminished by the use of coercive tactics that erode the mutuality of the cross-border economies.
Auto Trade. Our trade agreements have turned U.S. auto production into a seamless continental powerhouse, exceeding $400 billion in trade. The auto sector now can ship raw materials to be manufactured into parts in one country, assemblies in another and finished vehicles in another, all produced to common standards. Substantial investments in all three countries, fostered by the agreements, have optimized supply chains not dependent on ocean transport, with duty-free and simplified entry, multiple border crossing to take advantage of comparative advantage in each country, all resulting in much higher employment in all three countries vs prior to the agreements.
Agricultural Trade. Before NAFTA and the USMCA, agricultural trade between the U.S. and Mexico was less than $20 billion annually, compared to more than $120 billion in 2023 among all three countries. All three countries benefit from higher food safety standards and quality, substantial investments in supply chains, processing plants, infrastructure, logistics, and a much broader range of products. Disputes are fewer and cooperation with food safety and inspections is much more routine and accepted.
Energy Trade. The energy sector, particularly imports of electricity and oil and gas into the U.S., has expanded greatly under the free trade regime of the NAFTA and USMCA. Currently three-way trade is nearly $150 billion and all of it is duty-free. Investment in pipelines and electric transmission has been robust. Canada is the largest foreign supplier of oil to the U.S., about 4 million barrels of oil daily, heading to U.S. refineries specifically calibrated to use Canadian oil, all on commercial terms. Mexico imports over 5 billion cubic feet of natural gas daily from its largest supplier, the U.S. In the new America First regime, there is unlikely to be much support for further integration with the U.S., since it is demonstrating such a reliance on short term tactical advantages and not long-term economic goals.
Conclusion. The previously unused legal tactic of declaring a domestic crisis threatening a hugely disruptive tariff increase on all products was successful in its first application. It resulted in agreements with Canada and Mexico, to be finalized within 30 days, to not impose the tariffs in return for a “victory” to resolve the immigration and fentanyl crisis that is not directly related to either the tariffs or trade. Use of such a coercive tool against our friends and allies may have longer term repercussions in the overall diplomatic relationship.
And where is Congress in all of this uproar? They have a real interest in exercising their own Constitutional powers that are not dependent on the political party wielding the weapon of tariffs. Abdication of Congress of its role in the economy is a big mistake, as is likely to be demonstrated as further America First actions unfold.
