Congress Must Undo its Permanent Normal Trade Relations Votes for Russia, and China

Cuba and North Korea don’t receive our Normal Trade Relations; Russian exports should face the same tariffs as they do.

By Charles Benoit, CPA Trade Counsel

Less than 10 years ago, by votes of 92-4 in the U.S. Senate and 365-43 in the House, Congress voted to grant Russia ‘Permanent Normal Trade Relations’ (PNTR). We need to undo this, and put Russia back alongside Cuba and North Korea

But what exactly did this mean?

In short, it meant we were no longer concerned about Russia’s actions on the world stage or at home. We signaled to the world that come what may, producers in Russia could count on near-free access to the U.S. market.

And this isn’t conjecture – it was proven true less than two years later, in 2014, when Russia annexed Crimea. They still got to enjoy our wide open tariff schedule.

Is this time any different? Will Russian imports continue to enjoy access to the same tariff rates we extend to, for example, Great Britain, Norway, and Taiwan?

Let’s talk about what the import lobby doesn’t like us talking about, shall we?

Quick primer on what ‘Normal Trade Relations’ means

Like every country throughout history, the United States has a tariff schedule. A tariff schedule lists every conceivable good that could show up in a port, and applies a tax to it.

Our tariff schedule has three columns:

• Column 1: the tariff rates in Column 1 are our “Normal Trade Relations” tariffs, and average at 3.4% (the lowest committed among all 164 WTO countries). Hardly anything. Most industrial products are at 0%. Notable exceptions are textiles and apparel, where we still have tariffs somewhere around 12% on average. Also sugar, peanuts, and tobacco, where we have sky high tariffs. (We charge 155% – 192.7% on peanuts!)
• Column 1-Special: our tariffs under bilateral free trade agreements and tariff preference programs, where even most of our piddling, low-single digit tariffs go to zero percent. It’s called “Column 1-Special” because technically, these countries also enjoy access to our Normal Trade Relations tariff. If a producer in a free trade agreement country wants our Column 1-Special tariff rate, they’ll have to file a bit more paperwork. Or, they can just use our Column 1 rate. After all, it’s probably free anyway.
• Column 2: these are the countries we’re not happy with, who aren’t entitled to our Normal Trade Relations. Our Column 2 tariffs are on average over ten times higher than our Column 1 NTR rate, typically between 30% and 50%. They’re largely the left over from the 1930 Tariff Act, which is the last one Congress passed.

Here’s the kicker: Congress has handed out Normal Trade Relations status to every country in the world except Cuba and North Korea. Wow! Those are the only two countries whose merchandise is subject to our Column 2 tariffs. (We’ll have a word to say about Iran and other situations below).

What’s meant by “Permanent” Normal Trade Relations?

Keeping it concise and sparing you all the history:

• Our column 1 and 2 system goes back to 1951, when we began sorting countries into one of two tariff schedule columns. Look at the header image in this article to see for yourself. One column had countries eligible for our “Most Favored Nation” (what we now call ‘Normal Trade Relations’) tariff schedule. The other column listed countries subject to our tariffs listed in the Tariff Act of 1930 (i.e., Column 2 now). Soviet countries were all on Column 2, subject to the 1930 tariff rate.
• With Title IV of the Trade Act of 1974, we created a framework whereby countries could ‘graduate’ to our Normal Trade Relations tariff schedule temporarily and subject to regular review of them meeting various criteria, typically centered on human rights. The President had to make a determination that the foreign country was in compliance with the Title IV requirements for that country to continue to receive NTR tariffs for its exports.

“Permanent” Normal Trade Relations is what we call Congress passing legislation for ever-lasting NTR treatment for a country’s exports; NTR status is no longer subject to the Title IV human rights criteria. PNTR = free pass for dictators.

As for Russia, we first extended Normal Trade Relations in 1990 (it was still the Soviet Union), and that continued to the new Russian Federation. Presidents were required to periodically renew and extend Russia’s NTR status with Proclamations. Russia was accountable.

That all changed on December 14, 2012, when President Obama signed into law H.R. 6156, which made Russia’s NTR status permanent. A.k.a., ‘PNTR’.

Why does Iran still receive Normal Trade Relations? (They shouldn’t, but we skipped from NTR directly to banning all imports.)

