Trade and Security

What Comes After Tariffs: An IEEPA Primer

By Stephanie Zable
Thursday, July 19, 2018, 3:12 PM

The Trump administration released its latest escalation in the budding trade war with China on July 10: a 195-page list of $200 billion worth of Chinese goods that may soon be subject to a 10 percent tariff. This would follow the tariffs on $34 billion worth of goods that went into effect July 6 and the additional $16 billion worth expected shortly, as well as China’s tit-for-tat retaliation. But tariffs are not the only tool available to the president: Several times in recent months, news reports have indicated that the president is considering invoking the International Emergency Economic Powers Act (IEEPA). The statute allows the president to take aggressive unilateral action against Chinese economic activity in the U.S. To understand why the act so appeals to President Trump, one first has to understand what IEEPA is, how past presidents have used it, and why its potential invocation in a new context is likely explosive enough that Trump decided against invoking it - for now.

Administration Threats

The Washington Post reported June 29 that President Trump was considering an executive order authorizing the commerce secretary to block any transactions between U.S. telecommunications companies and “particular countries, products, or services that present an unacceptable risk to national security.” Although the proposed language did not specifically mention China, the targets are the Chinese telecommunications companies Huawei and ZTE, particularly the former, which is the leading Chinese player in the race to dominate 5G internet. Many in the tech and national security spheres believe that 5G will dominate the future and that dominating the development of 5G networks before China does is crucial to maintaining the U.S.’s technological edge. The administration has demonstrated its concern with the 5G race: In March the president blocked a merger between Qualcomm, the only U.S. company that is a significant 5G competitor, and Singaporean Broadcom, after the Committee on Foreign Investment in the U.S. (CFIUS) warned that the merger would harm national security. The administration has even reportedly considered nationalizing the 5G network to safeguard its development. While less extreme than nationalization, the proposed executive order is still a significant expansion of the president’s involvement in and power over the U.S. telecommunications industry.

Statutory authority for such an  executive order lies in the International Emergency Economic Powers Act. The White House invoked the specter of the statute in late June, when Trump came close to announcing that he would use IEEPA authority to “block firms with at least 25% Chinese ownership from acquiring ‘industrially significant technology’” from the United States. After a backlash, the president announced a few days later that he would instead support the Foreign Investment Risk Review Modernization Act (FIRRMA), separate versions of which have passed the House and been folded into the Senate’s National Defense Authorization Act. That act would expand CFIUS’s authority to restrict investment into the U.S. on national security grounds, which would allow heightened scrutiny of Chinese investment in critical U.S. technologies and help counter the “Made in China 2025” plan.

Notably, the president’s statement included a warning qualifying his retreat:

Should Congress fail to pass strong FIRRMA legislation that better protects the crown jewels of American technology and intellectual property from transfers and acquisitions that threaten our national security—and future economic prosperity—I will direct my Administration to deploy new tools, developed under existing authorities, that will do so globally.

Several presidents, including Trump, have used the authority granted by IEEPA to impose sanctions on countries such as Russia and Iran and to operate the U.S. export control system. But the Trump administration has repeatedly discussed expanding the use of IEEPA to a broad range of Chinese economic activity. Using the law to impose restrictions on China would be an unprecedented expansion of the president’s power over the U.S. economy.

What Is IEEPA?

The International Emergency Economic Powers Act was passed in 1977 to restrict the president’s powers to declare an indefinite emergency during peacetime. The law permits a president to “deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States,” if he first declares a national emergency under the National Emergencies Act (NEA).

The law allows the president to:

(A) investigate, regulate, or prohibit—

       (i)  any transactions in foreign exchange,

       (ii)  transfers of credit or payments between, by, through, or to any banking institution, to the extent that such transfers or payments involve any interest of any foreign country or a national thereof,

       (iii)  the importing or exporting of currency or securities, by any person, or with respect to any property, subject to the jurisdiction of the United States;

(B)  investigate, block during the pendency of an investigation, regulate, direct and compel, nullify, void, prevent or prohibit, any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States[.]

It also authorizes the president to make regulations “as may be necessary for the exercise of the authorities granted.”

