March, 2017

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National Security Actions on Imports and Investments

Mark K. Neville, Jr.

In last month’s discussion about possible directions in trade policy for the new Trump Administration we had referred to enhanced national security as a possible motivation for or justification of import measures.1 That was written in November, and this is being written in early January, so it is still too early to report what steps will be undertaken after the January 20 official start of the Administration. We are still at the stage where we discuss what might come to pass later rather than being at the point where we can pass comment on what actions have been taken already in fact.

With that as a proper reference base, I thought it worthwhile to expand on the role of national security in import transactions and in foreign direct investment into the US.2 Regardless of the extent to which national security is invoked as a matter of practice, it is important to take these statutory schemes on board to have a fuller appreciation for the entire panoply of powers that might be welded by the Executive branch.

Beyond Cargo Security

As a further prefatory note, we may take it that most readers will have become aware of the singular attention on national security after 9/11/2001, with the Customs Service peeled away from the Department of the Treasury, housed in a new agency, the Department of Homeland Security and assigned a new name, Customs and Border Protection. One expression of that focus is heightened cargo inspections, with the voluntary Customs-Trade Partnership Against Terrorism (“C-TPAT”) being the US version of the Authorized Economic Operator (“AEO”) scheme put forward under the auspices of the World Customs Organization.3

We’re not going to go into cargo security. Rather, we are going to look into programs that can either keep products out of the US or impose quantitative retractions or that impose tariff burdens. Those are all actions that have been threatened and, in examining the statutory scheme that might support them, let’s start with the most expansive, Section 232 of the Trade Expansion Act of 1962, 19 USC § 1862.4

Section 1862

In 1962, for many, the response to the ambient geo-political environment was a profound weltschmerz. And that is perfectly understandable—we were still at the height, or perhaps the depth, of the Cold War. In fact, the statute we will discuss here was enacted just 3 days before the Cuban Missile Crisis began.5 Moreover, the predecessor statute to 232 (b) was originally enacted by Congress as an element of the Trade Agreements Extension Act of 1955, c. 169, 69 Stat. 166, and amended by the Trade Agreements Extension Act of 1958, Pub. L. 85-686, 72 Stat. 678.

It is vital to understand that context. Simply put, Congress was concerned that the President must have full powers to deal with any emergency or, better still, to head off such a national security emergency with timely action.

To better understand the motivation in passing the statute it would be well to recall the old “horseshoe nail” proverb—“for want of a nail the horse was lost, for want of a horse the rider was lost, for want of a rider the message was lost, for want of a message the battle was lost, for want of a battle the kingdom was lost. And all for the want of a horseshoe nail.”

In actual fact, in his introductory remarks for the 1986 Senate hearings which ultimately led to amendments in 1988 Senator Roth referred to the fate of the Spanish Armada having been sealed with the earlier burning in a raid of most of the wood that had been stockpiled by the Spanish for use in making water barrels, which I had known about. He also noted the serious strains on the British supply of war materiel in fighting Napoleon due to the former’s reliance of Scandinavian tar and rope, which was new information for me.6

Congress employed very broad terms in fashioning Section 1862. The statute anticipates that the Secretary of Commerce, on his own initiative or upon another Cabinet Department request or an application of an interested party (read” domestic supplier or industry group), will conduct “an investigation to determine the effects on national security of imports of articles…” The President has 90 days after receiving the Commerce Report to make a determination and, if he determines that an article is “imported into the US in such quantities or under such circumstances as to threaten to impair national security” he can determine the nature and duration of the action that must be taken to “adjust the imports of the article and its derivatives” so as to alleviate the threat.

The grant of authority is for actions that will “adjust” the imports and the legislative history shows that Congress intended this to be without limit. The President was to be granted the authority to make use of tariffs, quotas, restrictions, stockpiling and any other variations of these programs—essentially whatever action was necessary.7

The scope of the statutory grant was the subject of Supreme Court review in a 1976 decision on the oil import program. In this connection, the removal of an article from eligibility for the tariff preferential treatment of the Generalized System of Preferences (“GSP”) would be analogous to the imposition of tariffs or fees.8 In effect, such an action would be to remove the exceptional duty-free treatment and simply expose the imported article to ordinary tariffs.

In FEA v. Algonquin SNG, Inc., 426 US 548 (1976) the Court reversed an appellate court decision that Section 1862 (b) does not authorize the President to impose a license fee scheme as a method of adjusting imports, but encompasses only the use of "direct" controls such as quotas. In so doing, the Court drew from the legislative history of the scheme which emphasized the broad grant of authority to the President.

