Trade Policy Under a Second Trump Administration and Implications for Business

Trade Policy Under a Second Trump Administration and Implications for Business

November 25, 2024, Covington Alert

The inauguration of President Trump on January 20 is expected to bring important changes to U.S. trade policy that are likely to affect companies that supply international customers, or are reliant on global supply chains. As discussed in our prior client alert, international trade is expected to be a key focus of President Trump, who has repeatedly expressed a preference for using tariffs as a policy tool to create perceived leverage for dealmaking with international partners on both economic and non-economic issues. Recent announcements by the Trump transition team regarding cabinet and staff appointments reinforce the view that trade policy under a second Trump administration could involve significant unilateral U.S. action, including the imposition of substantial new tariffs and a hawkish stance toward China. These new tariffs could be implemented swiftly after Trump takes office, or could alternatively be subject to more extensive investigative and reporting procedures, depending on the legal authority invoked. New tariff measures, as well as other trade actions Trump has proposed, could lead to retaliatory responses by U.S. trading partners, including key U.S. allies. This alert explores how trade policy may be implemented by a second Trump administration, and considers how companies may prepare for and mitigate the risks associated with these developments.

Cabinet Nominations and Other Economic Appointees

In recent weeks, Trump has announced several cabinet and staff appointments for his second administration, including individuals responsible for implementing trade policy. Key among them is Howard Lutnick, chairman and CEO of a Wall Street investment firm and co-chair of Trump's transition team, whom Trump has selected to be Secretary of Commerce. Echoing Trump's own views, Lutnick has been a strong advocate for using tariffs as an industrial policy tool and bargaining chip to rebalance U.S. trade, though he has suggested tariff measures under a second Trump administration may be more "targeted" than the universal 10 to 20 percent tariffs proposed by Trump during his campaign. In announcing Lutnick's forthcoming nomination, Trump noted Lutnick would lead the administration's "Tariff and Trade agenda," and that he would have direct responsibility over the Office of the United States Trade Representative ("USTR"). As USTR is a separate agency established by Congress within the Executive Office of the President to lead on trade issues, it is uncertain if the announcement was referring to informal oversight over USTR or a formal restructuring of the agency. Should Trump seek to consolidate USTR within or under the Commerce Department, he may face opposition from Congress, whose approval would be required for such a reorganization.

More recently, Trump also named hedge fund manager Scott Bessent to lead the Treasury Department, another agency that will help implement Trump's trade policy. Voicing his support for Trump's tariff plans, Bessent has emphasized that tariffs play a key role in protecting strategically important U.S. industries and are a critical negotiating tool for achieving U.S. foreign policy objectives. Stressing his view that the size and market power of the United States grant it the ability to dictate terms of trade with international partners, Bessent has argued tariffs are a potential source of "significant revenue" for the United States, while also suggesting that any new tariffs should be "layered in gradually."

Beyond Commerce and Treasury, Trump has announced a number of other appointments that suggest a more aggressive U.S. policy stance towards China, including selecting Florida Representative Mike Waltz to serve as National Security Advisor, Senator Marco Rubio for Secretary of State, and New York Representative Elise Stefanik for U.S. Ambassador to the United Nations. Rubio in particular has championed a number of China-focused initiatives, for example by serving as a principal sponsor of the Uyghur Forced Labor Prevention Act ("UFLPA"), advocating for more stringent export controls on China, proposing measures to ensure Chinese content does not benefit from U.S. trade agreements or the de minimis exemption for customs duties, and recommending steeper tariffs on certain Chinese goods. Stefanik has co-sponsored legislation to increase prosecution of trade-related crimes committed by Chinese persons, while Waltz has sponsored bills to prohibit federal retirement investing in Chinese securities.

Trump has not yet announced his selection for USTR. It also remains unconfirmed whether Bob Lighthizer-USTR in the first Trump administration and economic advisor to the most recent Trump campaign-will return to government in a formal capacity in a second Trump administration.

Statutory Authority for Implementation of New Tariffs

As described in our prior alert, Trump indicated during his campaign that he would use tariffs extensively to pursue U.S. policy goals and to address U.S. trade imbalances, proposing implementation of a universal minimum tariff rate of 10 to 20 percent on all U.S. imports and a separate tariff of 60 percent on imports from China. Trump also suggested he could impose additional tariffs in certain circumstances, including against imports produced by companies that move manufacturing out of the United States, and also against Mexican products should Mexico fail to stem the flow of migrants across its border with the United States. Trump has also floated the possibility of placing even higher tariffs on Chinese automobiles made in Mexico, as well as tariffs on imported electric vehicles, regardless of origin.

