Last week the Federal Circuit heard oral argument in HMTX Industries LLC v. United States, a case we have been tracking because it attracted four amicus briefs. In this case, HMTX appeals a judgment by the Court of International Trade, which upheld the U.S. Trade Representative’s tariffs on Chinese goods. HMTX alleged USTR’s tariffs “on hundreds of billions of dollars of imported Chinese goods are ultra vires and procedurally infirm.” This is our argument recap.
Pratik Shah argued for HMTX. He began by asserting that the substantive dispute of the case turned on whether the term “modification” in Section 307 of the Trade Act gave “USTR a blank check to raise tariffs by virtually any amount for virtually any reason.” He maintained the term “modification” “does not permit transforming the limited $50 billion tariff action into a $300 billion” action. He pointed to Federal Circuit precedent he said interpreted “modify” to “connote[] a moderate, minor, or incremental change” rather than “massive, radical escalations in tariffs” from, for example, “$50 billion up to $500 billion.
One judge suggested whether an expansion in tariffs is “moderate or not” seemingly “lies largely in the discretion of USTR.” If USTR had completed an “investigation and determined in the first instance that $300 billion was the right amount,” the judge predicted HMTX “wouldn’t be challenging that.” Shah agreed, but asserted that USTR “would have had to show . . . in the course of the investigation” that $300 billion was the right amount “based upon the investigated practices.” USTR could not, Shah argued, “go through it’s panoply of procedures” to justify the original action, then “turn to the modification provision” to increase a $50 billion tariff action to $300 billion.
The judge questioned HMTX’s interpretation of “modify,” noting that Congress may have “wanted to encourage the president and [USTR] to have . . . more flexibility” in dealing with trade. Rather than requiring USTR “to start all over again to address the same problem,” the judge suggested, USTR engaged in a “possible way of doing negotiations,” even they were not under “normal diplomatic” procedures. Moreover, the judge highlighted a justiciability problem: “who is to decide what is a modification and what is such a dramatic expansion that it is not a modification?”
While Shah claimed “the court has to decide,” another judge suggested he move to his “textual argument” related to § 307(a)(1)(B). In response, Shah explained that subsection B “authorizes a tariff increase only when the burden to the U.S. economy” arises from the investigated practices, not “subsequent action.” One judge suggested that “[a]nother plausible reading” of Subsection B permits a tariff increase in reference to “the overall problem that China is stealing our [intellectual property].”
Emma E. