Deep dive into the investigation under Section 301 of US Trade Act 1974
The US retaliation on the global digital tax developments has become a subject of intense scrutiny. After the trade war with China and France, the United States has now initiated an investigation on various countries for adopting the OECD recommended digital taxation. Amongst various nations, India, Australia, and the European Union are at the forefront. This investigation has not only led to unrest in global trade relations but has also raised serious doubts on the international trade rules and principles. In the ensuing paragraphs, we have attempted to decode the complex aspects of Section 301.
Deciphering Section 301
Section 301 of the Trade Act, 1974 grants the US Tax Representatives (USTR) a right to investigate and take action against the foreign acts, policies or practices that violate US rights under trade agreements, or when these actions may not violate any trade agreements but are considered ‘unreasonable or discriminatory and that burden or restrict US commerce.’
The USTR can self-initiate a case or act upon cases petitioned under Section 301. The Section 301 investigations are conducted by a subordinate, staff-level body of the USTR-led, interagency Trade Policy Staff Committee (TPSC).
The Section 301 Committee reviews the relevant petitions, conducts public hearings, and makes recommendations to the TPSC regarding potential actions under Section 301. The final decision from USTR is based on the recommendations from the TPSC.
Where the findings of the investigation are positive, the US under the Trade Act can impose unilateral actions, including any permutation and combination of the following:
- Imposition of import duties and other import restrictions, with a preference for import duties;
- Imposition of restrictions on services, including access authorization;
- Suspension of unilateral trade preferences;
- Entering into binding agreements with foreign countries to either eliminate the conduct in question or compensate the United States with satisfactory trade benefits.
Once the USTR initiates a Section 301 investigation, it seeks to negotiate a settlement with the concerned foreign country through either compensation or elimination of the particular barrier or practice.
How fair is such a Unilateral Measure under the International Norms?
The WTO agreements, negotiated and signed by a majority of the world’s trading nations including, the US, provide legal ground-rules for international commerce. They are essentially contracts that bind these governments to keep their trade policies within agreed limits. A country can change its bindings, post a negotiation with its trading partners, which could include compensation for their loss of trade.
In order to combat unilateral actions by the nations, article 23 of WTO’s Dispute Settlement Understanding (DSU) was specially designed. The verbatim of the said article is as follows:
'When Members seek the redress of a violation of obligations or other nullification or impairment of benefits under the covered agreements or an impediment to the attainment of any objective of the covered agreements, they shall have recourse to, and abide by, the rules and procedures of this Understanding.’
Basis the above, it was alleged that unilateral measures of the US under section 301 is clearly a violation of the WTO rules. In fact, in 1999, various members of the WTO represented by the European Communities made a representation before the Dispute Settlement Body (DSB) in this regard. In its justification, the US authorities made its case by providing that -
‘Section 301 investigation is a tool that the United States is using both to address matters that fall within the scope of the WTO agreements and matters that fall outside the scope of the WTO agreements. The United States retains the flexibility to determine whether to seek recourse for foreign unfair trade practices in the WTO and/or act unilaterally. The United States Trade Representatives (USTR) will invoke the dispute settlement procedures of the WTO DSU for investigations that involve an alleged violation of (or the impairment of US benefits under) WTO Agreements.’
The US authorities definitively, formally, and again unconditionally reiterated its commitment that the US government would implement Section 301 in a way consistent with its WTO obligations, the panel eventually ruled that Section 301 did not violate WTO rules.
Recent Action
China
The trade investigation was launched under Section 301 of the Trade Act, 1974, and an additional 25% tariff on USD 50 billion worth of imports from China was imposed in 2018. The Unilateral trade sanctions imposed on China in March 2018 triggered a trade war between the world’s two largest economies.
France
On 2 December 2019, the USTR completed the first segment of investigation with the conclusion that Digital Services Taxes under consideration by France are unreasonable, discriminatory, and burden the US commerce.
Based on this investigation, the USTR announced its determination to impose a 25% additional duty on products of France that fall into certain tariff subheadings having an estimated trade value of USD 1.3 billion. However, such additional duty is not be imposed until at least 6 January 2021. During January 2020, France agreed to suspend the imposition of its Digital Services Tax until the end of 2020 in order to bypass the increased tariffs from the US government.
Current hustle around Section 301
Various economies, including India, have acknowledged the fact that tech giants do not pay their fair share of taxes. Given that there is no consensus at the OECD, countries are forced to adopt unilateral measures to curb this practice. Implementing Digital Service Tax (DST) is one of these measures.
However, as per the Federal Register Notice issued by the USTR, the US views DST as
- Discrimination against US companies;
- Retroactivity; and
- Possibly unreasonable tax policy.
The USTR has launched an investigation on such nations, including India, and has called for public comments on the same. However, considering that the world has been struck hard by the deadly pandemic, the USTR has not yet scheduled for any hearing whereby the concerned countries would build their case.
India has been undeterred by the investigation launched by the US right from the inception. It has believed that digital taxation has become a necessity not just for developing countries but also for developed nations. In the upcoming years, it expects new economies to join the league.
The international trade policies encompass two types of obligations under the General Agreement in Trade Services (GATS), i.e., General obligation and Specific Commitments. In a nutshell, national treatment is one of the three specific commitments. It refers to a commitment to treat one’s nationals and foreigners equally. A country only has to apply this principle when it has made a specific commitment. In response to the investigation, the center has made it clear that India has not taken any separate commitment in the service sector at WTO, and thus, it is not required to give a national treatment in that sector.
Although the US has been insisting that the investigation intends to provide fairground for everyone, the nitty-gritty of the matter is that the US is concerned about the adverse impact on its tech giants that includes Google, Amazon, Netflix, Facebook, etc. It would be interesting to see what measures the concerned nations would take to make such tech giants pay their share of taxes.
At the core of WTO and international trade, there is multilateralism. The ethos of multilateralism, even if far from perfect in practice, is about cooperation. Such unilateral actions not only distort the trade peace but could also have major consequences on multilateralism. Economics professor John McMillan had characterized multilateralism this way: ‘If you help me, I’ll help you.’ However, under Section 301, it is ‘Unless you help me, I’ll hurt you.’