While the emergency is ongoing, the president is subject to certain procedural requirements, most importantly consulting with Congress “in every possible instance” and reporting to Congress at least once every six months, in addition to an initial report. Congress is empowered to end the emergency at any point through a concurrent resolution, though at least one court has declared this provision unconstitutional (and severable).

Unlike judgments of the Committee on Foreign Investment in the U.S., the president’s declarations under IEEPA are not specifically exempt from judicial review. The Eastern District of Louisiana has held, for example, that issuing an order under IEEPA does not render a decision by the Treasury Department’s Office of Foreign Assets Control non-reviewable. Thus, presidential actions could be susceptible to judicial challenge. However, courts have typically refused to limit the president’s IEEPA-granted authority and have repeatedly upheld the act. The Supreme Court ruled in 1981 that the authority granted under IEEPA was constitutional due to the president’s foreign affairs powers and, moreover, that the president could override judicial orders as they related to property transfers nullified under U.S.C. 1702(a)(1)(B). Six years later, the First Circuit held that whether Nicaragua posed a significant enough threat for the president to declare a national emergency was a nonjusticiable political question.

Past Use of IEEPA

Presidents have made ample use of IEEPA, particularly to impose sanctions for national security reasons. During the Iran hostage crisis, President Jimmy Carter used IEEPA to “block[] the removal or transfer of ‘all property and interests in property of the Government of Iran, its instrumentalities and controlled entities and the Central Bank of Iran which are or become subject to the jurisdiction of the United States.’”

IEEPA has also been used to prosecute actors for violating sanctions regimes. Marc Rich—who would later, controversially, be pardoned by President Bill Clinton—was convicted in 1983 and sentenced to prison for violating IEEPA by selling oil to Iran. More recently, the Chinese company ZTE pleaded guilty to violating IEEPA by shipping U.S. products to Iran. ZTE paid a $1.19 billion fine and agreed to stop selling to Iran. The Commerce Department announced April 16 that it would bar U.S. companies from selling to ZTE for seven years because ZTE had failed to implement the settlement fully (this is an independent Commerce Department action to enforce a settlement, not an act under IEEPA). ZTE would have had to shut down without access to U.S. semiconductors, but President Trump agreed to a reprieve, saving the company and undermining the Commerce Department. (ZTE is not out of the woods yet, however: The Senate has passed language to revoke the deal, creating friction between Congress and the White House.)

When Congress allowed the Export Administration Act to lapse, President Ronald Reagan used IEEPA authority to extend it via executive order by declaring that the act’s expiration constituted a national emergency. After Congress again refused to renew the law in 1994, President Clinton did the same. Every president since has used IEEPA to continue export controls, and in 2008 the U.S. District Court in the Northern District of Illinois ruled that this did not contravene congressional intent because Congress had never amended IEEPA to prevent this use. However, the House-passed version of FIRRMA would codify U.S. export controls, eliminating the need for the president to use IEEPA authority to continue them.

What IEEPA Would Allow

IEEPA’s authority is broad. As the Supreme Court noted in the 1981 Dames & Moore case, “[t]he language of IEEPA is sweeping and unqualified.” And the authority granted by IEEPA does not require congressional approval, nor does it necessarily involve the time- and resource-intensive CFIUS review process. It simply requires that the president officially declare a “national emergency” under the NEA, which would be reasonably straightforward on the basis of the U.S. trade representative’s Section 301 report on Chinese practices related to forced technology transfer and intellectual property theft as well as the National Security Strategy’s description of China as a “strategic competitor.”

For President Trump, the primary advantage of IEEPA over CFIUS process is that IEEPA permits much broader action, including blanket bans on certain sectors or types of investment. As noted above, reports indicate that Trump has considered: a ban on any investment into “industrially significant” U.S. technologies from companies at least 25 percent-owned by Chinese investors; enhanced export controls on technology headed to China; and authority for the secretary of commerce to block any transactions involving U.S. telecommunications. Alternatively, he could presumptively ban all Chinese investors from the U.S. semiconductor or 5G industries, or from any industry that in China is officially or unofficially off-limits to foreign investors.

Broad investment bans are likely to strike China hard: As part of its “Made in China 2025” plan, the Chinese government has encouraged Chinese companies to invest overseas in specific sectors, including “overseas high-tech and advanced manufacturing companies.” China’s goal is to ultimately develop these technologies domestically, but as the reaction to ZTE’s punishment demonstrated, China is not there yet.

IEEPA’s breadth permits significantly more, if the president wants to be aggressive. He could impose sanctions on Chinese companies that are accused of profiting from intellectual property theft. He could prohibit all, or specific, U.S. companies from exporting to China. He could create a separate review process for transactions involving Chinese companies, under whatever rules and guidelines he chooses. He could prohibit American artificial intelligence companies from working with Chinese labs if American technology might be exposed to the Chinese government - or even if it wouldn’t. Theoretically, he could even prevent Chinese owners from exercising their rights with regard to their U.S. properties (though this would likely face constitutional challenges).

Downsides of IEEPA Use

So why did Trump, at least temporarily, decide against using IEEPA authority? Three primary factors may have played a role. First, the Committee on Foreign Investment in the U.S. already exists as an administrable, effective structure. Significant administrative hurdles would have to be overcome to create new rules through IEEPA. Second, FIRRMA is fairly certain to become law: It passed the House 400-2, and the Senate unanimously reported it out of committee. And the Dow Jones industrial average dropped more than 400 points the Monday after reports emerged that the president was considering using IEEPA. Treasury Secretary Steven Mnuchin may have used that reaction to convince the president that a more measured approach would cause less disruption.

More importantly, broad IEEPA use is likely to face legal challenges. The American Institute for International Steel filed its lawsuit June 27 challenging the Trump administration’s steel tariffs enacted under Section 232 of the Trade Expansion Act of 1962. (See Todd Tucker’s commentary on Lawfare for more on the industry challenges to the tariffs.) The institute argues that Section 232 is an unconstitutional delegation of Congress’s powers because the conditions under which the president can invoke national security are practically limitless, allowing him to impose tariffs under essentially any conditions and with no judicial review. The Supreme Court has not accepted a nondelegation argument since 1935, and it recently reemphasized the extensive deference it will afford the president when he invokes national security. But in May the court granted cert in Gundy v. U.S. to consider whether the delegation of Congress’s authority to U.S. attorneys was proper.

The steel alliance’s reasoning could similarly apply to IEEPA: It allows the president to take any action after declaring a national emergency. The National Emergencies Act is theoretically limited, but Congress has consistently failed to take the steps required to implement those limits, making the power practically unbounded (as Catherine Padhi noted in Lawfare, Congress has not once held the biannual consideration of declared emergencies required under the NEA). Lower courts have rejected this argument specifically as it pertains to IEEPA (for example, U.S. v. Amirnazmi in 2011 and Beacon Products. Corp. v. Reagan in 1987), and as noted above they have repeatedly ruled that IEEPA is constitutional. But Gundy could indicate a new openness to challenges invoking the constitutional separation of powers, particularly if the administration expands IEEPA beyond its traditional uses.

Implications

The president’s step back from IEEPA gave U.S.-China trade tensions a respite, though that was quickly shattered by the tariffs. Members of the administration, as well as outsiders, have been working to defuse the situation—for example, Mnuchin made a point of noting that the investment restrictions would apply to all countries, not just to China. But Mnuchin has also admitted that talks have broken down, as per the assertion by White House economic adviser and China hawk Peter Navarro’s that “talk is cheap.” So the softening suggested by Trump’s pullback from IEEPA appears to be temporary—an aberration. And the proposed telecommunications order would further rev up tensions. China has also suggested that it would use non-tariff barriers to respond to Trump’s tariffs, which could induce the president to provide a non-tariff answer.

IEEPA is an incredibly powerful tool that presidents have made considerable use of in the national security sphere. Since the Trump administration has defined strategic competition as a national security concern, it is logical that it would seek to use IEEPA’s broad authority to respond to allegations of anticompetitive Chinese behavior. Such an aggressive step would cause a seismic disruption to markets and to the U.S. relationship with China. For now, external forces seem to have persuaded the president to rely on existing and calibrated measures. But there is no guarantee that this will hold. And if the president decides to use his IEEPA authority, little would stand in his way. The United States exists in a near-permanent state of national emergency, and in that context IEEPA permits the president to take dramatic action with minimal oversight by Congress or the courts.