By Joo Yun Oh

Introduction

On January 23, President Donald Trump announced a steep tariff on solar cells and washing machines.[1] His decision is based on a long-forgotten law, Section 201 of the Trade Act of 1974, also called as the “safeguard law.” According to the safeguard law, a company can ask for a protection under safeguard measures if it can show that a product is being imported into the United States in such increased quantities that it substantially causes serious injury, or threat thereof, to the domestic industry producing that product.[2]

Domestic solar cell and washing machine industries are excited about the news of the tariffs. Some companies have publicly thanked the Trump Administration, calling the tariffs “a victory for American workers and consumers alike.”[3] However, it may be too early for those industries to call the decision a victory because the future of current safeguard measures is uncertain, and the measures will not fix the decreased demand for these products.

What is a Safeguard Law?

To initiate the safeguard law, a company may first file a petition to the United States International Trade Commission (USITC). Then, USITC goes through an investigation to determine whether there is clear evidence that increased imports of the item are a substantial cause of serious injury to the domestic industry, and whether any action should be taken.[4] Afterwards, USITC submits a report to the President and the President may take all appropriate and feasible action within his power to facilitate efforts to make the domestic industry more competitive.[5] Measures can be implemented through import duties, tariff-rate quota, or any other restrictions.[6] USITC asserts that it is not easy to trigger safeguard measures because the company concerned has to be hurt “seriously” and the import has to be the “substantial cause (important and not less than any other cause)” to the injury. However, the Safeguard Law only requires that the company show they were hurt by competition, which is a more relaxed trigger than other protective laws.

President George W. Bush was the last to use the Safeguard law when he invoked it in 2002  to protect steelmakers.[7] While it had not been utilized by the Obama Administration, the Trump Administration’s use of the law is not unexpected as he has seemed dedicated to bring jobs back to the country and fix trade deficits through use of his executive authority.

The Basics of the 2018 Safeguard Measure 

There are three U.S.-based manufacturers who filed the petition to invoke the safeguard law: Chinese-owned solar module company Suniva, German-owned solar company SolarWorld Americas, and Whirlpool.[8] The Safeguard Law protection implemented will apply a 30% tariff on crystalline silicon photovoltaic cells and solar modules for four years and, depending on import quota, a 20% to 50% tariff on washing machines for three years.[9]

The most affected countries from the implementation of safeguard measures are China and South Korea. China is the world’s largest producer of solar panels and washing machines, while South Korea follows closely behind in second.[10] South Korea’s two biggest home-appliance manufacturers are Samsung Electronics Inc. and LG Electronics Inc.

President Trump publicly criticized how domestic manufacturers are losing jobs due to the imports market, and has pushed foreign companies to set up manufacturing lines in the U.S. In response to Trump, Samsung and LG spent millions of dollars to ramp up their U.S. facilities, but now they are also dealing with the tariff.[11]

What Will Happen to the Safeguard Measure? 

The South Korean government is planning two primary ways of having the safeguard measures revoked: (1) filing a petition through the WTO, and (2) a complaint through the Court of International Trade. Both strategies are not novel to U.S. trade partners fighting against U.S. trade policy. Thus, analyzing the past will be useful to providing instructive predictions for the future.

WTO Petition

Under Article XIX of the General Agreement on Tariffs and Trade 1994 (GATT), WTO allows its members to apply the safeguard measure only if the increased quantity of imported products seriously injures the domestic market.[12] However, under Articles XXII and XXIII of the same agreement, it also provides a dispute settlement process to members who are opposing the measures. The South Korean government is preparing to enter a dispute settlement by filing a petition to the WTO Appellate Body.[13]

When President Clinton issued an order to restrict line pipe imports in 2000, South Korea was the primary exporter of line pipe into the United States and the country quickly contested the action in the WTO. After two years of investigation, WTO concluded that safeguards measures were in violation of WTO’s Agreements on Safeguards.[14] The WTO Appellate Body declared the following: (1) the U.S. did not offer adequate opportunity for prior consultations with Korea, a member having a substantial interest in the exportation of line pipe; (2) the U.S. did not provide a causal link between the increased imports and the serious injury or threat; and (3) the measures were beyond what was necessary to prevent or remedy serious injury.[15] The WTO then ruled that the safeguard measures on line pipe were inconsistent with the obligations of the United States under the Agreement on Safeguards.[16] After the decision was announced, negotiations took place between the two countries and President George W. Bush issued an order on August 2002 to ease the measures. The tariff was terminated six months later.[17]

