Editor’s note: We asked Chad Bown to update his post from October 9, 2017 to reflect the Trump administration’s decision on January 22 to impose new tariffs.
On Monday, President Trump imposed new “safeguard” tariffs and quotas on billions of dollars in imports of solar panels and washing machines.
This is a pivotal moment for U.S. trade relationships. Trump’s actions could result in a tsunami of demands for protection against imports of hundreds of other products. Trade barriers on solar panels and washers also would probably lead to costs for the U.S. economy, a slowing of efforts at climate mitigation, and retaliation by trading partners.
There were already tariffs on solar panels and washing machines
The key feature shared by the solar panel and washer cases is that the United States already imposes special tariffs on these products, but limits these tariffs to only a couple of foreign source countries. In solar, the United States imposed antidumping and countervailing duties on imports from China beginning in 2011 and Taiwan in 2014. The problem for the struggling U.S. industry is that there was a surge of new solar imports from Malaysia, South Korea, Singapore, Mexico, Thailand, and Vietnam.
Similarly, the United States imposed tariffs on washing machine imports from South Korea and Mexico beginning in 2012 and China beginning in 2016, so that products came in from Thailand and Vietnam instead.
It is unsurprising that these country-specific tariffs—imposed under antidumping and countervailing duty laws—impeded imports only from the initial foreign sources. Research talks about how tariffs may lead to “trade diversion,” in which the overall volume of trade does not necessarily change that much—all that changes is that the supplier moves from one country to another.
This is important because there are hundreds of other goods out there just like solar panels and washing machines. The United States has already imposed similar special import tariffs on those products, but only on selected foreign sources. Depending on Trump’s actions here, those could be next up to ask for much more protection.
The law permitted Trump to choose something aside from tariffs and quotas
Trump’s tariff decisions on solar panels and washing machines fell under Section 201 of the U.S. Trade Act of 1974. Under this law, the U.S. International Trade Commission, or ITC, investigates whether imports cause injury to a U.S. industry. If a majority of the commissioners finds that there is a problem, the president then has the legal authority to take action.
Because the panel has found that there are problems with both solar panels and washing machines, Trump had the legal authority to impose import protection.
The trade barriers that Trump applied are temporary and limited to four years under this law; many trade barriers have been implemented for only three. This is because WTO rules say that after three years, adversely affected trading partners can receive “compensation” by retaliating against the tariffs. The announced solar panel tariffs were for four years, the washing machine tariffs were for three.
But the law also allows the president to take a completely different approach. One is to avoid trade protection by instead offering “adjustment assistance” to employees in the affected industry, helping them to move out of struggling industries and into growth sectors. Or as a final possibility, even when the ITC finds evidence of injury, the law also allows for Trump not to implement any policy at all.
Perhaps not surprisingly, President Trump adopted neither of those options and went with tariffs.
Section 201 has rarely been used in modern history
Before the current two investigations, the United States initiated only 74 cases under Section 201, although it has gotten involved in more than 2,000 of the other special tariff cases—under antidumping and countervailing duty laws—over the 42 years of the law’s existence. The last time a president imposed trade restrictions under the law was 2001, when President George W. Bush slapped tariffs and quotas on $17 billion of imported steel.
In 40 of the 74 historical cases, the ITC voted to provide the president authority and discretion over whether and how to impose trade protection. Yet, since 1974, the president has chosen to implement trade restrictions in only 19 of those 40 occasions.
Expect many more cases now that Trump has imposed protection
The Section 201 law has been used rarely because U.S. companies seeking protection didn’t know whether the president would grant it.
Companies and unions have therefore turned to other laws that were purely bureaucratic and do not involve presidential discretion. Special tariffs have been requested and granted much more frequently under those laws. However, the main drawback for the industries is that the tariffs do not cover imports from all foreign sources and could result in trade diversion rather than protection.
Now that Trump has imposed trade barriers on solar panels and washing machines, he has shattered any remaining uncertainty about his protectionist and antiglobalist inclinations. There are hundreds of other products with U.S. special import tariffs currently imposed against countries such as China.
His decision could trigger a tsunami of new requests for trade barriers under this Section 201 law. Like solar panels and washing machines, the affected industries would ask to further extend existing American trade barriers to import sources beyond China, to include South Korea, Japan, Mexico, Canada, Europe, and others.
Climate mitigation and other worries with Trump’s import protection
Economic theory also suggests that Trump’s new import restrictions would result in higher consumer prices and fewer purchases, thus imposing costs on the U.S. economy.
Other parts of the U.S. renewable energy industry are likely to suffer from trade action against solar panel imports. The Solar Foundation finds that 85 percent of the 260,000 U.S. industry jobs are outside of manufacturing. Employment in distribution and installation of panels would be put at risk if the price of solar energy increases and consumers—such as utilities—switch to different forms of electricity, such as wind, coal, or natural gas.
Solar trade restrictions might also slow the advance of U.S. climate mitigation industries and its clean energy future. Increasing the U.S. price of solar panels creates the incentive for utilities to switch to more carbon-intensive coal or natural gas.
Finally, like any new U.S. trade barrier, foreign retaliation could arise that would hurt unwitting U.S. exporting companies and their workers. This could lead to further tit-for-tat actions and even a trade war.
Trump has now taken the bait on these two politically enticing opportunities to impose trade protection. How the world responds will largely determine whether his actions were a watershed moment for U.S. trade policy.
Chad P. Bown is a senior fellow at the Peterson Institute for International Economics in Washington. With Soumaya Keynes, he hosts Trade Talks, a weekly podcast on the economics of international trade policy. Follow him on Twitter @ChadBown.