Blame Congress for Iran still receiving Column 1 tariffs. Congress used to be better, but they’ve atrophied on trade.

For example, Cuba had been in our good NTR list until December 1960, when Congress voted them back to Column 2. And that was despite them being a signatory of the GATT (which continues to this day as the framework the WTO oversees). Cuba is a fellow WTO member, but we’ve denied them Normal Trade Relations for their human rights oppression. We should do this a lot more!

When the Iran crisis happened, Congress didn’t follow up like they’d done with Cuba in 1960. Instead it fell to Jimmy Carter to use the International Emergency Economic Powers Act (IEEPA) for the first time. Carter’s first invocation of IEEPA was limited, focusing on freezing public Iranian assets in the United States. But then, on April 17, 1980, President Carter issued Executive Order 12211, which prohibited effective immediately “the direct or indirect import from Iran into the United States of Iranian goods or services, other than materials imported for news publication or news broadcast dissemination.”

Once all imports were banned, it may have seemed redundant to worry about legally moving Iran from Column 1 to Column 2. But that’s short sighted, because these IEEPA sanctions inevitably weaken as diplomats play geopolitical checkers. Sure enough, the 1980 trade embargo lasted just one year.

To his credit, in 1987 Rep. Richard Ray (D-GA), introduced H.R. 3338 to move Iran from Column 1 to Column 2, but it didn’t get out of committee. It was presumably overtaken by events again: on October 29, 1987, President Reagan brought back the total trade embargo against imports from Iran. (E.O. 12613).

It’s a shame about Rep. Ray’s bill! Once again, the Presidential trade embargo didn’t last. On April 28, 2000, President Clinton amended the Iranian import ban, allowing for the importation of certain Iranian agricultural items as well as textile floor coverings.

An importer keen to bring in Iranian pistachios double-checked with U.S. Customs and Border Protection, and the agency confirmed that Iran enjoyed our NTR tariffs. The Iranian pistachios could be imported for just 1.9 cents per kilogram. American pistachio growers were forced to resume paying top dollar for bigshot DC lawyers to file anti-dumping suits to try and defend against the cheap import competition.

It would be a good idea to have a middle ground between ‘total ban’ and ‘open borders’. We should repeal PNTR for our adversaries.

Using IEEPA to ban all imports from Russia, not to mention China, is likely a bridge too far politically.

Using IEEPA to at least begin embargoing certain classes of products would be a nice start; however we haven’t seen that yet with Russia. But the problem with any IEEPA action is that they’re perceived as time limited. Presidents come and go. But laws Congresses passes tend to have serious inertia.

Repealing PNTR for both Russia and China (which, let’s remember, annexed Hong Kong last year) should be viewed as a minimum for anyone who considers themselves a hawk. Doing so would shift them both back to the Trade Act of 1974’s Title IV framework, which could be simultaneously amended with some new criteria. Like, ‘no conquering foreign lands’, or something to the effect.

Our goods imports from Russia are relatively minor, around $20 billion a year, and $13B of that is fuel. The two runners up are platinum ($2.2B) and iron and steel ($1.4B). We’re a decent sized producer of all of that, we don’t need their imports. Let’s remove PNTR, and immediately move Russia to Column 2 of our tariff schedule.

Doing so would signal a long term, lasting decoupling. Not some flimsy IEEPA order that crumbles at a subsequent diplomatic ‘reset’. Moving Russia to Column 2, in turn, gives domestic producers the certainty they need to make investments in scaling up production of those items here, knowing they won’t have to worry about being flooded with Russian dumping once tensions ease.

As for China, repealing PNTR for them is long overdue. Failing to do so now signals that we’re reserving this for after they conquer Taiwan. Let’s not do that! We can repeal PNTR for China now, and switch them to a Presidential-waiver system. Add criteria as we see fit. Repealing PNTR need not automatically deny access to Column 1 tariffs, as we’ve discussed. So if Congress repealed China PNTR, it would:

1. Serve as a much more powerful signal than even our Section 301 tariffs, which are drawing constant litigation. Multinationals would get the message with PNTR repeal that they absolutely cannot count on supplying the United States with merchandise from China; and
2. Send the message to China that if they annex Taiwan like they did for Hong Kong, then the jig is up. It’s full decoupling, assured by their lack of PNTR.