A

I'm Scott.

B

I'm Bill and we're the Trade Guys.

C

You're listening to the Trade Guys, a podcast produced by CSIS where we talk about trade in terms that everyone can understand. I'm Alex Kisling and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys. Thanks for listening to the Trade Guys. On today's episode, we unpack the latest developments around the Trump administration's Section 301 tariffs and take a look at the state of digital services taxes in Europe following President Trump's recent threat to impose 100% tariffs on countries that move forward with those taxes. All that and more on today's episode of the Trade Guys. All right, Trade Guys, I want to focus on a couple of topics today, starting with the latest on the Section 301 investigations launched by the Trump administration. We covered this a few weeks ago, but there's been several developments since then. USTR held public hearings over the past several days. Countries targeted by the investigations are pushing back. Democratic state attorneys general are threatening legal action. And a range of domestic stakeholders have weighed in. So we have a lot to cover here. But, Scott, can you just start it off by refreshing everyone's memory?

A

Sure. Section 301 is a very flexible statute in terms of the remedies and the extent and ability of the US to take unilateral action in the face of unfair trading practices. It's been used by the Trump administration quite effectively versus China in the first term. And Trump 45, now Trump 47, is using it again. And in many ways, the broad investigation is in general speaking, targeting practices related to forced or illegal labor practices.

C

Right, Right.

A

And it's about 60 countries wrapped up in it in the midst of sort of fulfilling the process requirements of the 301 statute. They're going through the public hearings now, they were earlier this week. And it reminds us of a kangaroo court of some, some sort because you have a lot of conversations, a lot of interests get their time before the panel and comments get made on a record. But you get a, get an idea of the scope and complexity, what's on offer. A couple things do have emerged, at least in my view is first, there's a real problem with hypocrisy. Trade policy gets you a lot of fun things. Gotta have a sense of irony in a lot of these comments. And so we make of trade policy people and their comments about certain sectors. Yes, we do on a regular basis. But in this case, I think American hypocrisy may get us in trouble. Now, keep in mind that we're targeting unfair practices, and some of these practices, particularly in the labor side, are quite subtle and often very local in action. So we're looking for things like child labor or forced labor. Would point out that The United States, 11 states that have no minimum age for agricultural family labor. So this is something that could easily bounce back on us that one of the actions, if we start to apply tariffs on the basis of these kinds of charges, it would be fairly straightforward for a responding country to make a similar charge against us. One of the reasons tariffs haven't really hurt the economy, as we've talked before before, is that there's generally been an avoidance of retaliatory tariffs on the part of the counterparties. I'm not sure that's going to happen this time, and that's, for me, that's an exposure that we're facing. Same with some of the commercial concerns. If you look at Brazil ethanol, yes, Brazil has some factor endowments that make for very inexpensive ethanol production, and they use it in fuels and lots of things in Brazil. And they are they have a big export platform. But it's not to say the United States does not have its own subsidies and protections associated with ethanol. Last I checked, there were high tariffs on ethanol coming into the United States. There were subsidies for the production of corn and corn ethanol, and there are also a mandate for usage in motor fuels. So that's why 10 to 15% of motor fuels are ethanol. It's a federal standard. So we have our own exposing our own dirty laundry as we're talking about the problems of other places. So who knows where this leads other than the outcome that they anticipated from the start. But it's been a mess so far.

C

Yeah. Bill, out of these USTR hearings this week, anything stand out to you?

B

Well, first, it reminds me of the old joke about the Senate where everything's been said but not everyone has said it. And what we've had here is a parade of there've been two parades, a parade of countries claiming either that they're innocent or mostly claiming that they're innocent or claiming that this is all a pretext. And also there's been a parade of special US Domestic interests arguing in favor of high tariffs in particular cases. So the steel people have been in, of course, the seafood people, meaning the catfish and shrimp people, have been in about Vietnam. There have been a number of other domestic parties arguing, you know, basically trying to climb aboard the train and take advantage of the situation to argue not so much on the forced labor case as just to get high tariffs for their particular item and using the hook that those items are made with caught in the case of fish with forced labor. Actually, in the fish case, they might have a point. We've seen that kind of parade before. It'll be interesting to see what happens. I think it's widely expected everybody knows what's going to happen. You know, USTR found everybody guilty in the first place. And it's unlikely they're going to let anybody off the hook. They're going through the procedural motions because the law requires them to.

C

But this will change nothing.

B

Right? The USTR deserves credit for that. I mean, it's not a small accomplishment. And as we've said before, Trump is notorious for ignoring those kinds of things. But in this case they haven't. But I think in the end you're going to see either the 10 or 12.5% tariffs on all of the countries that are imposed. The interesting thing that came out that I thought was interesting is this is clearly an area where there's going to be once again litigation. You know, and the lawyers are already coming out of the woodwork and plaintiffs are showing up. And the most interesting one was the same group of Democratic state attorneys general that sued over the Section 122 tariffs. Now, people who follow the stuff recall they all lost. I mean, several people won that case. The attorneys general lost because they basically court ruled, they didn't have standing. They couldn't prove they'd been harmed, largely because they didn't buy anything that was affected by the sheriffs. The only winners in that case were two small companies in the state of Washington and the state of Washington, which did buy stuff. But the attorneys general are back and they're going to argue apparently that the 301 cases, the investigations are a pretext, basically that the fix is in. And that what is interesting is they're going to argue what we've discussed in previous weeks, which is basically that the investigations don't do the job. They don't do what the statute requires. They are assertions rather than proof. And there's no evidence provided that the standard is you have to find a practice that is unreasonable, unjustifiable or discriminatory. In this case, unreasonable is the one that USTR seems to be settling on. And you have to prove that it's a burden or restriction on US Commerce. And I think the attorneys general are going to argue that with the exception of a couple countries in this 75 page report, they don't prove any of that. They just assert it and that therefore they don't meet the standard. And that'll be interesting because it'll force the judges, I think, first of all, to make a decision on the merits and not on the process, because the process has been followed. And it'll force the judges to ask the question, you know, what burden does the statute impose on the executive? Do they actually have to do an investigation? Do they actually have to find forced labor in this case? They have to find, in other words, they have to find the practice that the country's being accused of. And can they establish that it's a burden on US Commerce? And in most of these countries, I think they haven't done that. So the tariffs will go into effect. Ambassador Greer made a comment today, actually, which is July 9th, that they're coming soon, but maybe not exactly on July 24th, which will even add to the confusion, because it means that there will be a gap between the end of the 122 tariffs, which definitely disappear that day, and whenever they decide to oppose the new ones. But they'll be back. And it's not over because lawsuits abound. And we're going to be talking about this for months, but they can keep

C

moving it forward as the litigation plays out. The litigation isn't going to just tie

A

this up unless they're enjoined, and the

B

courts have consistently refused to do that.

A

So, yes, that's true.

B

Every time these tariffs have come up, people have gone to court, try to get an injunction to block them, and the courts have consistently let the tariffs go into place and while the litigation goes forward. So I think if you're counting on saying this for a year, if you're counting on getting off the hook via the judicial system, don't hold your breath.

C

Why would the state AGs have any greater standing here than they did in the IEEPA case? Is there any distinction?

B

I don't think so. And I mean, no, I haven't read

A

their brief, but I don't. You could make the distinction.

B

Well, there. There isn't one yet because the terrorists aren't in effect yet. But no, I don't think they have any more standing than they had the first time. But keep in mind, first adjective that I use, Democratic state attorneys general.

C

Right.

B

You know, this is a political exercise.

C

Of course it is. Yeah.

B

For them, it's not just a substantive exercise.

C

Right.

B

And finally, to acknowledge something Scott said, something that's very important, we said many times on the podcast, there's no rule in trade against hypocrisy and there's probably no better demonstration of that than these cases for exactly the reason Scott said.

C

Can you just on the mechanics here because I, I think it's notable and maybe I misunderstand this, but the pace at which these 301 investigations are playing out is remarkably f is it not compared to what the standard usually is for 301 investigations?

B

Certainly is not follow the timeline of most investigations. The statute permits a year and if you look back, most of them have taken close to it. Even in Trump 1.0. The China investigations I don't think took a full year but they took much longer than the three months that has been given to these and number of people have pointed out that you have in theory anyway because your investigations need to be country specific. You have 60 investigations going on and you've managed to complete all of them in three months. And in that three months you produced a paper, a report which as I said really doesn't get into the details with the exception of I think three or four countries. It doesn't provide any specific examples or evidence of forced labor. Burdener restriction.

A

We either have a case of astonishing efficiency on the part of the government or a preordained conclusion which is the one.

B

I'd go take your pick but I think we know the answer. I mean it would be nice to have an astonishing display of efficiency but

C

yeah, yeah, that's an easy multiple choice test.

A

Yes, fair enough.

C

All right. All right, we'll keep an eye on it. I want to turn to our other topic for today. And on June 26, President Trump threatened on a truth social post a 100% tariff on European countries that implement a so called digital services tax on US Companies. This has come up in the past and there are some European countries that already have a digital services tax on the books, as do several other countries outside of Europe. But Bill, remind us, what is the digital services tax and what triggered this comment from President Trump?

B

It's a tax on digital services, which means in effect it's a tax on largely on the large digital platforms that provide those services. So think Meta Alphabet or Google, Amazon, potentially cloud services. I'm not sure the taxes reach that yet.

C

This is tax on their revenue.

B

Well, that's the interesting thing. That's a very important point. It is a tax on their revenue. Most corporate taxes are on profit, but this is not on profit. It's. And one of the reasons the tax wonks object to this tax is exactly the point you raised. It's a tax on revenue. So even if the company is losing billions of dollars, they're still going to be paying a tax because it's based on what they're taking in and not on their profit. And I don't know why that is, but just the way that the most of these countries have put it in place, the American objection has been, I can see both sides of it. The American objection, which I think is an accurate one, is that these taxes adhere unequally to American companies. That most of the large platforms that end up being taxed, because there's a threshold, they don't tax you unless your gross revenue is over a certain amount, which varies from country to country. But it's a fairly large amount, which means they only pick up the 6, 7, 8, 10, whatever it is. Biggest digital services companies in the country, those are almost always American companies, if not all of them, 80% of them will be American companies. And this has led not just the Trump administration, but the Biden administration as well. And actually, I think dating back to the Obama administration complained that this is in effect a discriminatory tax that is aimed at American digital services providers. And it's an attempt basically to make their access to in particular European markets more difficult and to give their European competitors, if they have any, which they sometimes do and sometimes don't, a leg up in the marketplace. I think there's a lot to that argument. At the same time, it's a little hard for me to say that digital services tax is unwarranted. Governments have taxing authority. If they want to tax services, they tax other services. If they wanted to tax digital services, they could do this. The unfortunate part of this is the results of what they do are skewed against the Americans. And there's a complicated record, particularly in Europe, of more than one or two European politicians saying publicly that their laws are aimed at the American providers. Now, there's some other Europeans who've been smarter than that and didn't say that and have said that these laws are intended to be non discriminatory. And it's one of these things where on their face they are non discriminatory. They don't say we're taxing American companies. They say we're taxing companies with revenues greater than X amount, which happen to be all American companies.

A

You know, it's one of these things. The last time we discussed this, I think that we recall that scene from Animal House where the upperclassmen Delta brothers are taking some driving range practice. And down on the field below is an ROTC drill happening. And I think it's Otter who says to the other brother is like, they're abusing our pledges. They can't do that. Only we could abuse our pledges and hilarity ensues. But that's basically what's going on here. You can't tax our companies, only we can tax our companies. So there's some of that going on. You know, I've often wondered, given that the extent to which we've been. This has been a difficulty that stretched into the years now, and we can't find a way to shock the system into some kind of resolution, I wonder if we might just cut off digital services. Instead of 100% tariffs on somebody's wine, just stop providing the services for a week in a sovereign nation state and see what happens.

B

Well, that's been tried in a smaller context and I wouldn't say it works. One of the subsidiary issues here, which it's not exactly a digital services tax, has been the tendency of some countries. Australia was first and Canada is the one I'm going to be talking about was second in deciding that they want to force the digital service provider companies to pay the media that they allow to post on their site. So in Australia, you have to Meta. In particular, Google were told, you know, if you're going to have Australia media institutions on your site and you're going to post their material, even though it's not your material, you need to pay a share of your revenue back to those companies. And the Canadians have picked up on that too. And in the Canadian case, the two biggest companies, which are Meta and Google, followed different tracks. Google cut a deal with the Canadian government and they're paying.

A

So they're paying royalties or at least usage fees.