Let’s compare our present case with the past. According to the South Korean government, there were no prior consultations provided by the U.S. government and this may work in favor of South Korea because WTO’s past decision requires prior consultation between the country planning to implement safeguard measures and the country who would be substantially affected by the measures.[18] Also, the fact that WTO members have been raising their voices against recent U.S. trade protectionist actions cannot be ignored.

Additionally, there is an important difference between washing machines and the three trade items that were most recently subject to safeguard measures in the late twentieth century. The three most recent articles to receive safeguard protections were lamb meat, wheat gluten, and line pipe.[19] Unlike these products, the demand for washing machines is heavily driven by consumer satisfaction, so an increase in prices for foreign competitors may not necessarily lead to an increase in sales for domestic manufacturers. Since evaluating whether the tariff was necessary to remedy a serious injury depends on the effectiveness of the tariff, and the tariff may not help domestic washer machine companies if their product doesn’t meet consumer expectations, regardless of price, this factor may weigh in favor of South Korea’s claim.

A caveat regarding the effectiveness of the WTO Appellate Body is that is merely provides a “recommendation” to make changes on safeguard measures. However, winning the case can still cause the desired result to be achieved. For instance, in 2002, South Korea was able to induce the U.S. Government into negotiating for a reduced tariff percentage or reduced tariff period. Additionally, if the WTO decides that the safeguard measures are inconsistent with the WTO Agreement on Safeguard, then South Korea can ask for a remedy, and may obtain the right to receive compensation by increasing tariffs on other U.S. manufactured products.[20]

United States Court of International Trade Complaint

The United States Court of International Trade (USTIC) deals with trade matters, especially regarding the effect of dumped and subsidized imports on domestic industries. Samsung and LG filed a complaint to the USTIC in 2014 when the United States Department of Commerce determined that the South Korean government was providing countervailable subsidies through domestic tax credits.[21] In response the Department of Commerce applied an ad valorem duty (a duty expressed as a specific percentage of the value of the goods) on Samsung and LG’s products, Samsun and LG then contested the decision.[22]

These past claims have not been successful for LG or Samsung.[23] However, this time LG and Samsung are dealing with a safeguard measure that has less to do with anti-dumping or subsidies so it is not easy to make predictions from the past decisions.

How Should U.S. Manufacturers Respond to Safeguard Measures? 

Until the WTO decision, Korean importers should face steep tariffs.[24] Although the U.S. and South Korea have signed a mutual Free Trade Agreement (FTA), most of Samsung’s and LG’s production lines are in Southeast Asia so it is hard for Samsung and LG to avoid price adjustments. U.S. home-appliance manufacturers can exploit this opportunity to gain market share. Companies manufacturing washing machine parts may also benefit from the current safeguard measure. Samsung and LG Electronics still occupy a large share of the U.S. market and the two companies can keep the market share by producing in their newly-opened U.S. manufacturing facilities. Because the U.S. manufacturing plants are mostly assembly lines for final products, Samsung and LG still need to find U.S. partners who can supply the parts, thereby creating new business opportunities for the washing machine industry.

However, U.S. manufacturers still need long-term strategies to fundamentally enhance their market competitiveness because there is no guarantee that safeguard measures would remain in place for three years. Also, according to the data compiled by USITC, after the end of the safeguard measures on lamb meat, wheat gluten, and line pipe, the corresponding data do not support a clear conclusion that these three industries achieved sustained competitiveness.[25] So, U.S. manufacturers in washing machine industry should keep in mind that they need more than safeguard measures to survive and thrive with competition.

