DUTY DRAWBACK AND THE STEEL AND ALUMINUM TARIFFS: A FIGHT TO BE FOUGHT?

Presidential Proclamations 9704 and 9705, which entered into force on March 23, 2018 imposed additional tariffs of 10% ad valorem on a wide range of imported aluminum products, and 25% ad valorem tariffs on many imported steel products. The tariffs were imposed pursuant to Section 232 of the Trade Expansion Act of 1962, 19 U.S.C. § 1862, which permits the President to “adjust imports” deemed a threat to national security.

The pronouncements sent shock waves through many international supply chains. Many manufacturers using imported steel and aluminum, and many traders, anticipated that they would be able to recover at least some of these tariffs using the duty drawback statute, when the imported goods, or products made therefrom, were exported.

But the President appeared to throw cold water on that idea when, on April 30, 2018 he issued additional proclamations which declared – for the first time – that the Section 232 tariffs are ineligible for refund as drawback. Thus, for example, paragraph 6 of the President’s April 30, 2018 steel proclamation, declares –

(6) No drawback shall be available with respect to the duties paid on any steel article pursuant to Proclamation 9705, as amended by paragraph 1 of this Proclamation.

A similar drawback restriction was issued in respect of aluminum products covered by Section 232 tariffs. Customs subsequently announced that the drawback restrictions would be retroactive, and would affect goods imported on and after March 23, 2018.

It had widely been expected that Section 232 tariffs would be eligible for duty drawback. A number of companies made contingency plans based on this expectation, now apparently dashed. This leads to the question – may the President lawfully deny drawback to goods subject to Section 232 tariffs?

While this is a close question, the President’s power under Section 232 is limited to “adjust[ing] imports.” It seems unlikely that the President can take action respecting exports, the activity which generally triggers claims for duty drawback.

 

Section 232: Delegation and Authority

The U.S. Constitution entrusts to the legislative branch the exclusive power to impose tariffs, and requires that such tariffs be uniform throughout the United States. The Constitution also prohibits the imposition of a duty or tax on exports. 

Section 232 represents a limited delegation of Congress’ power to the Executive, designed to allow the President to respond quickly to imports which may threaten the national security.

A national security clause was first enacted in the Trade Agreements Extension Act of 1955, but at that time it only constrained the President's authority to reduce tariffs, "if the President finds that such reduction [of tariffs] would threaten domestic production needed for projected national defense requirements.”  Shortly thereafter, the national security clause was amended to allow the President to raise tariffs. The power was expanded in the Trade Agreements Extensions Act of 1958,which allowed the President to take action against an imported article, and its derivatives, and allowed the “quantities” or “circumstances” of the article/derivatives to be considered.  Congress also directed the Executive Branch to consider certain factors. The Trade Agreements Expansion Act of 1962 further broadened the power to “adjust imports” to its current form.

 

Judicial Interpretation of Presidential Powers Under Section 232

The U.S. Supreme Court has considered the extent of the President’s authority to “adjust imports” under Section 232. In Federal Energy Commission v. Algonquin SNG, Inc., 426 U.S. 548 (1976), the President, acting pursuant to Section 232, had imposed “license fees” on certain oil imports, asserting that increased imports represented a threat to national security. An importer sued, alleging (1) that Section 232 represented an unconstitutional delegation of Congressional tariff-setting power, and (2) that the power to “adjust imports” only allowed the imposition of quotas and other quantitative measures, and did not allow for the imposition of a duty or charge on imported goods.

Justice Thurgood Marshall, writing for a unanimous court, first held that Section 232 was not an improper delegation of authority. Reviewing the text of the statute, he wrote that the statute satisfied the conditions for a proper delegation (emphasis added):

Section 232 … easily satisfies the test [for a valid delegation]. It establishes clear preconditions to Presidential action – inter alia, a finding by the Secretary of the Treasury that an “article is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security”. Moreover, the leeway that the statute gives the President in deciding what action to take in the event the preconditions are fulfilled is far from unbounded. The President can act only to the extent “he deems necessary to adjust the imports of such article and its derivatives so that such imports will not threaten to impair the national security.”

Turning to the question of the extent of the President’s delegated powers, the Court indicated that the language of Section 232 “seems clearly to grant him a measure of discretion in determining the method used to adjust imports”. The Court found no basis for the plaintiffs’ argument that “adjusting imports” was limited to “encompass only quantitative methods – i.e. quotas – as opposed to monetary methods – i.e. license fees – of effecting such adjustments.” The Court noted that the language of Section 232 anticipated adjustments when imports were being made “in such quantities or under such circumstances” as to threaten to impair the national security.” Examining the legislative history, the Court noted that Congress was concerned that imports could threaten national security not only based on their quantity, but also on “their character.”  The Court then examined, in great detail, the legislative history of national security measures to control imports, and concluded that both qualitative and quantitative measures were embraced to “adjust imports” under Section 232.

The question posed in the current circumstance, of course, is whether restricting drawback falls within the scope of the term “adjust imports.”

 

Possible Challenges to the Drawback Restriction

There are potentially at least three (3) grounds on which the President’s denial of drawback rights in respect of Section 232 duties might be challenged in the courts.

1.      Action in Excess of Delegated Authority

The first grounds for challenging the drawback restriction is that it is ultra vires, or beyond the President’s delegated power.  The simple formulation of this argument is that a restriction on drawback does nothing to “adjust imports”; Rather, it is focused entirely on exported or destroyed goods that are not imported for consumption. Drawback occurs long after goods have been imported and subjected to any “import adjusting” measures the President might elect to impose. While the President can act to restrain imports, once those restraints have been applied, he has no delegated authority to interfere with other Congressional measures, such as the drawback statute.

The Government might raise some argument that denying drawback restrains imports, since a person knowing that a Section 232 tariff cannot be refunded as drawback might be reluctant to import in the first place, but in our judgment, such an argument would be strained. The President might be hard-pressed to explain how curtailing an action which Congress has expressly authorized to promote domestic industry and employment is threatening national security.

2.      Unconstitutional Export Tax

Article I, Section 10, Clause 2 of the U.S. Constitution contains a very strong ban on the imposition of any tax or charge on exports.  The ban is equally applicable to the States and the Federal government, and it is very broad in scope. This clause was the basis of the Supreme Court’s 1998 decision in United States Shoe Corp. v. United States, 523 U.S. 360 (1998), which struck down as unconstitutional the Harbor Maintenance Tax as opposed to exports.

The only circumstance where a charge may constitutionally be placed on exports is if the charge is a proportional “user fee” for a defined service. There is no indication that the drawback restriction is imposed for any such purpose, and it is imposed discriminatorily, on steel and aluminum goods, and products made from same.

The argument would be that the denial of drawback operates as a “tax” on exports which would not otherwise exist. If the drawback denial could be so characterized, our judgment is that this is a potentially strong argument on which to challenge the drawback denial in the proclamation.

3.      Procedural Violation

While Courts are reluctant to review the merits of Presidential action where the President has been given discretion, they will review whether delegated Presidential authority has been exercised in accordance with statutory procedural requirements.

In this regard, we note that Section 232 requires that remedial action take effect no later than 15 days after the President determines to take the action in question. In this case, the President’s determination was made on March 8, and nothing was said in respect of drawback until April 15 – well more than 15 days later. The supposed “retroactive” application of the ban is a construct of CBP, not the President.  The drawback restriction would appear to be infirm on procedural grounds.

The longer the steel and aluminum tariffs remain in place, and imported steel and aluminum products are used in export production the more likely that this controversy will be landing in the courts in the foreseeable future.