Could Donald Trump force US firms out of China? Pretty much
To hear President Donald Trump, trade talks with China may have a new breath of life. At the G-7 meeting in France, Trump said, "We’ll see what happens, but I think we’re going to make a deal."
Trump has said before that a deal was imminent, only to see negotiations unravel, but this comment comes after he hinted he would ratchet up the U.S.-China trade war.
On the eve of the G-7 meeting, Trump warned Aug. 23 via Twitter, "Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA."
And for those who doubted he could do that, he asserted, "try looking at the Emergency Economic Powers Act of 1977. Case closed!"
International trade legal experts broadly agree with Trump. If he wanted to force American companies to cut their China ties, he could make it hard for them to stay, and even harder to invest more.
Trump’s tweet about ordering American firms out of China sent the stock market reeling, with the Dow Jones Industrials down over 600 points. Days later, White House National Economic Council director Larry Kudlow offered calming words. Trump, he said, was only asking companies to rethink China.
"There's no immediate action here," Kudlow said on Meet the Press Aug. 25. "This is nothing new. Maybe the way it was phrased was a little tougher than usual, but (it was) come home to America. This is the best place to work and live and earn and invest."
At the same time, Kudlow said "ultimately," Trump does have the authority.
A potent legal mandate
The International Emergency Economic Powers Act of 1977 gives a president sweeping powers to control economic transactions with any nation. That includes the movement of goods and money. To trigger it, Trump would need to declare a national emergency.
"He’s been laying the groundwork for the case against China for 18 months," professor of international trade at University of Kansas Law School and advisor to the international law firm Dentons Raj Bhala said. "Starting with the U.S. Trade Representative report in March 2018, the White House has laid out like a legal brief a very clear, well-footnoted case against China."
That case charges China with the forced transfer of technology from American firms to China, and giving state-owned businesses an unbeatable edge over potential American competitors who want to sell inside China.
That could qualify under the law. It defines threats broadly, as any external threat to "the national security, foreign policy, or economy of the United States."
The Congressional Research Service, the nonpartisan policy arm of Congress, says that since 1977, presidents had declared national emergencies under the act 54 times against countries including Iran, Myanmar, Russia and more. In 1979, President Jimmy Carter froze the assets of the Iranian government, and then expanded that to block the transfer of all goods, money, or credit destined for Iran.
That second power is key.
"In theory, the President could block all financial and business transactions between those subject to U.S. jurisdiction — U.S. citizens, U.S. residents, and any company operating in the United States — and China," said Hofstra University law professor Julian Ku. "This would not ‘order’ U.S. companies to leave China, but it would render those investments in China much less valuable economically or completely value-less, which would force U.S. companies to leave China."
Going forward, a full ban could bar any new investments in China.
Trump could also ban American firms from selling to the federal government.
"There is precedent for restricting procurement from foreign parties, and I suppose in this case, the items to be procured would be Chinese, even though the company making them was American," said William Reinsch at the Center for Strategic and International Studies in Washington. "This would not be a huge stretch."
If Trump went down this path, Congress could overrule him by passing a resolution to undo his declaration of a national emergency. It would need to pass in both houses, and since it would face a presidential veto, both houses would need to muster a two-thirds majority to prevail.
Congress has never done that.
Alternatively, American companies could sue.
"Anything he does will be litigated, and if he tries to order U.S. companies to abandon their Chinese investments, I imagine they could easily get injunctions on the grounds of irreparable harm," said Reinsch.
University of Arizona law professor David Gantz echoes that point.
"If he forced a sale of a factory in China at a fire sale price, there’s a colorable taking case under the 5th Amendment," Gantz said. "It’s never been successfully done, but there could be challenges there."
Gantz cautioned that courts tend to defer to presidential authority on this, and appeals could take years.
Bhala said China could appeal to the World Trade Organization on the grounds that without an actual war, this would violate the terms of Most Favored Nation agreements. But Bhala gives that approach long odds.
"The United States would never relinquish sovereignty to allow the WTO to decide matters of the IEEPA," he said.
On top of that, Washington has blocked fresh appointments to the key WTO appellate body. Today, instead of its normal seven members, it has three. And the terms of two of those expire at the end of the year.
"The WTO appellate body is dead as of Dec. 19," said Bhala. "You need a minimum of three judges. Ironically, the only one left is Chinese."