The Meaning of "Discrimination" in Section 338's Predecessor (Section 317 of the Tariff Act of 1922)

In my post on the Trump administration's invocation of Section 338 of the Tariff Act of 1930 last week to impose tariffs on certain Canadian imports, I offered some quick thoughts on how broadly "discrimination" in that provision of the statute might be interpreted and applied. As I later learned from Mona's great post, Section 338 has its origins in Section 317 of the Tariff Act of 1922, and as it turns out there is some in-depth scholarship on what "discrimination" meant in that context. Mona cited to this scholarship briefly, but in this post I'm going to pull out a longer quote from it.

The quote comes from Wallace McClure, a legal scholar who worked at the U.S. State Department for many years and published a book in 1924 called "A New American Commercial Policy, As Evidenced by Section 317 of the Tariff Act of 1922." You can read and download the whole book here. Below I have excerpted a long discussion of what "discrimination" means and what some examples are (footnotes omitted, and hopefully copying and pasting from an OCR'd book did not leave any errors). As I said in my earlier post, I have doubts as to whether these tariffs will be imposed, but if it does happen at some point, and they end up being litigated in court, the parties will have a lot of material to work with in interpreting and applying the term "discrimination" in this context.

One short passage from the McClure book that might be of particular relevance is the following:

Somewhat similar is the purpose of stipulating that a discriminatory practice is not to be actionable unless it is "unreasonable". There are certain practices which, though clearly discriminatory, are commonly accepted as justifiable because of the existence of peculiar or unusual circumstances.

In the case of U.S. Section 338 tariffs imposed on Canada, a key point in contention in any litigation in U.S. courts could be whether the circumstances here involve "practices which, though clearly discriminatory, are commonly accepted as justifiable." With regard to whether the Canadian actions constitute discrimination, the following justifications could be offered: (1) the Canadian actions on motor vehicles and alcoholic beverages are in retaliation for earlier U.S. tariffs; and (2) Canadian discrimination in favor of EU products through its dairy trade regime is permitted under a bilateral trade agreement that is consistent with WTO rules. The question is, what would a U.S. court think of these justifications?

Here's the rest of the discrimination sections from McClure:

3. WHAT IS A "DISCRIMINATION"?

In a carefully prepared address upon the administrative features of the pending tariff bill, Senator Smoot explained at length the proposed Flexible Tariff Policy, reaching the conclusion that "the elastic tariff provisions provided effective protection against discriminations for American overseas commerce."

The Tariff Commission, in formulating its policy and making its recommendations under Section 317, may be presumed to have laid down full and clear definitions of the expressions, contained in the law, which limit the application of the authorized defensive duties. Perhaps the most important problem arising in this connection, and certainly the immediately obvious one, is concerned with the meaning of the phrases "unreasonable charge, exaction, regulation, or limitation which is not equally enforced upon the like articles of every foreign country" and "discriminates in fact against the commerce of the United States such manner as to place the commerce of the United States at a disadvantage compared with the commerce of any foreign country." In other words, the definition of "discrimination", within the meaning of Section 317, is an essential question – and one not without difficulties. Experience has shown that an extensive margin exists between practices that are clearly consistent with strict equality of treatment and practices that are clearly discriminatory.

In the statement made by the House Managers to accompany the report of the Conference Committee on the tariff bills of the House and the Senate, occurs the following:

"... The Senate amendment inserts a new section giving the President discretionary powers to impose additional duties or prohibition upon imports from any country discriminating against the overseas commerce of the United States.

This section follows the precedent established by a maximum and minimum provision of the Payne-Aldrich Act, which had for its purpose the obtaining of equality of treatment for American overseas commerce. The Senate amendment, however, is more flexible than the provision of the Payne-Aldrich Act and is designed to reach every form of discrimination, direct or indirect, whereby American commerce is placed at a disadvantage as compared with the commerce of any foreign country."

Attention is called particularly to the statement that the language employed "is designed to reach every form of discrimination, direct or indirect." It was evidently expected that a very broad and inclusive definition of "discrimination" would be used by the administrative officers of the Government in interpreting and enforcing the law.

This impression is confirmed by an examination of the text of the Act. In subdivision (a) the additional duties are made applicable when another country imposes any unreasonable charge on a product of this country which is not equally enforced upon the like articles of every foreign country; and also when another country discriminates in fact against the commerce of the United States.

Such language seems to indicate that legalistic distinctions of all kinds are to be ignored and that the defensive duties are to be applicable whenever a different and larger burden is placed on American as compared with any other external commerce. "In fact" doubtless possesses, however, its familiar connotation of "material", "real" or "actual", as distinguished from "theoretical" or "as a matter of law". The use of the words suggests the intention of the framers of the Section to confine its application to the service of practical utility, that is, to obtain for American exporters substantial equality of treatment, omitting action in regard to practices that, though discriminatory on paper, do not interfere with the practical flow of trade. Somewhat similar is the purpose of stipulating that a discriminatory practice is not to be actionable unless it is "unreasonable". There are certain practices which, though clearly discriminatory, are commonly accepted as justifiable because of the existence of peculiar or unusual circumstances. A good example in point is the freedom of trade until recently permitted between the corner of Switzerland in which Geneva is located and the adjoining districts of France. The arrangement for this overleaping of political frontiers originated in the time of Napoleon and, in eliminating the arbitrary political boundaries that divide a single economic area, appears to have proved very acceptable to both French and Swiss inhabitants. No one would contend that, because of it, Switzerland and France have unreasonably discriminated against the United States in favor of each other.

Inequalities that would otherwise be unreasonable may be considered permissible for reasons such as the requirements of sanitation or public safety.

The expression "unequal imposition or discrimination" occurs several times in Section 317, however, obviously with intent ordinarily to use the terms synonymously and to make any "unequal imposition" a "discrimination". That an exact interpretation of "discrimination" is the intention of the Section is suggested, moreover, by the abandonment in its favor of provisions contained in the original House Bill authorizing practices which would themselves have been discriminatory in operation. The House Managers, continuing the passage quoted above, said:

"Sections 301 and 303 of the House bill provide for special negotiations whereby exclusive concessions may be given in the American tariff in return for special concessions from foreign countries. Section 302 of the House bill places in the hands of the President power to penalize the commerce of any foreign country which imposes on its imports, including those coming from the United States, duties which he deems to be "higher and reciprocally unequal and unreasonable." Under the Senate amendment, however, the United States offers, under its tariff, equality of treatment to all nations, and at the same time insists that foreign nations grant to our external commerce equality of treatment; and the House recedes with an amendment rewriting subdivisions (e) and (f) and making further clerical changes."

Finally the breadth of meaning of discrimination is established by the definition of "foreign country" as "any empire, country, dominion, colony, or protectorate, or any subdivision thereof within which separate tariff rates or separate regulations of commerce are enforced." The language of this definition seems to leave no doubt that an unequal imposition upon the commerce of the United States when compared with impositions upon the commerce of a country's own colonies, if such colonies possess separate tariff laws or regulations of commerce, is a discrimination within the terms of Section 317.

4. EXAMPLES OF DISCRIMINATORY PRACTICES AND POLICIES

An examination of the present world commercial situation reveals numerous and varied discriminations, many of which seriously interfere with the commerce of the United States.

First, there is the existence, just referred to, of preferences between parts of an Empire. For instance, Canada accords to Great Britain and Great Britain accords to Canada treatment in respect to import duties that is more favorable than the corresponding treatment which either gives to the United States. Each of these two countries has its wholly separate customs laws and, although they are the best customers of the United States and the United States is one of the best customers of each of them, each imposes upon imports from the United States duties that are unequal to and heavier than the duties which it places upon similar goods imported from the other. As already indicated, such treatment constitutes a discrimination against the United States. The same is true in the case of the preferential export duties which certain colonies grant to the mother country.

Second, there are countries, notably France, which have enacted double-column schedules of import duties. The lower schedule commonly represents the rates which the tariff policy and budgetary needs of the country really require. The higher schedule is commonly expected to be used for bargaining purposes and as a defense or threat against countries which do not grant their lowest rates. Such is the case with France, which, notwithstanding the fact that its products receive equality of treatment in the American market, imposes maximum rates upon numerous products from this country. There is no question as to the liability of France to the imposition of additional duties under Section 317. Countries having this so-called maximum-minimum tariff system commonly bind themselves by treaty to accord all or portions of their minimum rates.

