An introduction to Section 301
By Lucile Flandinette, Nathaniel Nurse and Allison Christians
Those who have been following the spread of digital service taxes around the world have no doubt noticed that the United States has initiated “Section 301” investigations of a number of such measures and concluded that some are discriminatory or unreasonable and burden or restrict U.S. commerce. In this post, we explain the conceptual and technical aspects of the § 301 investigations and their relation to international processes that would normally be applicable to cross-border trade disputes of this kind.
What are § 301 investigations?
Section 301 refers to a specific provision of the Trade Act of 1974 , now codified in Title 19 of the U.S. Code. The Act granted the U.S. President the right to unilaterally suspend or withdraw trade agreement provisions or impose import restrictions on foreign goods and services under specified circumstances. At the time of its enactment, the President’s authority was restricted only by internal limitations within the Act as well as then-existing international obligations. Today, the authority to investigate and determine whether a foreign practice is objectionable, and if so, what retaliatory actions would be appropriate, rests with the United States Trade Representative (USTR) according to the terms set forth in 19 U.S.C. §2411(c)(1). The range of available retaliatory measures includes the imposition of duties or other import restrictions, the withdrawal or suspension of trade agreement concessions, or the entering into of “a binding agreement with the foreign government to either eliminate the conduct in question (or the burden to U.S. commerce) or compensate the United States with satisfactory trade benefits.”
After the WTO was established in 1994, the United States declared via a Statement of Administrative Action that it would use the WTO’s Dispute Settlement Understanding when it sought to use this §301 authority to investigate an issue that involve an alleged violation of a WTO agreement. However, the United States recently dismantled the Dispute Settlement Understanding by blocking appointments to its Appellate Body. Without a functioning Appellate Body, even if a WTO panel were to find a current trade violation, the other party to the dispute could block any retaliatory action by “appealing into the void.”
Using the internal §301 process without the Dispute Settlement Body, the United States seeks to threaten tariffs that it characterizes as “retaliatory” in relation to the U.S.’ own internal investigation of the measure, without any oversight or review. This approach not only avoids the WTO procedures for settling disputes but it also confines the investigation to the U.S. domestic legal framework, which speaks not of WTO violations but of the more general concept of “unreasonable or discriminatory” actions that “burden or restrict U.S. commerce,” with all the terms as defined in U.S. domestic law.
VIEW THE USTR INVESTIGATION TIMELINE INFOGRAPHIC
The §301 Investigation Process
In accordance with § 301, DSTs are discriminatory if they deny national treatment to U.S. services. Sections 301(a) and (b) establish the substantive criteria required for an affirmative determination that a foreign country has engaged in unfair trade practices. The procedure and process for making such a determination, from initiation of a complaint through to the implementation of trade sanctions, are identified in sections 301-305 of the Trade Act of 1974.
Section 301 (a)(1) Mandatory Action
Expresses the conditions where, following an
investigation, the USTR shall act to:
- enforce U.S. rights under a trade agreement that are being denied; or
- eliminate an act, policy or practice of a foreign country that
- 🗸 violates, or is inconsistent with, the provisions of, or otherwise denies benefits to the U.S. under, any trade agreement; or,
- 🗸 is unjustifiable and burdens or restricts U.S. commerce.
Section 301(b) Discretionary Action
Expresses the conditions where, following an investigation, the USTR shall act where it finds that:
- an act, policy, or practice of a foreign country is unreasonable or discriminatory and burdens or restricts United States commerce; and,
- action by the U.S. is appropriate.
The language of “mandatory” and “discretionary” refers to the scope of retaliatory authority assigned to the USTR, which varies according to the foreign practice that has fallen under its investigatory authority. After completing an investigation, concluding dispute settlement proceedings, and consulting with the foreign country, interested persons, governmental committees, and potentially the United States International Trade Commission, the USTR is required to make a “determination” as to whether the trade practices are unfair pursuant to section 301.
The first investigation: France’s DST
The United States initiated a §301 investigation into France’s DST in mid-July 2019 and released its findings in the form of a report by early December of the same year. The USTR determined that France’s DST falls under § 301(b) because it “discriminates against U.S. companies, is inconsistent with prevailing principles of tax policy and [is] unusually burdensome for affected U.S. companies.” Whether these characterizations in fact describe the relevant measures is a question of fact and law that has not been reviewed outside of the USTR itself.
Following the conclusion of the USTR investigation, the U.S. threatened to impose “retaliatory” tariffs of up to $2.4 billion on a range of French products including champagne, wine, cheese and handbags. In late January 2020, however, then-U.S. president Trump and French president Emmanuel Macron declared a “truce” and agreed to suspend their impending tariff war until the end of 2020 when a collective OECD solution on the taxation of the digital economy was expected to be finalized.
However, in June 2020, then-U.S. Treasury Secretary Mnuchin publicly announced that OECD discussions with European governments had reached an “impasse.” Mnuchin declared that the “United States remains opposed to digital services taxes and similar unilateral measures,” and warned that “if countries choose to collect or adopt such taxes, the United States will respond with appropriate commensurate measures” under § 301. Accordingly, on 10 July, 2020, Robert Lighthizer announced the USTR decision to impose an additional 25% tariff on French products with a “commercial value of $ 1.3 billion in response to the adoption of the French DST.”
France continues to have the right to bring a case to challenge the USTR’s decision despite the U.S. characterizing its own action as retaliatory. As in the WTO dispute between China and the U.S. in 2018 over an earlier § 301 investigation, a WTO panel might find that the tariffs imposed by the U.S. with respect to France’s DST violate WTO terms. Such a finding would be inconsequential, since the U.S. could forestall retaliation by appealing into the void of their own making. Despite this positional advantage, in early January 2021 the U.S. unilaterally decided to suspend its tariffs for the time being.
Second investigation: 10 Other Jurisdictions
The §301 investigation of France’s DST communicated a warning to other jurisdictions not to follow France’s lead, but even so a number of jurisdictions have subsequently announced similar measures. The USTR accordingly announced in mid-2020 that it would launch a second series of investigations in regards to the measures proposed or adopted by Austria, Brazil, Czech Republic, India, Indonesia, Spain, Turkey, the United Kingdom and the European Union. As in the investigation of the French DST, the USTR will determine whether the new DSTs are discriminatory, burdensome or restrictive to U.S. commerce. Last month, the USTR announced that the DSTs of Austria, India, Italy, Spain, Turkey and the United Kingdom are unreasonable or discriminatory and burden or restrict U.S. commerce and thus are actionable under § 301(b). The USTR investigations for the DSTs of Brazil, the Czech Republic, Indonesia and the European Union are still ongoing.
Meanwhile, other countries continue to revise their plans for adopting DSTs, presumably as they closely monitor the developments at the OECD. If the expected mid-2021 completion to its work on the taxation of the digitalized economy materializes, it is likely that many DSTs, and the related U.S. investigations, will fall away. But if a grand bargain remains elusive, it is likely that many countries will follow through on existing plans to initiate a DST and others will formulate new plans to do so. The likely response of the new U.S administration remains yet to be seen.
◄ Back to Digital Tax Log
Lucile Flandinette, Nathaniel Nurse and Allison Christians, CTF Digital Tax Log, Entry #5, 16 February 2021, at http://www.ctf.ca/CTFWEB/EN/Newsletters/Blogs_and_Reports/Digital_Services_Updates/Entries/Entry05.aspx
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