The 50 percent problem with Trump’s Canada tariffs

President Trump recently used Section 338 of the Tariff Act of 1930 as the legal basis for his new trade war on Canada, imposing 50 percent tariffs on some $20 billion in goods that the U.S. imports annually, covering everything from hockey sticks to alcohol.

But “up to 50 percent” does not mean 50 percent whenever the president feels like it. And it doesn’t mean any form of alleged discrimination. Congress passed Section 338 to give the president a tool to retaliate against foreign countries that discriminated against the U.S. in tariffs and other customs matters, not against any practice that the government deems unfair. These distinctions could become important when Trump’s new tariffs on Canada invariably end up in court.

The Federal Circuit Court’s decision in HMTX Industries v. U.S. explains why. Importers challenged the massive expansion of the tariffs Trump imposed on China in his first term under Section 301 of the Trade Act of 1974 . If the administration could turn an initial $50 billion trade action into tariffs covering more than $350 billion in imports, they asked, what prevented this provision from authorizing an all-out trade war?

The Federal Circuit rejected that argument . The U.S. Trade Representative’s power was not limitless, the court explained, because any modified tariff remained tied to the original action and had to be tailored to the statutory goal of eliminating the Chinese conduct under investigation. It could not raise tariffs “for any reason” or by an amount that wasn’t “appropriate” to achieve its original goal.

Those limiting principles should matter under Section 338. In July, Trump stated that Canadian measures involving automobiles, dairy and alcoholic beverages discriminated against American exports of cars, cheese and booze.

Take the case of automobiles. The proclamation says that Canadian discrimination denies American car makers export opportunities, along with the economic benefits that come from selling more cars to Canada. Yet it also says the tariffs will expand opportunities for U.S. car makers to sell more cars at home, increase domestic production and employment, and “may spur Canada to remove the discrimination.”

These are not the same objectives. Compensating for a loss of export markets is remedial. Protecting American producers from Canadian competition is protectionist. Imposing enough economic pain to make Ottawa change its policies is coercive.

Section 338 may grant wide latitude in designing a remedy. But Congress chose the word “offset.” And the definition of the word at the time was clear, as it is today. As the Merriam-Webster dictionary defines it, to “offset” something is “to counterbalance or to compensate for something else.” This limits the president to imposing tariffs in an amount and on those products that will compensate for the burden Canada’s discrimination places on U.S. companies.

But the White House’s own figures put the alleged lost exports at $5.6 billion for autos and $582 million for alcohol , nowhere near the $20 billion in goods subject to Trump’s 50 percent tariffs. And cars and car parts are not on the list of products subject to tariffs, begging the question of how these tariffs are supposed to protect American car producers from Canadian competition.

HMTX suggests courts should be skeptical of precisely this move to impose tariffs in any amount, on any product, for any reason the president wants. The court did not hold that once U.S. Trade Representative found an actionable Chinese practice, it acquired a general tariff power over China.

Suppose Canada adopted a measure costing American exporters $500 million annually. Could the president respond with $10 billion in tariffs on unrelated Canadian products because doing so might force Ottawa to surrender?

A statutory maximum tells the president how far he can go if the facts support a maximum tariff. It does not tell him how far he should go in any particular case. Rather, Congress instructed the president to offset the burden or disadvantage of a particular type of discriminatory action. That requires some demonstrable relationship between the injury and the remedy.

Trump’s decision to go directly to the statutory maximum makes that question especially important. Why does a 50 percent tariff offset the Canadian disadvantage when 15 or 25 percent would not? Simply repeating the statutory word “offset” does not answer those questions.

That is the important lesson of HMTX. The federal circuit rejected the specter of a “limitless trade war” precisely because Section 301’s remedial purpose continued to constrain the tariffs imposed under it. The same logic should apply to any attempt to use Section 338.

If 50 percent represents what is necessary to offset a demonstrated Canadian disadvantage, Trump has a statutory argument. If, instead, it simply represents the amount of pressure Trump picked to prosecute the newest of his many trade wars, then something fundamentally different has happened.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University. Peter E. Harrell is a visiting scholar at Georgetown’s Institute of International Economic Law and attorney in private practice. Jennifer Hillman is a professor from Practice at the Georgetown University Law Center.