Conclusion

It is time for the practitioners in U.S. to shake the dust off the pages of Section 201 of the 1974 Trade Act. Practitioners should be ready to provide the washing machine industry with guidelines on how to prepare for the aftermath of the safeguard measures. While it is tempting for manufacturers to believe that safeguard measures are the answer to a slump in business, practitioners should advise manufacturers that while seizing the benefits of safeguard measures, they should simultaneously find ways to sustain market competitiveness in the long run.

[1] The Editorial Board, Trump Starts His Trade War, WALL ST. J. (Jan, 23, 2018), https://www.wsj.com/articles/trump-starts-his-trade-war-1516755083?mod=searchresults&page=1&pos=7

[2] 19 U.S.C. 2251(a) (2018).

[3] Jacob M. Schlesinger and Erin Ailworth, U.S. Imposes New Tariffs, Ramping up ‘America First’ Trade Policy, WALL ST. J. (Jan 22, 2018), https://www.wsj.com/articles/u-s-imposes-trade-tariffs-signaling-tougher-line-on-china-1516658821?mod=searchresults&page=1&pos=9

[4] 19 U.S.C. 2252(a) – (b) (2018).

[5] 19 U.S.C. 2253(a)(1) (2018).

[6] 19 U.S.C. 2253(a)(3) (2018), Proclamation No. 7274, 65 Fed. Reg. 9193 (Feb. 18, 2000).

[7] Eliza Patterson, The US Provides Section 201 Relief For The American Steel Industry, (March, 19, 2002), https://www.asil.org/insights/volume/7/issue/4/us-provides-section-201-relief-american-steel-industry

[8] Ana Swanson and Brad Plumer, Trump Slaps Steep Tariffs on Foreign Washing Machines and Solar Products, N.Y. TIMES. (Jan, 22, 2018), https://www.nytimes.com/2018/01/22/business/trump-tariffs-washing-machines-solar-panels.html

[9] Proclamation No. 017, 83 Fed. Reg. 3541 (Jan, 25, 2018); Proclamation No. 017, 83 Fed. Reg. 3553, (Jan, 25, 2018)

[10] Andrew Mayeda, Rainer Buergin, Alessandro Speciale, BLOOMBERG, Trump Pulls His Punches In First Foray Into Long-Pledged Tariffs, (Jan 22, 2018); Michael Lewis, How Asian Giants Can Counter Trump’s Washing Machine Tariff, (Jan 22, 2018)

[11] Samsung Newsroom, Samsung Kicks Off U.S. Production of Premium Home Appliances, (Jan 12, 2018), https://news.samsung.com/us/samsung-kicks-off-us-home-appliances-production/ ; LG Press Release, LG Electronics To Build U.S. Factory For Home Appliances In Tennessee, (Feb 28, 2017), http://www.lg.com/us/press-release/lg-electronics-to-build-us-factory-for-home-appliances-in-tennessee

[12] Agreement on Safeguards, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 154

[13] Shin Ji-hye, Seoul confident in taking US washer safeguards issue to WTO, (Jan 23, 2018), http://www.koreaherald.com/view.php?ud=20180123000804&ACE_SEARCH=1

[14] David Ryan, The Effects of Section 201 Safeguards on U.S. Industries, 44 GEO. J. of INT’L L. 249, 291 (2012)

[15] Id. ¶ 263, 264; Appellate Body Report, United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea, ¶ 263, WT/DS202/AB/R (Feb 15, 2002).

[16] Id.

[17] Ryan, at 294.

[18] Id.

[19] Ryan, at 252-253.

[20] Agreements on Safeguards, supra Article 14; General Agreement on Tariffs and Trade, Article XXII and XXIII (1994).

[21] DEP’T OF COM., LRW’s From the Republic of Korea: Initiation of CVD Investigation, 77 Fed. Reg. 4279 (Jan 27, 2012).

[22] Id.; Samsung Elecs. Co. v. United States, 973 F. Supp. 2d 1321, 1323-1324 (2014).; LG Elecs., Inc. v. United States ITC, 26 F. Supp. 3d 1338, 1341 (2014).

[23] Id.

[24] Proclamation No. 017, 83 Fed. Reg. 3553, (Jan, 25, 2018)

[25] Ryan, at 303-304.