“National Security” Indicia

If the remedial action to be taken to “adjust” imports falls under a broad grant the object of that action—national security—also admits of a broad definition. Congress has provided some metrics for the definition, including without limitation
  • domestic production needed for projected national defense requirements
  • capacity of domestic industries to meet such requirements
  • existing and anticipated availabilities of resources (HR, products, raw materials, other supplies and services)
  • requirements of growth in such industries and such supplies and services
  • effect of imports on such industries
  • capacity of the US to met national security requirements.9
There have been many actions taken under this authority, principally in the context of oil imports.10 It is fair to say that the importation of articles in almost any product sector could have a national security implication. That imports of steel, automobiles, airplanes and machine tools have national security repercussions is obvious. However, even such mundane items as footwear and clothing could the same effect, to the extent that the US might not be able to be self-sustaining in its ability to equip its military.

International Order

The GATT, at Art. XXI, expressly provides for action taken by signatories that it considers necessary for the protection of its essential interests. The provision first focuses upon fissionable materials and arms, ammunition and implements of war, but then spreads its coverage to “such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment.”

This exception has been the subject of only a few discussions at the GATT or its WTO successor. Notably, in 1975, Sweden had imposed a global quota on footwear, invoking this authority. Many countries reserved their rights, and Sweden offered to consult but actually withdrew the measure in 1977 before any formal proceedings ensued further. The US trade embargo Cuba was defended at the GATT by reference to Art. XXI.11

There is also a national security exception that is embedded in the various free trade agreements (FTAs) entered into by the US. For example, Art. 23.2 of the Korea-US FTA provides for an “essential security” exception, with the similar exception set forth in Art.
21.1 of the US/Morocco FTA.12

GSP

Within the wide scope of the discretionary authority of Section 1862, we have referred to a removal of imported articles from eligibility for GSP. Not surprisingly, the GSP provision itself provides specifically for such action.13

Foreign Investment into US

Quite apart from actions taken to adjust imports into the US, Congress has also been concerned about the national security implications of investments in the US, with the result that ownership or control over key industries or access to natural resources would pass to foreign interests. Recall here the controversy that surfaced in the recently concluded presidential campaign over Russia gaining control over uranium. Recall, too, the earlier 2006 controversy over acquisition of six major US port operations by Dubai interests.

There is a mechanism in place that is charged with closely scrutinizing such investments. It is headed up by the inter-agency Committee in Foreign Investment in the United States (“CFIUS”), which was initially established in 1975.14 Most recently, an Obama administration advisory panel was quoted15 as saying that CFIUS should be more involved in reviewing potential Chinese acquisitions of semiconductor manufacturers. This was stated to be a national security imperative.

Conclusion

Taken as a whole, the US trade laws reflect the importance of many non-commercial policy goals. Ensuring national security should be taken as an overarching goal. Beyond that, we should be mindful of such other social goals as eliminating prison or child labor, despoliation of natural resources, plunder of cultural artifacts or trafficking in protected wildlife products and others besides.

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1. Neville, “US Trade Policy Relaunch--Possible Directions,” 28 JOIT no. 2, text at n. 23 (Feb. 2017).

2. The role of national security in regulating exports from the US is well known and will not be touched upon here.

3. See Neville, “Big steps—and big parties—in Beijing and Brussels: joint cargo security validation in China and the EU, 19 JOIT No. 6 at 21 (June 2008) and Neville (ed.), International Trade Laws of the United States: Statutes and Strategies, ch. 9 at ¶ 9.08 [1].

4. Act of Oct. 11, 1962, Pub. L. 87-794, 232, codified at 19 USC § 1862. You should note that the Cuban Missile Crisis began just three days after its passage.

5. This section was later amended in 1975 and 1988.

6. Remarks of Senator Roth, S. Hrg. 99-1041, 99th Cong., 2d Sess. on S. 1871 at 1 (1986).

7. Remarks at 101 Cong. Rec. 5588 and 101 Cong Rec. 5299 (1955) and S. Rep. No. 232, 84th Cong., 1st sess. 4 (1955) cited in 1982 (Counsel-Inf. Op.) 6 O.L.C. 557 (authority to adjust imports of ferroalloys by stockpiling and removal from GSP-eligibility).

8. 1982 (Counsel-Inf. Op.) 6 O.L.C. 557.

9. 19 USC § 1862 (d).

10. See, e.g., Ex. Ord. No. 11703, 38 Fed. Reh. 3579 (Feb. 7, 1973), as amended by Ex. Ord. No. 12188, 45 Fed. Reh. 989 (Jan. 2, 1980) and Pres. Proc. No. 5141, 48 Fed. Reg. 569929 (Dec. 22, 1983).

11. COM.IND/6/Add.4, p. 53 (notification); MTN/3B/4, p. 559 (response citing binding resolution under Inter-American Treaty of Reciprocal Assistance).

12. The latter is available at https://ustr.gov/sites/default/files/uploads/agreements/fta/morocco/asset_upload_file570_3860.pdf

13. 19 USC § 2463 (b) (2).

14. See Neville (ed.), International Trade Laws of the United States: Statutes and Strategies, ch. 15.

15. Talley, U.S. Chip Firms Need Protection, Panel Says, Wall St. J., Jan. 7-8, 2016 at B3, col. 1.

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