Scott Lincicome and Chad Smitson
In a scramble to replace “emergency” tariffs invalidated by the Supreme Court, the Trump administration imposed temporary 10 percent tariffs under Section 122 of the Trade Act of 1974 and launched new “Section 301” investigations into the economic and labor policies of several US trading partners. According to various reports, the White House expects the Section 301 cases to result in new US tariffs that replace the (legally and economically dubious) Section 122 tariffs when their 150-day statutory time limit expires this summer. This has led some observers and interested parties—including our friend Rick Woldenburg, CEO of Learning Resources, Inc., and lead plaintiff in one of the Supreme Court IEEPA cases—to suggest that the Section 301 investigations are a “sham” because “the decision to impose these taxes has already been made.”
Based on what we’ve seen from the administration so far, Rick has a strong point.
For starters, Treasury Secretary Scott Bessent has repeatedly indicated—including at a Wall Street Journal event this week—that the IEEPA tariffs will be “back in place at the previous level” (and thus generating the same amount of revenue) by the time the Section 122 tariffs expire in July. The only vehicle for such tariffs would be the pending Section 301 cases, which—as detailed in this Cato Briefing Paper—the administration used in 2018 to impose tariffs on Chinese imports following a lengthy investigation into how China’s intellectual property and technology policies have harmed the US economy, thus warranting remedial tariffs. The secretary’s recent comments suggest that the current 301 proceedings’ findings and recommendations have, pace Woldenberg, already been decided—tariffs are coming.
Early indications from the Office of the US Trade Representative, which administers Section 301 investigations, reinforce Woldenberg’s conclusions.
Following the IEEPA ruling, USTR initiated two sets of Section 301 investigations—on forced labor practices in several countries and on “structural excess capacity” (SEC) in several others. In the latter set of cases, USTR’s Initiation Notice outlined its plan to investigate SEC in 15 countries and the EU. In particular, the agency said SEC occurs when a government uses policy (e.g., tariffs, subsidies, etc.) to artificially sustain industrial capacity that exceeds domestic demand and thus leads to exports that end up harming the US manufacturing sector and economy.
As evidence of this situation, USTR alleged that each economy maintains various non-market policies, has manufacturing industries with low capacity utilization rates (i.e., below 80 percent), and has “persistent” trade surpluses. Based on this information, the agency will further investigate whether SEC exists in each economy and, if it determines that it does, consider imposing remedial measures, such as tariffs, to offset the SEC or convince foreign governments to fix it.
The agency’s claims in the Initiation Notice raised a host of legal, economic, and practical concerns and thus motivated Cato scholars to submit comments on the case record to elaborate on some of them and show why the path USTR laid out in the Initiation Notice was problematic.
Our comments first explained that, based on the facts, law, and economic literature, a legitimate and lawful finding of SEC—i.e., one that actually could justify new tariffs—must contain four elements: (1) long-term, industry-specific evidence of structural overcapacity, as opposed to cyclical, market-based issues; (2) evidence of specific government policies directly linked to SEC, as opposed to broad-based or unrelated policies that might indirectly cause low capacity utilization in a certain industry; (3) evidence of real harm to US firms in the industries under examination, as required by the statute (and common sense); and (4) clear causal links between the three above criteria.
In short, USTR must conclusively prove the existence of SEC, identify the specific government policies that caused it, and directly tie the SEC to identified harms—lost sales/exports, depressed investments/jobs, etc.—to US manufacturers.
Without this analysis, we explain, USTR is simply “cherry-picking disparate, unrelated statistics to reverse-engineer new US trade restrictions.” The remainder of our comments then go on to show why such an analysis would be extremely difficult, especially by July.
First, capacity utilization data are not uniform across countries, making cross-country comparisons difficult. And, as shown below in Figure 2 from our submission, many of the investigated economies with comparable data have higher utilization rates than the United States:
This calls into question the value of nationwide capacity utilization data as evidence of SEC. Much more is needed (see other graphs from our submission: Figure 1 — Most Recent Reported Utilization Rates & Figure 3 — Utilization Rates 2016 to Present).
Second, USTR’s 80 percent capacity utilization benchmark is faulty. As we document, the Initiation Notice’s source for this number traces back to a Department of Commerce report that covers only the US steel industry and, in turn, is based on nothing more than local newspaper websites and dead links to missing articles.
As Figure 5 demonstrates, US industries exhibit a wide range (17 percentage points) in utilization rates, and it’s well known that some industries run at higher rates than others. For these and other reasons, reputable sources, such as the Federal Reserve (which deliberately does not set target rates) and the economics literature, strongly advise against a single benchmark—at 80 percent or any other number—for determining “healthy” capacity utilization across all industries. If USTR does so in the current case, it would be an arbitrary and embarrassing decision.
Third, our comments identify another glaring problem with USTR’s analytical framework: the agency treats other economies’ relatively low capacity utilization rates as clear evidence of anti-competitive, non-market policies by foreign governments, but it assumes that similar rates in the United States are somehow solely the result of those same foreign policies, instead of other factors or non-market interventions by the US government.
In reality, however, the United States government has enacted many of the same non-market policies here that USTR is investigating abroad. Even before the Trump administration’s broad tariffs, for example, Washington had for decades protected US manufacturers with tariffs, Buy American and other localization rules, “trade remedy” duties, and numerous other non-tariff barriers to trade. The federal government has also directly and indirectly spent trillions of dollars on grants, loans, tax credits, and other subsidies expressly intended to boost US manufacturing output and capacity. This includes most recently the CHIPS and Science Act, the Inflation Reduction Act, the Infrastructure Investment and Jobs Act, and the One Big Beautiful Bill Act. Given that the US’s utilization rate is well below the 80 percent threshold offered by USTR (currently operating at 75.3 percent with a long-run average of 78.2 percent for the manufacturing sector as a whole), perhaps the agency should also look inward for evidence of SEC.
Other comments have poked other holes in USTR’s analytical framework. Most notably, Cato adjunct scholar Kyle Handley partnered with fellow economists Emily Blanchard (Brookings) and Stan Veuger (AEI) to show why the agency cannot simply assume that a trade surplus is prima facie evidence of SEC. In their comments, the economists explain that trade surpluses primarily reflect benign macroeconomic factors, such as the national savings rate and international comparative advantage, rather than nefarious government policies.
They further demonstrate that—contra USTR—there is no statistically significant relationship between an economy’s trade surplus and its manufacturing capacity utilization rate. In fact, their rigorous analysis of the economies under investigation shows the relationship going modestly in the opposite direction, i.e., economies with higher utilization rates tend to have lower trade surpluses (see their figure below).
If USTR wants to claim that a trade surplus is somehow evidence of SEC, far more evidence and analysis are needed. It simply cannot be assumed.
These Section 301 investigations are now ongoing, and final determinations from USTR probably won’t be issued for a couple of months. We’ll thus have to wait to see how the agency ultimately assesses “structural excess capacity,” what kind of trade restrictions it proposes in response, and, in turn, whether Woldenberg’s “sham” accusation is right. Nevertheless, there are clear reasons to be concerned right now. As we conclude in our comments, “USTR has assigned itself a herculean task in attempting to quickly substantiate SEC-related grievances with the foreign economies now under investigation, and broadly applying a handful of disparate, economy-wide capacity utilization and trade data points would be a woefully insufficient shortcut.” Given that the Section 122 clock is ticking, this appears to be precisely what the agency plans to do.
