NICK GOSNELL
Hutch Post
HUTCHINSON, Kan. — Former President Donald Trump said on the campaign trail in September that he would put large tariffs on John Deere if they move their jobs to Mexico. Raj Bhala, Brenneisen Distinguished Professor at KU Law, explained some of the potential mechanisms a President could use to accomplish that.
"There are a number of legal levers the president could use," Bhala said. "The first is the president could use section 232 of the Trade Expansion Act of 1962 and say that the agricultural machinery that is being imported into the United States impairs the national security of the United States. We have to have a viable farm sector, and to do that, we have to have excellent domestically made farm equipment to harvest agricultural goods. And we can't be dependent on Chinese or even U.S. companies that are making their equipment overseas. Now, this was, of course, you'll remember, this was exactly the argument made on countries China and Canada on steel and aluminum. Section 232, the national security argument, was what the Trump administration used. Another possibility would be section 201 of the Trade Act of 1974, which allows the president to take action against import surges that are causing or threatening to cause serious injury to a U.S. industry, the kind of industry you just mentioned that's occurring in Kansas and in Iowa. If it can be shown that it is imports of agricultural machinery that are the cause of that injury, then section 201 would allow the president to impose tariffs on foreign made equipment. That includes, again, equipment made overseas by a U.S. multinational. Now, we've seen section 201 used during the Trump administration with respect to washing machines and solar equipment. So that's the second mechanism."
There's also Section 301, which says that a foreign government is engaging in an act, policy, or practice that is unfair or discriminatory or unreasonable against the United States, and that is a burden or restriction on U.S. commerce. That is much less likely, due to the differences in the relationship between Mexico and the U.S. as opposed to China. However, there is another avenue a chief executive could take.
"The president could simply, to use the Nike marketing line, he could just do it," Bhala said. "In other words, the president could just simply impose, as President Trump has talked about doing, a tariff of 10% across the board, or 60% on all Chinese goods, or 200% on John Deere equipment made in Mexico. The problem with that, it is probably going to be illegal under both U.S. law and our treaty obligations under the World Trade Organization agreement and under the U.S.-Mexico-Canada agreement or USMCA. I would note that President Nixon, well, he simply imposed a 10% tariff on imports back around 1971, all imports to stem a tide of imports and restore America's balance of payment position as we were coming off the gold standard. And it was quite successful in that time. He took it off after about three months, and there was never really much of a legal challenge that was successful anyway to President Nixon's actions."
Part of that may have been because those actions didn't last very long. More to the point, do tariffs work when they are used?
"I hate to give you the lawyer's answer, but I think the lawyer's answer is the best one, is really it depends," Bhala said. "It depends on a number of factors. It depends, for example, on how high, how stiff the tariff is. A small tariff, you know, 5%, 10%, it may be possible for the producer, exporter overseas and the importer in the United States to absorb the tariffs, particularly if the competitors, the domestic competitors are raising their prices in an, say, an inflationary environment. A 200% of tariffs, no, that can't be absorbed. Another factor on which whether tariffs are effective depends is what economists call the elasticity, the price elasticity, and the elasticity of substitution for the good in question. How easy, for example, is it for consumers of John Deere goods to purchase other farm goods? That goes to the elasticity of substitution. If they have other alternatives, then imposing the tariff is simply going to cause the farmers to shift to other producers of a like farm product."
The problem is that the issue is larger than just one sector of an economy, particularly if retailiatory measures are taken by the other country.
"In other words, does, say, Mexico, if Mexico is where the John Deere equipment is now being made, retaliates against the United States on U.S. exports to Mexico, hitting other sectors? For example, let's talk about exports of wheat or other Kansas or Missouri farm products, farm commodities to Mexico. If Mexico whacks our farmers with tariffs, then we could say that regardless of the efficacy of keeping John Deere jobs in the United States, we've hurt our export-oriented farmers and their incomes. We have seen, of course, tit-for-tat retaliation by China in the trade war with China. We should not expect Mexico would roll over and play dead against U.S. tariffs on products that are being made in Mexico and shipped to the U.S. So we look at the first of the market itself, the ag equipment. Then we look at the broader economic assessment of how other products have been affected. And then third, what do tariffs do to our overall status as the world leader in advancing free markets?"
These are all open questions as Americans get ready to go to the polls in November. Not that trade policy alone will get someone to vote one way or the other, but it is a component of the United States place in the world, which should be a concern when choosing who to support.
Below is the full podcast interview with Bhala.