While Congress has primary constitutional authority to set tariffs, it has delegated significant authority to the President to modify existing tariffs. Whether Trump has sufficient authority under existing statutes to impose the tariffs he has proposed will depend, in large part, on the rationale used to justify such measures, and the timeline (and sequence) in which they are announced and implemented. While some statutory authorities grant wide discretion to the President to modify tariffs, other delegations of authority are more limited or subject to more burdensome procedural or reporting requirements. Whatever authority the President invokes, it is likely that imposition of any across-the-board tariffs by the second Trump administration will prompt legal challenges.

The International Emergency Economic Powers Act ("IEEPA")

Among those statutory authorities that could be used by the Trump administration to impose new tariffs, IEEPA confers the broadest discretionary authority to the President while imposing the fewest procedural hurdles. Under IEEPA, the President is authorized to regulate imports where he declares that a national emergency exists with respect to an "unusual and extraordinary threat . . to the national security, foreign policy, or economy of the United States." Once such a declaration is made, the President must "consult" with Congress before taking action, and transmit a report to Congress "immediately" upon taking such action. Neither procedural requirement would materially delay President Trump's ability to announce tariffs under IEEPA immediately upon taking office and impose such measures shortly thereafter. Tariffs imposed under IEEPA could notionally remain in place for an unlimited duration, and while Congress retains the ability to terminate a national emergency declared by a President, it has never successfully exercised this power (having never even attempted to do so until 2023). Republican control of Congress further renders such an outcome unlikely in the near future.

IEEPA itself has never been used to apply across-the-board tariffs of the type proposed by President Trump, though President Nixon relied on IEEPA's predecessor statute-the Trading With the Enemies Act ("TWEA")-to impose a 10 percent tariff on most U.S. imports in 1971 in response to a "balance of payments" emergency. Nixon's use of TWEA in this way was later upheld in court, and federal appellate courts have more recently granted substantial deference to presidents on foreign affairs, trade policy, and national security issues. The broad authority granted under IEEPA, coupled with the deference courts have shown the President, could make IEEPA an attractive option for the Trump administration to implement broad-based tariffs, particularly in ensuring that its actions will survive subsequent legal challenges.

Section 338 of the Tariff Act of 1930

Trump could also invoke Section 338 to impose new tariffs, up to 50 percent, for an unspecified duration. Like IEEPA, Section 338 would enable the President to act swiftly, as the statute contains relatively few procedural requirements. It requires only that the President make a finding that a foreign country has taken unreasonable or discriminatory actions that disadvantage U.S. commerce as a precondition for taking action under the statute. Where such unreasonable or discriminatory actions persist even after tariffs are imposed, the President may take further action to block imports. Despite the wide discretion afforded to the President under Section 338, the statute has largely gone unused, having been invoked only a few times in the years immediately following its enactment in 1930, and has never been subjected to legal challenge in court. The untested nature of the statute could make it a less attractive option for the Trump administration, and because the statute limits new tariffs to 50 percent, Section 338 would be ill-suited for imposing China-specific tariffs at the 60 percent rate Trump has proposed. Nevertheless, the swiftness with which tariffs could be announced and imposed under Section 338 is a relative advantage when compared to other statutory authorities with more burdensome procedural requirements.

Section 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962

Trump could also potentially impose broad-based tariffs using Section 301 and Section 232, both of which were previously used by the first Trump administration. Unlike IEEPA and Section 338, however, both Section 301 and Section 232 require the executive branch to carry out detailed investigations and reporting processes, prior to imposing (or even announcing) new tariffs. In the case of Section 301-which requires that USTR make a finding that a foreign country is violating or denying U.S. rights under a trade agreement or is engaged in unjustifiable conduct that burdens or restricts U.S. commerce-the administrative process would likely take several months, and possibly as long as 12 months or more. Section 301 tariffs must also be terminated after four years unless an extension is requested and is approved by USTR. Similarly, under Section 232-which requires the Department of Commerce to investigate and make a finding that imports threaten U.S. national security-the Trump administration would likely be unable to announce or impose tariffs until the investigation concluded, which could take approximately 6 to 12 months.

One option for avoiding the lengthy procedural requirements associated with new investigations under these statutes would be to modify existing tariffs imposed under Section 301 (such as those currently in place against China) or Section 232 (such as those in place against steel and aluminum). Modification of existing measures could be done with comparatively little notice, though subject to the general constraints of the existing measure (e.g., limited to China in the case of Section 301 tariffs, or limited to steel and aluminum products in the case of Section 232). As with IEEPA, federal appellate courts have been disinclined to constrain the President's authority under either Section 301 or Section 232, which could make these statutes a possible vehicle for implementing either China-specific measures or a universal tariff.

Section 122 of the Trade Act of 1974

Finally, the President is also empowered to impose tariffs of up to 15 percent under Section 122 to address balance-of-payment problems. Such tariffs may only remain in place for 150 days, unless extended by Congress. Similar to Section 338, the 15 percent tariff ceiling under Section 122 makes this statute an unlikely vehicle for higher China-specific tariffs, and the time-limited nature of Section 122 tariffs may also prompt the Trump administration to prefer to use less restrictive alternatives such as IEEPA or Section 338. Nevertheless, Section 122 could be utilized as a means to quickly impose universal tariffs on a temporary basis while more permanent (or procedurally burdensome) measures are considered.

Congress Unlikely to Constrain the Trump Administration on Trade

Given its constitutional authority over trade, Congress can be a potential obstacle for implementation of executive branch trade policy objectives. Under a second Trump administration, however, Congress is unlikely to act as such a restraint. During his first term, President Trump relied extensively on delegated executive authority to achieve his trade policy objectives, and will likely do so again during his second term. In certain instances, the Trump administration was forced to rely on Congress, for instance to implement his renegotiation of the North American Free Trade Agreement ("NAFTA"), which became the U.S.-Mexico-Canada Agreement ("USMCA"). Where Trump seeks to pursue trade actions that require congressional input-such as the negotiation of trade agreements with a market access component, creation of new authorities to impose reciprocal tariffs on foreign countries, or reauthorization of trade preference programs-he is unlikely to face serious congressional pushback, especially during its first two years given Republican control of both the House and the Senate. Moreover, while Trump's protectionist measures were often viewed as out of step with the traditional GOP approach to trade during his first term, those views have recently enjoyed broader support among the Republican Party, and even align with the views of a large cross-section of congressional Democrats. Congress is therefore unlikely to be a significant check on President Trump's power to implement his trade policies.

Potential International Responses to Trump's Trade Policies

Several U.S. trading partners have warned that they may implement retaliatory measures in response to any new tariffs imposed by a second Trump administration. China, the EU, and Mexico have all made statements to this effect, though none have publicly identified specific U.S. products that would be targeted as part of any retaliatory action. Other countries that may consider retaliatory measures include Canada, India, Russia, Japan, and the UK, all of which announced or implemented retaliatory tariffs against U.S. products in response to tariffs imposed by the first Trump administration. U.S. companies exporting to these countries, as well as to others that may face greater tariff risks under a second Trump administration (such as those with which a large bilateral U.S. trade deficit exists), should be aware of both the direct impact increased U.S. tariffs may have on their operations, as well as the potential implications of retaliatory responses. While the U.S. exports that may be subject to retaliation have not yet been identified, prior retaliatory measures implemented during the first Trump administration can provide insight into likely targets, and Covington can assist with assessing potential risks for your business.

China

In addition to his proposal for China-specific tariffs of 60 percent, Trump also suggested throughout his campaign that he could pursue other trade actions against China, including removal of China's Permanent Normal Trade Relations ("PNTR") status, which would require legislative action by Congress. While the idea of rescinding China's PNTR has found support in Congress-including in a December 2023 report by the House Select Committee on the Chinese Communist Party, a November 2024 report by the U.S.-China Economic and Security Review Commission, and legislation sponsored by Republican members of Congress-such proposals have thus far not advanced beyond initial stages. Trump has also proposed imposing tariffs not only on goods originating from China, but also on goods produced outside of China by Chinese-owned companies. While it's possible that Trump could implement certain ownership-based trade measures through existing statutory authorities such as IEEPA, a broader shift away from traditional country-of-origin rules toward an ownership focus would reflect a major change in U.S. customs law, and-depending on the approach-could require legislative action by Congress. To the extent Trump attempts to impose tariffs on Chinese-owned companies producing goods that qualify as originating in Mexico or Canada under the USMCA, the Agreement's rules of origin would likely also need to be changed.

Should President Trump implement China-specific tariffs or other measures, China would almost certainly retaliate, particularly given recent estimates that Trump's proposed China tariffs, if fully implemented, could shrink China's GDP by nearly 0.7 percent. China could craft retaliatory tariffs to target politically sensitive U.S. exports, potentially following an approach similar to that it deployed between 2018 and 2019 in responding to Section 232 and 301 tariffs imposed by the first Trump administration. During that time, China imposed escalating retaliatory tariffs on a range of U.S. exports to China, including agricultural products, autos and auto parts, medical equipment, chemicals, and textiles, among others. The United States and China eventually made progress in late 2019 toward conclusion of the "Phase One" trade deal, leading China to remove certain retaliatory tariffs, or liberally approve tariff exemptions, while leaving other tariffs in place. In an important change since 2018, China has lessened its dependence on certain U.S. products-particularly in the agricultural sector-such that China may be better positioned to impose retaliatory measures on such goods while avoiding negative economic repercussions domestically.

Europe

The EU and the UK are likely to be substantially impacted by the expected shift in U.S. trade policy under a second Trump administration, including universal or China-specific tariffs, and potential tariffs on electric vehicles. Recent estimates suggest that a 10 percent universal tariff could cost European economies as much as $150 billion, with Germany-and specifically its auto sector-particularly exposed. Moreover, the EU is facing a second Trump administration from a position of relative economic weakness and internal political turmoil (resulting from a shift to the right in both recent EU and domestic elections, which has created political challenges for coordinated EU action). This is particularly true to the extent that the relatively stronger U.S. economy may give the Trump administration more policy space to pursue aggressive and unconventional trade policy actions, at least in the immediate term. Following Brexit, the UK is uniquely exposed to any escalating trade tensions between the EU and the U.S., and to a large extent, the economic impact on the UK will depend on the EU's response to any U.S. tariffs. At a more strategic level, the UK may find itself forced to take sides with the EU, the United States, or even China, and the next four years may well determine whether the UK can continue to claim to enjoy a "special relationship" with the United States. While the UK has declined to speculate on what actions it may take in response to U.S. tariffs, the European Commission previously made public its work to develop a contingency plan for increased tariffs under a second Trump administration, also approaching other trade partners-such as Australia, Japan, and the Republic of Korea-to seek a coordinated response, as noted in our prior alert. More recently, however, the EU's response planning has slowed, as recently re-elected European Commission President Ursula von der Leyen seeks to finalize appointments to the new European Commission.

It appears likely that the EU's toolkit will contain many of the same actions it deployed between 2018 and 2020 in response to U.S. tariffs implemented under the first Trump administration. These include tit-for-tat retaliation on U.S. product categories (focusing on products with strong symbolic or commercial importance); pursuing legal action against the U.S. before the World Trade Organization ("WTO"); and the adoption of safeguard measures to protect against a potential wave of Chinese and other products diverted to the EU market following U.S. tariff increases. In all three of these actions, the EU is likely to seek to work with allies (e.g., the UK, Canada, Japan, Australia, and New Zealand) to maximize the impact of responses to the shift in U.S. trade policy and its ripple effects. The EU may also seek to negotiate smaller U.S. trade agreements (or informal "packages") in exchange for a truce on tariffs; and may pursue broader protective measures that are not U.S.-specific, including the use of subsidies and other industrial policies to develop strategic sectors in Europe.

It is unclear precisely what form transatlantic dialogue may take under a second Trump administration, or whether existing economic dialogues such as the Trade and Technology Council ("TTC") will survive. In this sense, the TTC may serve as a litmus test for the style and institutional continuity of the transatlantic economic relationship. The Trump administration may also seek to side-step the EU and instead engage directly with EU Member States. Such an approach would raise the stakes for the Commission, which must protect its exclusive competence over trade matters at a time of internal strain within the EU. Other EU initiatives may also impact U.S. economic relations, particularly as the EU seeks to implement several trade-adjacent programs, several of which have prompted concern or opposition in the U.S. Congress. These include the Carbon Border Adjustment Mechanism ("CBAM"), the EU Forced Labor Regulation ("EUFLR"), the Deforestation Regulation ("EUDR"), and the more general Corporate Sustainability Due Diligence Directive ("CSDDD"). In particular, the EU's CBAM-a carbon border adjustment program that will impose a levy on select EU imports of industrial goods beginning in 2026-is poised to receive growing attention. While the CBAM and other initiatives are viewed as important, standalone elements of the European Green Deal that address climate, environmental, human rights, and technology matters, it is possible that they could become part of an EU-U.S. "package" insofar as the United States seeks to modify these measures to the benefit of U.S. firms, or to reinforce components of these programs that focus on China-targeted enforcement.

Canada, Mexico, and the USMCA

Trump's new trade policy approach will also have significant ramifications for North American trade. As noted in our prior alert, the upcoming review of the USMCA in 2026 is set to be a crucial moment for U.S.-Mexico-Canada trade relations, with significant economic considerations at stake. The review process will begin in earnest in 2025, and the Trump administration will be required under U.S. law to carry out various consultation, public notice, and comment procedures relating to the review by next October. Trump has suggested he views the review as an opportunity to seek substantial changes across the agreement, including with respect to automotive trade in particular, though the United States is also expected to include agricultural, labor, and other issues among its priorities for the review. Growing U.S. trade deficits with USMCA partners since the agreement came into effect in 2020 may also be a central focus. While Canadian and Mexican officials may seek to frame the review as a more discrete exercise, they will also come to the table with their own demands, which are expected to include labor-related issues and enforcement mechanisms, energy and environmental matters, and agricultural disputes, among others.

The 2026 USMCA review is likely to compound, and be complicated by, the potential for rising North American trade tensions resulting from Trump's potential new tariff measures. In addition to the threat of an across-the-board tariff of 10 to 20 percent, Trump has also threatened even higher tariffs on Mexico if it fails to stop the flow of migrants across its border with the United States. Specifically, just days before the U.S. election, Trump indicated he would "immediately" impose a tariff of 25 percent on all Mexican exports to the United States, which could be escalated to 50 or 75 percent in the event that Mexico fails to cooperate. The threat resembled a similar one Trump made in 2019 indicating he would use IEEPA to impose a 5 percent tariff on Mexican products, in order to prompt Mexican action on immigration. Trump has also threatened to impose tariffs of 200 percent or higher on imports of Mexican-origin cars produced by Chinese firms. In response, Mexican officials have emphasized they are working diligently to address concerns regarding immigration, drug trafficking, and Chinese investment in Mexico (while also stressing that Mexico accounts for a much smaller percentage of total Chinese investment in North America than either Canada or the United States). At the same time, Mexican officials have stated they could impose retaliatory measures against U.S. exports in response to U.S. tariffs, if necessary.

Canada, for its part, has responded to the possibility of new U.S. tariffs by downplaying the threat and emphasizing that prior U.S.-Canadian cooperation enabled the countries to conclude bilateral agreements under the first Trump administration to address specific trade issues. More recently, Canadian Prime Minister Justin Trudeau stated that, while his preference would be to extend the USMCA in the 2026 review, Canada would also be open to seeking a separate trade deal with the United States that would exclude Mexico (a proposal backed by some provincial leaders in Canada as well). Asserting that China's use of Mexico as a "back door" to invest in North America has raised concerns about Mexico's commitment to shared North American economic success, Trudeau emphasized that Canada must prioritize its "deepest economic partnership" by working directly with the United States to conclude a new bilateral trade agreement to replace the USMCA, if necessary. While Mexican President Claudia Sheinbaum has downplayed Trudeau's statements, Canada's stated willingness to keep "all doors open" in moving forward with the USMCA review may inject further uncertainty into the USMCA review process.

Conclusion

In summary, the second Trump administration is expected to bring important changes to U.S. trade policy that are likely to affect companies reliant on international supply chains or customers. Covington's diverse trade policy team in Washington, which includes former senior government officials, is uniquely positioned to provide thoughtful strategic advice to clients seeking to monitor, prepare for, and react to these evolving trade developments. This includes evaluating the impact that potential tariffs or other trade measures may have on companies and their supply chains; assessing exposure to new trade measures as well as opportunities for duty savings; and advising on a range of U.S. trade compliance matters to ensure companies are in the best position to pursue tariff mitigation, where necessary. Covington can also assist companies in developing and implementing strategies for confronting potential supply chain disruptions, including exploring options for engaging directly with U.S. and foreign government officials and building alliances with trade associations or others in implementing such advocacy efforts.

In addition, Covington can also assist with assessing exposure to potential foreign retaliatory trade actions, and evaluating options for confronting such measures. Covington's strong EU trade policy team-including a former EU Trade Commissioner and senior trade, economic and diplomatic officials-can help companies navigate the EU's response to new U.S. trade measures, identifying the risks this raises, and engaging with the EU policy process to mitigate them and create opportunities. Similarly, our China and Latin American experts have decades of experience on trade matters, and are uniquely capable of providing advice to companies regarding strategies for confronting possible changes to U.S. tariffs or retaliatory actions and engaging with foreign government officials.

If you have any questions concerning the material discussed in this client alert, please contact members of our International Trade practice.

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