Third, there are countries, notably Switzerland and pre-war Germany, which have developed double-schedule tariff systems upon a plan substantially different from that just described. Their tariff laws as enacted by their legislatures contain one uniform schedule of rates; but, by entering into treaties providing on the one hand for lower rates and on the other hand for most-favored-nation treatment, they have gradually constructed what is in effect a system not dissimilar, with reference to the present discussion, to the maximum-minimum arrangement. The "general-conventional" system may be just as discriminatory under the terms of Section 317 as is the French practice. In either case the lowest duties could be granted to another country either freely or in return for reciprocal favors or concessions. There appears to be nothing in the language of Section 317 which forms the basis of any distinction as to its application between free favors and favors accorded for a consideration. Presumably, therefore, its defensive duties are applicable to discriminations against the United States resulting from either sort of preference to third countries.

Fourth, there are countries which have entered into one or more reciprocity treaties with other countries for the exchange of favors or concessions which are not generalized, that is, are not accorded to countries other than the two between which the particular reciprocity treaty is in force. An interesting example is Haiti, which has a single reciprocity treaty - with France - under the terms of which, in return for French minimum duties for certain of its products, it accords substantial special reductions to numerous goods of French origin and heavy reductions to French liquors. American goods which compete with those of France in the market of Haiti are undoubtedly placed at a disadvantage by the existence of this arrangement, which must be assumed to constitute a discrimination against the United States and so to render Haiti liable to the enforcement of the defensive duty provision of Section 317.

Finally, it is necessary to consider a large number of minor provisions of law and incidental practices that result in unequal burdens to American commerce. From time to time many little ways of favoritism crop out, often not even intimated by the text of the law. A thing so intangible as an unofficial act of a customs officer which would result in the delay of goods from a particular country, while hastening the passage through the customs house of the goods of a rival country, might conceivably be of genuine importance where competition is close or the market insufficient for two cargoes. Under such circumstances every little advantage counts in making sales. Some instances of concealed and other miscellaneous inequalities may appropriately be examined:

(a) Referring to the discriminations against American commerce which Section 317 was designed to combat, Mr. Smoot, in his above-quoted address to the Senate, mentioned the practice of certain countries,

"giving a separate classification to and levying a higher rate upon cottonseed oil than upon olive, palm, or other competing oils, or so adjusting their automobile duties that those types of cars which we export are subject to the highest rates."

This practice is one of long standing. It was the cause of much diplomatic correspondence when, following the enactment of the maximum-minimum provision of the Tariff Act of 1909, serious effort was made to obtain for cottonseed oil, a distinctively American product, a parity of treatment with edible oils ordinarily originating in other countries. Italy at the present time, notwithstanding its treaty assurance of most-favored-nation treatment to American products, imposes a higher duty upon cottonseed oil than upon other oils which are used for identical purposes, but which are not important exports of the United States. It is probable that the resulting unequal burden upon the American product is a discrimination within the meaning of Section 317. In other words, the competitive use to which a product is put, rather than its name and extractive source, would seem, within narrow limits and in perfectly clear cases, to be the decisive factor in respect to the operation of the defensive duties. Otherwise, ingenious refinements in tariff nomenclature might entirely defeat the purpose of the Section.

(b) A more debatable case is found in the practice of levying especially high duties upon products that are more important exports from the United States than from other countries but which do not compete with other products of a similar variety commonly originating elsewhere than in the United States. A case in point was furnished when Italy, in 1921, increased its import duty upon typewriters from seventy-five to four hundred lire gold per quintal. Reverting to the preceding paragraph, an intermediate example would result if, instead of differentiating between cottonseed and similar oils, all such oils were highly taxed and oil-bearing seeds and nuts were admitted freely or at low rates of duty. The invocation of Section 317 with respect to these practices seems improbable, though the one is and the other would be, in a sense, discriminatory against the commerce of the United States.

