By Charles Benoit, CPA Trade Counsel
An upcoming vote in Congress will be on par with the 2001 decision to grant China Permanent Normal Trade Relations. And Senate Finance Republicans are supporting it. They need to see the light.
The chief betrayer is Senator Mike Crapo (R-Idaho), the top Republican on the Senate Finance Committee. If Republicans don’t abandon his betrayal of our nation, the GOP will spend another decade tarnished as the party of globalization, big tech, and the hollowing out of our country. The GOP will be the party responsible for Made-in-China cars taking over our streets, Made-in-China planes operated by our airlines, and the ultimate capitulation of our domestic industrial capacity.
Background: It’s a few minutes before midnight in the legislative process.
Congress wants to pass a big piece of legislation to help us compete with China. Both chambers passed bills last year. The House passed its “America COMPETES”, and the Senate its “U.S. Innovation and Competition Act” (USICA).
What’s happening now is that the two chambers are going to “conference” with each other to see if they can merge the bills and send a final to the President to sign.
Each bill has a section devoted to trade (a so-called ‘trade title‘): those are Division K of COMPETES (House’s), and Division G of USICA (Senate’s).
The House’s trade title in COMPETES is all positive—dubbed by CPA as the “Most pro-worker trade legislation introduced in Congress in decades.” It has a couple big wins, and also nothing makes things worse. USICA’s trade title is cancerous to its core—akin to committing economic treason against American workers and industry.
As the top Republican on Finance, Senator Crapo boasts that he was the one who “secured inclusion” of this economic treason as part of USICA.
COMPETES’ trade title will help our country; USICA’s trade title ensures China’s dominance
Both trade titles do a lot. COMPETES’ is all positive, USICA’s Is 99% negative.
Each trade title has one headline grabbing reform that the other doesn’t have. COMPETES closes the disastrous “de minimis” loophole for imports from China (urgently needed!). USICA wrecks Section 301 of the Trade Act of 1974, which is the President’s ability to use tariffs to fight unfair trade practices. In particular, it totally dismantles our tariffs on China, handing President Xi and the Chinese Communist Party an incredible win in China’s fight to displace U.S. leadership and innovation in critical industries.
Congressional Republicans want hundreds of billions worth of Made-in-China imports to come in at the same tariff rates we give to Britain, Norway, Taiwan, etc.
Because China doesn’t abide by the rules of the WTO, President Trump used Section 301 of the Trade Act of 1974 to impose tariffs on almost half of what we import from China. This was long overdue, and even hugely popular. Roughly speaking, it added an additional 25% tariff to around 40% of what China sends us. President Biden has mostly maintained the Section 301 tariffs on China.
Chinese producers thus turned to the weakest link: old guard Chamber of Commerce Republicans who prioritize big money K Street lobbyists over their own constituents.
Here is what USICA does to Section 301, which is the only tool the President has to minimize our dependence on imports from China. It’s so crazy, we’ve included citations at the end of this article so you can check for yourself:
Why would Senate Republicans do this, you ask?
Because big money D.C. outfits want it, and they listen to them, not their constituents. Firm’s like China’s Guangdong Textiles I&E Co. Ltd file a petition with USTR saying “Chinese factories are the most approprate [sic] choice” for face masks, and they get supporting petitions filed by polished D.C. groups like the National Retail Federation and the American Apparel and Footwear Association.
Most Senate Republicans fall right in line.
A heroic three Senate Republicans, Senators Tom Cotton (R-AR), Josh Hawley (R-MO), and Marco Rubio (R-FL), called out the trade title for what is was from day one. They should be commended, and to the extent the Republican Party has a future, they will be the face of it for not betraying voters’ trust and selling out American workers and American manufacturers. When USICA’s trade title first surfaced last year, Senator Hawley said:
“I can’t support a bill that harms American workers and cuts tariffs on products made in China in the name of ‘increased competition.’ For decades, US policy makers have watched as millions of American jobs were shipped overseas, corporate America sold out to the Chinese Communist Party, and our industrial economy was replaced by slave labor in Xinjiang. We must correct the failed Washington consensus that has allowed Beijing to thrive at the expense of working Americans.”
Senator Crapo: news flash, China broke its Phase One deal
USICA’s trade title is even more of a betrayal now than it was last year.
