President Trump Issues Proclamation Finding National Security Threat from Automotive Imports Under Section 232; Directs USTR to Initiate Negotiations with Japan, the EU, and Other "Appropriate" Countries

On May 17, 2019, President Trump issued a Proclamation containing his determinations in the US investigation into the effects of imports of automobiles and automobile parts on the national security of the United States, pursuant to Section 232 of the Trade Expansion Act of 1962.

In the Proclamation, President Trump (1) determines that imports of automobiles and certain automobile parts threaten to impair the national security of the United States (concurring with the Secretary of Commerce's finding in the investigation); but (2) delays a final decision on potential automotive import restrictions to allow the US Trade Representative (USTR) to negotiate agreements with Japan, the EU, and any other country USTR "deems appropriate" to "address the threatened impairment of the national security[.]" The Proclamation does not state what remedies or other actions the President might take if those negotiations fail, nor does it—contrary to earlier media reports—expressly exclude any countries from potential import restrictions. Instead, the Proclamation states only that recently negotiated agreements with Canada, Mexico, and Korea "could help to address" the alleged threat to national security. As a result, trade-related tensions in the US and global auto industries will likely remain high for the foreseeable future.

We provide below an analysis of the Proclamation and its implications.

Department of Commerce Report and National Security Determination

The Proclamation provides a brief summary of the Secretary of Commerce's report on the Section 232 investigation, which was submitted to the President on February 17 but has not been made public. The Proclamation contains the following information about the Department of Commerce's report and investigation:

• Scope. The Section 232 investigation covered "imports of passenger vehicles (sedans, sport utility vehicles, crossover utility vehicles, minivans, and cargo vans) and light trucks…and certain automobile parts (engines and engine parts, transmissions and powertrain parts, and electrical components)[.]" The categories of automobile parts covered by the investigation had not previously been disclosed. However, the Proclamation does not provide any further details (e.g., specific HTSUS codes) regarding the scope of the investigation or its findings and recommendations.
• National security determination. The Secretary's report concluded that "the present quantities and circumstances of automobile and certain automobile parts imports threaten to impair the national security as defined in section 232." This determination was based on a finding that American-owned automotive research and development (R&D) "is critical to national security," but is threatened by automotive imports and closed foreign markets. In particular—
  • "The rapid application of commercial breakthroughs in automobile technology is necessary for the United States to retain competitive military advantage and meet new defense requirements…The United States defense industrial base depends on the American-owned automotive sector for the development of technologies that are essential to maintaining our military superiority." However, "increases in imports of automobiles and automobile parts…have over the past three decades given foreign-owned producers a competitive advantage over American-owned producers."
  • Furthermore, "protected foreign markets, like those in the European Union and Japan, impose significant barriers to automotive imports from the United States, severely disadvantaging American-owned producers and preventing them from developing alternative sources of revenue for R&D in the face of declining domestic sales."
  • Because "[d]efense purchases alone are not sufficient to support . . . R&D in key automotive technologies," American-owned automobile and automobile parts manufacturers "must have a robust presence in the U.S. commercial market[.]" However, American innovation capacity "is now at serious risk as imports continue to displace American-owned production." An alleged lag in R&D expenditures by American-owned producers "is weakening innovation and, accordingly, threatening to impair our national security."

In light of the above factors, the Secretary concluded that automobiles and certain automobile parts are being imported into the United States "in such quantities and under such circumstances as to threaten to impair the national security of the United States." The Secretary found that such imports are "weakening our internal economy" and that "[t]he contraction of the American-owned automotive industry, if continued, will significantly impede the United States' ability to develop technologically advanced products that are essential to our ability to maintain technological superiority to meet defense requirements and cost effective global power projection."

• Recommendations. The Proclamation states that, based on the above findings, the Secretary recommended actions to the President to adjust automotive imports, and that "[o]ne recommendation was to pursue negotiations to obtain agreements that address the threatened impairment of national security." The Proclamation does not state what other recommendations were provided in the report (e.g., import restrictions).

As noted above, the Trump administration has not published the Secretary’s report on the Section 232 investigation, and it has not indicated when it will do so. Though the statute requires that the report be published, it does not provide a specific deadline for doing so. However, the affirmative determinations made by the Secretary and the President will likely heighten congressional and industry pressure to publish the report so that the reasoning and factual basis for the Secretary’s findings can be scrutinized.

Presidential Determinations on National Security and Appropriate Action

The Proclamation contains the following substantive sections:

• National security determination. The President concurs "in the Secretary's finding that automobiles and certain automobile parts are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States[.]"
• Determination on "necessary and appropriate" action. The Proclamation directs USTR to "pursue negotiation of agreements contemplated in [Section 232 (c)(3)(A)(i)] to address the threatened impairment of the national security with respect to imported automobiles and certain automobile parts from the European Union, Japan, and any other country the Trade Representative deems appropriate." The President has determined that this action is "necessary and appropriate" to remove the threatened impairment of national security.