B

Yes, yes. And Meta did not. And Meta has stopped carrying Canadian news sources on Facebook in Canada now. Did anybody notice? I don't know. I'm not in Canada and I don't usually look up Canadian news sources anyway, at least not daily. But, you know, one is, one company has taken a hard line, one has not. And this is going to come up in other countries because other countries have. In the Australian case, both companies initially paid and then I think in the Medicase, they've changed their mind and have subsequently refused to pay and cut off their access to Australian media. So sometimes they take a hard line. Obviously, if Alphabet decided that they were going to remove Google from France, that would have a fairly significant impact on everybody and everybody who uses it. Google Chrome as a search engine, for example, and everybody who uses GMAIL as an example. But it would also have a significant impact on Google's revenue, which is probably why they haven't done it. I have to say there really was an effort to work this out and I give the Biden administration credit for doing this. There has been this now more than 10 year effort in the OECD, the Organization for Economic Cooperation Development, which is the organization basically of the more developed countries, to create a tax regime that addresses several different issues. The biggest one being how you allocate revenue between countries when the entity, which would be the classic 1B, the service provider, doesn't necessarily have a physical presence in the country. And there's two pillars of that agreement and one pillar is a question of basically taxation of those kinds of companies. And that pillar was near to solution. And it was a case where the Biden administration, in its first Secretary of the Treasury, Yellen, in her first year in office, basically cut a deal with the other parties in which they agreed to postpone imposition of their digital service taxes while the OECD worked this, this out. And the United States, I think, made, you know, some concessions with respect to what was, what would be acceptable to us, as did some other countries. And it was on a track to, I think, to resolution. Turned out to be a very slow track and it never quite got to the end. And then when Trump came in, of course he, you know, he rejected all that. So we're kind of on that score, I think in purgatory as far as it's concerned.

C

Yeah. Scott, just a bigger picture question here. Where does this leave the US EU trade deal that was just kind of wrapped up by the EU a week or two ago. Does this blow that up in any way or.

A

It's still an outstanding issue and it's not exactly clear what Europe agreed to do, if anything, and what we're going to do about what they didn't do. So it's a loose end and it's one of the things while the tariff rates and the overall structure of the agreement is now approved by the European Parliament and supposedly ready to implement, there's still items like this that are outstanding and where there's still sort of causes belly on both sides. So we got work to do.

B

I think Trump was fairly clear whether he means it or not, you never know. But I think he was fairly clear that, that he would do this even if it superseded the European Agreement and that the Europeans have been very clear with respect to the other 301 tariffs where they're threatened that anything that would Take their overall tariff limit above 15% they would regard as a breach of the agreement and this threat is 100%. So yes, that would breach the agreement. And the Europeans have not been clear about exactly what they would do in that circumstance. But that gets back to Scott's point. These are all areas where we may be ultimately getting into retaliation as opposed to what happened last year.

A

So what a fine mess we have.

B

Well, it's going to get more complicated because why not?

C

Of course it is.

B

The Section 232 tariffs are rearing their ugly head again. They have not gone away. Some of them have not been announced. I think we went through a list of those a couple weeks ago. The current one that people are beginning to be more worried about is the semiconductor tariffs. The President in January imposed 25% tariffs on a very small set of high end chips. That didn't get anybody too upset. But he left the door open to a much broader, presumably 25% tariff on all or both chips pending subsequent negotiations. There doesn't seem to be any particular evidence that subsequent negotiations have gone on, but I assume they have. But now six months have passed and people are beginning to wonder whether this is one more area where we may end up with 232 tariffs. The ITIF, the Information Technology Innovation foundation did a study that modeled what would happen if 25% tariffs were imposed basically on ICT information communication technology. I think it was broader than just chips, but instead that the net result over 10 years would be a, I think $1.9 trillion decline in US GDP, which is not small. But that hasn't happened yet. But I think people are in this case, as along with other cases, aircraft being the prime example, are beginning to make the case that, you know, we may or may not have a problem with chips, but a tariff on imports would make everything worse and it would make everything worse for the US manufacturers.

A

That creates more problems than we have.

B

Exactly. So I think that's why these are being slow rolled.

A

Yeah, it's one of those things that the section 232 doesn't have to lead to tariffs. And sometimes tariffs are exactly the wrong thing to do to address the concerns about national security.

B

Yeah, putting compromising your company's ability to produce and do what they need to do because the materials, it depends on how, it depends on the nature of the tariffs. But if they're broad and they cover raw materials or if they cover chips, the effect of that is you're just going to make everything in the United States that uses chips more expensive. Which means you're going to cut chip demand, which is going to affect your domestic companies as well as foreign companies. It's not a situation that has a happy ending for anybody.

C

Well, let's leave this on a happy ending then, guys. Thank you so much. That was two very fascinating topics. So I'm glad we covered those today. And thanks as always to our listeners for joining us. We'll be back next week. Take care. Until then.

A

Thank you.

B

Thank you.

C

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