Our 301 tariffs would be much larger than they are now — recall, they cover less than half of China’s exports to us — but before he left office President Trump signed a “Phase One” deal with China. This suspended the U.S. implementation of $300 billion in additional U.S. tariffs, in exchange for China agreeing to buy stuff from us. The goal was to hopefully level-off the trade deficit. Senator Crapo was a big fan:
The Phase One trade deal with China is an important and meaningful step forward. Signing a protocol that allows the importation of U.S. fresh chipping potatoes into China will impact Idaho greatly. Thank you @POTUS, @USDA and @USTradeRep https://t.co/dU7lCLv4zo
— Senator Mike Crapo (@MikeCrapo) February 25, 2020
Well, by the following year, it was evident that China wasn’t even living up to this simple deal. USTR has confirmed China failed to meet its commitments.
And guess what, Senator Crapo? Exports of potatoes to China actually fell 29.01% from July 2020 to June 2021, according to Potatoes USA (see page 12, PDF). In any sane world, this would make Senator Crapo angry enough to abandon his support for USICA’s trade title.
Given China’s blowing off of the Phase One deal, we should now be imposing that $300 billion tranche of tariffs outlined by USTR but suspended by the Phase One deal. Instead, we have Trump’s own party leading the charge to wipe out all of what President Trump fought for. Senate Republicans are selling out Trump’s chief trade win, along with the American people.
Senator Crapo is a phony on China
Senator Crapo isn’t stupid, he understands trade policy. He is laser focused on making imports as cheap and easy as possible. Obviously, as we’ve seen above, he cares especially about Made-in-China imports being cheap. And yet, when he’s pushing to facilitate making imports from elsewhere cheaper, he’ll frame it as a ploy to weaken our relationship with China:
We also need free trade agreements in the Indo-Pacific so that those countries can strengthen economic relationships with us, rather than China. pic.twitter.com/Xic8xFDOE8
— Senator Mike Crapo (@MikeCrapo) March 31, 2022
Senator, how can you expect other nations to not deepen their relationship with China when this is precisely what you’re pushing for in USICA?
This can’t be emphasized enough: USICA’s trade title’s primary effect will be to help imports from China! Wake up please!
Having spoken with plenty of Senate staff, we can share that a common rhetorical misdirection by supporters of tariff cuts for China is that “we can’t make that here”. But, to avoid the China tariffs, importers can source from anywhere else in the world! There is nothing that we must rely on from China.
Everything that USICA gets wrong on trade, COMPETES gets right.
Made-in-China producers have been able to minimize the effect of our Section 301 tariffs by restructuring their imports from China to exploit our de minimis loophole, which lets any shipment declared at under $800 enter tariff free. This has led to an explosion in low-value shipments, almost a billion a year! Think about how insane that is. How in the hell is CBP supposed to inspect 2.7 million shipments per day? They can’t. It’s an open borders nightmare. (Senate Finance Republicans love it).
Fortunately, the COMPETES Act takes out the chief source of counterfeits and dangerous goods by excluding Made-in-China merchandise from being imported through de minimis. This is desperately needed. But USICA doesn’t touch it.
USICA makes it harder to fight imports of goods made with forced labor
The Tariff Act of 1930 gives the Customs Commissioner authority to block imports of goods made with forced labor. This has been around for almost a century. But now that it’s getting used more frequently, the import lobby is upset. They have good sourcing relationships in China and aren’t bothered by human exploitation. So at their behest, USICA will turn what’s always been a customs function — a responsibility of the Customs Commissioner — into an inter-agency process. Anyone who knows D.C. knows this is a mechanism to make it much harder to accomplish the stated policy goal. Shame on Senate Republicans for supporting such a measure.
— Senator Todd Young (@SenToddYoung) April 11, 2022
COMPETES is good on GSP & MTB, USICA is bad
The Miscellaneous Tariff Bill (MTB) is a biennial tariff cut free-for-all for importers, although it’s marketed as a way to help manufacturers source needed intermediate goods not made here. Truth be told though: more finished goods than inputs come through, and its use has grown exponentially over the last decade. COMPETES has an important fix for MTB by ensuring that only intermediate goods used in the domestic production of final goods are eligible for tariff cuts. USICA lets finished goods continue to get tariff cuts.
Under USICA, publicly-traded yacht-dealer MarineMax, Inc., will be able to continue to file petitions for tariff cuts on imported yachts. To hell with our domestic producers, right? If China can sell yachts cheaper, then our producers deserve to fail, right Senator Crapo? The last MTB process that played out in 2020 is costing taxpayers about $1.2 billion per year. If COMPETES’ trade title passes, MarineMax will be out of the MTB game.