The referenced statutory provision affords the President 180 days to negotiate an agreement that "limits or restricts" the subject imports and authorizes him to take additional actions if the negotiations fail, though the Proclamation itself omits the "limits or restricts" language. Under the law, if the President determines within 90 days of receiving the Secretary's report that the action that should be taken based thereupon is "the negotiation of an agreement which limits or restricts the importation into, or the exportation to, the United States" of the subject merchandise, and:

1) No such agreement is entered into before the date that is 180 days after the date on which the President makes the determination; or

2) Such an agreement that has been entered into is not being carried out or is ineffective in eliminating the threat to the national security posed by imports of such article;

the President "shall take such other actions as the President deems necessary to adjust the imports of such article so that such imports will not threaten to impair the national security."

The Proclamation does not state what "other actions" the President might take if the negotiations to be conducted by USTR fail. While the Proclamation makes no direct reference to potential import restrictions, it does not rule them out, and the Trump administration is expected to continue using the threat of such restrictions as "leverage" in the proposed negotiations and, perhaps, with other trading partners. However, the Proclamation states only that "[w]ithin 180 days of the date of this proclamation, the Trade Representative shall update [the President] on the outcome of the negotiations[.]" An accompanying White House press release simply states that "if agreements are not reached within 180 days, the President will determine whether and what further action needs to be taken."

• Possible country exemptions. The Proclamation does not exclude any country from potential Section 232 measures on automotive imports, nor does it reference the USMCA side letters in which the United States agreed to exclude significant volumes of Canadian and Mexican automotive goods from any such measures. It states only that the President, in making his determination under Section 232, has "considered the renegotiated United States-Korea Agreement and the recently signed USMCA, which, when implemented, could help to address the threatened impairment of national security found by the Secretary." By not guaranteeing that these countries will be excluded from future Section 232 measures, this language might be intended to increase pressure on Canada and Mexico to ratify the USMCA, and on Korea to implement the revised KORUS agreement.

Outlook

The President's decision to delay a final determination on automotive import restrictions was expected, given the economic and political ramifications of such restrictions and the fact that the Trump administration's trade agenda currently is dominated by other priorities that would be disrupted by significant new Section 232 measures. These priorities include the USMCA, for which the Trump administration is currently seeking congressional approval; the nascent bilateral negotiations with Japan and the EU; and the ongoing bilateral negotiation with China, all of which would have been jeopardized by new Section 232 restrictions on automotive imports. Moreover, it appeared unlikely that the Trump administration would announce significant new tariffs on automotive imports so soon after increasing Section 301 tariffs on US$200 billion in Chinese imports and proposing similar tariffs on the remaining US$300 billion in Chinese imports earlier this month – moves that drew a negative reaction from financial markets.

Though the Trump administration has deferred temporarily a final decision regarding Section 232 restrictions on automotive imports, the Proclamation raises serious concerns that such restrictions might be imposed in the future, particularly given (1) the President's broad affirmative determination that nearly all automotive goods imports from all sources threaten national security; and (2) the implication that restrictions might be imposed if Japan, the EU, and potentially other countries do not quickly negotiate trade agreements with the United States that "address the threatened impairment" through unspecified means. Completing such negotiations within the next six months will be difficult, particularly given that the US-Japan negotiations remain in preliminary stages and the US-EU negotiations have not yet begun due to significant disagreements between the two sides over their scope.

Moreover, the negotiations could be complicated significantly by potential US demands for limitations on Japanese and EU automotive exports to the United States. Indeed, the "agreements contemplated in [Section 232 (c)(3)(A)(i)]" and referenced in the Proclamation "limit or restrict" the importation into, or the exportation to, the United States of the subject merchandise (whereas the WTO Agreements prohibit voluntary export restraints and similar measures). Japan and the EU are expected to resist strongly any commitments that would limit or restrict their automotive exports to the United States, even at volumes substantially above current trade (as Mexico and Canada agreed to in their respective side letters to the USMCA). Indeed, EU Trade Commissioner Cecilia Malmström stated after the release of the Proclamation that "[t]he EU is prepared to negotiate a limited trade agreement [including] cars, but not WTO-illegal managed trade." Japan similarly has stated that any trade agreement it reaches with the United States must be consistent with WTO rules. The United States has not publicly clarified what commitments it will seek in the forthcoming negotiations with Japan and the EU regarding automotive trade, and if they will involve limitations on automotive exports. In addition, it has not indicated what actions, if any, it plans to take with respect to automotive imports from other countries not referenced in the Proclamation. Thus, while the Proclamation has temporarily delayed a final decision in the Section 232 investigation, it has prolonged and exacerbated the uncertainty regarding the Trump administration's plans for automotive import restrictions.

The Proclamation is available here.

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