(c) Still another variation of what seems to be the common principle of the preceding examples is found where a product of the United States is dutiable at higher rates than the same product of another country differing slightly in process of manufacture or in constituent elements. The butter content of condensed milk manufactured in the United States and sold abroad is normally seven and eight-tenths per centum. The British Guiana Customs Duties Ordinance, 1922, inaugurated a drastic increase in the duty on condensed milk containing less than ten per centum of butter fat. Italy levies a tax of sixteen lire gold per quintal upon natural vaseline and thirty lire gold upon vaseline containing paraffine-a distinction which appears to affect adversely the importation of vaseline from the United States. Recent reports from another country have given account of a change in classification, as a result of which a certain brand of American-made hats appears to be subject to higher duties than similar hats of different makes, from whatever place originating. Whether or not these unequal burdens are discriminations within the meaning of Section 317 probably depends on whether they are bona fide regulations for the promotion of health, the avoidance of adulteration and the correction of erroneous classifications on the one hand or, on the other hand, instances of disguised favoritism. The determination of this question will obviously be difficult in many cases.

(d) It is a common practice among commercial nations to include, for the purpose of making assessments for ad valorem duties, the cost of transportation. This practice results in unequal impositions upon the commerce of more remote as compared with nearby countries. Similarly, the packing in which goods are contained is commonly dutiable and long-distance shipments, which require heavier packing, are consequently subjected to added burdens. The comparatively isolated location of the United States renders its commerce peculiarly vulnerable to these inequalities. This country itself levies duties upon packing, however, and the inclusion in valuation of such items as freight is a long-accepted practice which is recognized in at least one international convention - the final act of the Conference of Berlin as amended at Brussels in 1890. Moreover, the official valuations for the Chinese tariff have been fixed by the international commission, upon which the United States was represented, on the basis of the values of goods delivered at Shanghai. These two examples of unequal burdens could hardly be considered unreasonable discriminations by the American Government. It is interesting to note, however, that Switzerland, which is able to import automobiles brought in by their own power from France and Italy, was recently induced to lower its duties upon the heavy crating necessary for automobiles shipped overseas from the United States.

(e) Specific duties are collected by La Luz and Las Palmas, Canary Islands, on all merchandise entering their ports, at rates varying according to zones of origin. The first zone consists of Spain and its possessions; the second of the remaining ports of Europe, the Mediterranean Sea and part of the Atlantic coast of Africa; the third of the remainder of the world. The products of the United States thus pay the highest rates: whether they are discriminated against within the meaning of Section 317 forms a nice question with the chances of decision apparently favoring the negative.

(f) The parcel-post regulations of Venezuela require the collection of a fee of five cents for handling each package brought in from foreign countries except the United States, with respect to which the corresponding duty is thirty cents. This appears to be a palpable discrimination against the latter country.

(g) In certain countries – particularly in Central Europe — the emergencies of the war and reconstruction periods have developed regulations forbidding the importation or exportation, except under license, of the commodities named in extensive lists. Agreements to license the exchange of fixed quotas or contingents" of specified commodities have been concluded between countries. Where goods cannot cross the frontier except under license, the grant of which may be left to the discretion of administrative officials, opportunities for favoritism are obviously many. Other such opportunities may arise in the determination of limited quotas of goods for competing states. There is evidence that American commerce has suffered some detriment in this way, but such cases are difficult to prove. They seem undoubtedly discriminatory.

(h) The Comisión Exportadora de Yucatán is an official branch of the socialist government of that state, which has a complete monopoly of the production and marketing of Mexican sisal (henequen). A recent report to the Comisión, presented by its attorney, contained this statement:

"Since it is our aim to develop the consumption of our sisal hemp, our institution has undertaken to facilitate all the operations carried through in Europe, one of the many facilities afforded being that of assigning a lower price than the one quoted in the United States, taking into consideration the greater cost of transportation of the merchandise, there being no doubt that if, to the price obtainable in the United States, we should add the excess rate of freight for transportation to Europe, we would be placed in an unfavorable position in competing with the other fibers sent there."

In view of the recent immense progress of state socialism in certain important countries, the question whether a practice of the sort described is a discrimination, within the meaning of Section 317, seems of great potential moment.