Renewal of MTB has traditionally been linked to renewal of the Generalized System of Preferences (GSP), launched in 1974. GSP is ostensibly designed to favor developing countries who are “on the right track” developmentally. It does this by cutting tariffs for those countries, encouraging offshoring of production to them. 119 countries are included, including powerhouses like Brazil and Thailand.
President Trump kicked India and Turkey out of GSP for various reasons, and the import lobby was furious. So USICA makes it much more difficult for future Presidents to exercise their foreign affairs discretion with GSP. Under USICA, foreign countries and importers will be able to sue in court to overturn the President’s foreign policy decisions vis-a-vis GSP. Conversely, COMPETES appropriately adds more criteria nations must meet to ensure progress on environmental standards and human rights if they’re to continue receiving duty-free access.
A final plea to Senate Republicans
Look, don’t listen to the empty suits that knock on your door on behalf of multinationals. Their lobbying for tariff cuts in spite of everything happens because it’ll save their firms money on imports, and that’s how these individuals can justify their salary. Indeed, if they win a tariff cut, they can likely justify their salary for the rest of their career. So they proceed on autopilot. They also have inertia-zombie think tanks on their side, so it’s a cozy autopilot. Truth is, many multinational CEOs would probably flinch if they were presented with the USICA’s windfall for President Xi. But the workings of the empty suits in D.C. don’t bubble up that high.
1. USICA’s Sec. 73001 inserts a new “Sec. 305A” into the Trade Act of 1974. Citations to provisions of the new “Sec. 305A” are thus referring to new provisions created by USICA’s Sec. 73001. Sec. 73001 was also very poorly written. The first part of Sec. 73001 undermines Sec. 301’s future use, but there is also a “CLERICAL AMENDMENT” portion of Sec. 73001 in the latter half of the text which is focused on undoing our existing China tariffs.
2. Sec 305A(f)(2) defines “Severe Economic Harm” as “circumstances under which failure to grant the exclusion would render the business of the entity unprofitable”. There is no requirement for import entities to substantiate this. The definition is also blind to the fact that Chinese producers typically use separate, U.S.-based LLCs as their entities for importers-of-record. Declaring these importing entities as “unprofitable” due to 301 tariffs while not accounting for profits to affiliated entities makes this test a complete farce.
3. See Sec. 305A CLERICAL AMENDMENT (c), “Treatment of Certain Exclusions Relating to People’s Republic of China”. Sec. 305A CLER. AMD. (c)(2)(C) then directs refunds within 90 days of Chinese producer’s refund request.
4. Sec. 305A(c), “Implementation of Exclusion Process”. While importers and Chinese producers are free to make entirely unsubstantiated claims with no burden of proof and at no cost to them, USTR is forced make determinations to each claim about its necessity relating to the foreign discriminatory practice. Absent that, USTR must do an exhaustive study for every exclusion request. This includes studying whether denying the request would “increase consumer prices” (305A(c)(2)(C)) or “ability to fulfill contracts” (305A(c)(2)(E)), and even require USTR to do an antitrust analysis: “Whether the failure to grant the exclusion is likely to result in a particular entity or entities having the ability to abuse a dominant market position.”(305A(c)(2)(F)) .
5. Sec. 305A(d): “This section shall not apply to duties imposed … pursuant to a dispute resolution process under the World Trade Organization.”. Due to the outrageous burdens imposed on USTR by these amendments, the practical effect will be that the only viable Section 301 actions going forward would be those authorized by a WTO Panel of international jurists. Significantly, this greatly limits the application of Section 301, which was written to provide broad authority to combat “unfair trade practices”. Because WTO authorization is required, only WTO recognized damages will be authorized. And WTO Agreements do not usefully provide for remedies against the very activities, chiefly relating to IP theft, that were subject to our China 301 action.
6. See Sec. 305A CLERICAL AMENDMENT (b)(4) “Timeframe of Exclusion and Renewal”. See also Sec. 305A. CLER. AMD. 5(B), requiring that USTR’s decisions “be supported by substantial evidence from the administrative record.”
7. Sec. 305A(a): “before taking action under Section 301(b), the Trade Representative shall analyze the impact of the action on United States entities … and consumers in the United States with a goal of mitigating the impact of duties on United States entities and consumers … including by evaluating alternatives or modifications to particular actions.”
8. USICA Sec. 71034 “Briefing on report related to process for excluding articles imported from the People’s Republic of China from certain duties imposed under section 301 of the Trade Act of 1974.”