Plan B for tariffs: USTR investigations are aimed at restricting imports

After the courts blocked earlier tariffs, the Trump administration turns to Section 301 probes to justify new duties-putting India and other major trading partners under scrutiny

It was only a matter of time before the Donald Trump administration resorted to Plan B to impose tariffs. Last week, the United States Trade Representative (USTR) initiated investigations under Section 301 of the Trade Act, 1974. The so-called reciprocal tariffs imposed by US President Donald Trump last year under the International Emergency Economic Powers Act were recently set aside by the US Supreme Court. But the administration soon imposed a 10 per cent tariff under Section 122 of the Trade Act, which allows for up to 15 per cent tariffs for 150 days. Thus, it needs a more durable mechanism for tariffs. Tariffs are central to Mr Trump’s economic agenda. The basic reasoning is that the US’ trading partners, including close allies, have not been “fair” to the US. As a result, the US runs a large trade deficit, and higher tariffs are expected to restrict imports and boost American businesses. 

The first investigation initiated by the USTR is against 16 countries or blocs, including India, for “structural excess capacity and production in manufacturing sectors”, which are “adversely affecting US businesses”. These are sectors in which the US, according to the USTR, seems to have lost substantial capacity or has fallen behind. They include aluminium, automobiles, batteries, chemicals, electronics, machine tools, steel, and transportation equipment. It has been argued that excess capacity in countries that are trading partners may result from intervention that increases domestic capacity and suppresses domestic demand. The second investigation, launched against 60 trading partners, and covering over 99 per cent of US imports (2024), relates to restricting the import of goods produced with forced labour. US laws prohibit the import of goods produced or manufactured by forced labour. 

Clearly, the idea behind these investigations is to find ways to impose tariffs, possibly close to the reciprocal rate. However, this law also requires the trade representative to seek consultation with countries whose policies and practices are under investigation. This could lead to another round of negotiations. India did well over the past year by continuously engaging with the US despite a challenging backdrop. Since the trade agreement has not been finalised, India will need to continue the negotiations. In the context of the new investigations, India must convey that it is not using unfair means to boost exports. In fact, it is hard to argue for anyone that India has structural excess manufacturing capacity. Unlike many developing economies, India’s growth is not export-driven. India runs a current-account deficit, which means it buys more from the world than it sells, and depends on foreign savings to bridge the savings-investment gap. 

To be fair, India has run a trade surplus with the US, but economists have also shown that it is performing well below its potential even in labour-intensive goods. Similarly, given the level of industrial activity and availability of workers, the possibility of using forced labour is low. Besides, India’s democracy is a natural safeguard against such practices. However, these investigations seem focused more on US interests than on the practices in other countries. So, it will be critical how the Indian side presents its case and how quickly trade uncertainties are addressed through an agreement. Nonetheless, it would be worth watching how investigation proceeds in the case of China, where the state actually directs capital allocation to build capacity and suppresses domestic demand.