The Section 301 Surge Is Upon Us: Investigating Excess Capacity and Production

The first of a large batch of expected Section 301 investigations has arrived, as USTR announced yesterday that it was initiating investigations on acts, policies, and practices of various countries/economies "relating to structural excess capacity and production in manufacturing sectors." It's a big group being investigated: "China, the European Union (EU), Singapore, Switzerland, Norway, Indonesia, Malaysia, Cambodia, Thailand, Korea, Vietnam, Taiwan, Bangladesh, Mexico, Japan, and India."

What are we likely to see here in terms of results? We all know the context is that Section 301 is being used as a replacement for the IEEPA tariffs. Will all the identified countries/economies be found to be engaging in acts, policies, and practices that are "unreasonable or discriminatory and burden or restrict U.S. commerce" for all the sectors investigated? Or will there be instances where USTR finds insufficient evidence for that conclusion?

As I wrote here, I'm skeptical of "overcapacity" as a focus of unfair trade concerns. I'm not sure exactly what it is people are looking for here, and I feel like there are better alternatives to focus on. In its Federal Register notice, USTR talks about "governmental interventions or policies incentivizing companies to maintain or grow their unused capacity inefficiently." I have a sense of what the "governmental interventions or policies" of concern are and how you might develop rules that constrain them. By contrast, I'm not sure I understand how you assess whether there is excess capacity and production. Along with everyone else, though, I'm about to find out. USTR explains a bit in the notice, but it will be interesting to see how the explanations are applied in the various specific sectors covered by the investigations. Here's a brief rundown of what USTR says.

First, it notes that "[k]ey trading partners have developed production capacity untethered from the incentives of domestic and global demand." To me, the reference to "untethered" could/should be a key point here. How do you know in a particular sector whether the capacity is "tethered" to domestic or global demand?

USTR also explains that "[s]tructural excess capacity has been characterized generally as under-utilized industrial production capacity that is sustained through governmental interventions or policies incentivizing companies to maintain or grow their unused capacity inefficiently" (I quoted part of this sentence above). Here, I'm curious about the evidence of the particular "governmental interventions or policies," and how they "incentiviz[e] companies to maintain or grow their unused capacity inefficiently." Are we just going to hear that these interventions/policies co-exist with the unused capacity, or will there be efforts to tie them together through cause and effect?

USTR also says: "Across numerous sectors, many U.S. trading partners are disregarding market-based policies and producing more goods than they can consume or productively invest domestically." In this context, let me raise a point in the other direction: Doesn't the U.S. do something similar in certain sectors? Soybeans and airplanes are good examples. If these concepts were to become general principles in the trading system, how would they apply to specific U.S. sectors? USTR later notes that:

The creation or maintenance of structural excess capacity and production may result from policy interventions by trading partners that increase their domestic capacity and production while suppressing their domestic demand. Such interventions maintain capacity and production well above what would be expected under more market-oriented conditions. This may include: (1) promoting production and export untethered from market drivers of supply, demand, and investment, including through subsidies; (2) suppressing domestic wages; (3) non-commercial activities of state-owned or - controlled enterprises; (4) sustained market access barriers; (5) lax or inadequate environmental or labor protection or social safety net; (6) subsidized lending; (7) financial repression and currency practices; and others.

I've heard plenty of suggestions over the years that the U.S. engages in (1), (4), and (5), as well as a couple of the others.

Of course, the main way the Trump administration sees the U.S. as being off the hook is by looking at the overall trade balance: "Among others, structural excess capacity in manufacturing sectors can be evidenced by the existence of large or persistent trade surpluses in certain sectors, including the nature and quality of an economy’s trade balance with the United States." In the administration's view, the U.S. trade deficit means the U.S. can't be guilty here.

As to whether the investigated countries/economies are guilty, USTR is going to get input from interested parties (I assume the investigated governments will make extensive submissions, but we'll see), and then make a determination. That may be the end of the story, given the broad discretion for USTR under the statute. However, affected parties may decide they want to test the limits of judicial review, in which case specific findings may be explored in more detail in the U.S. court system.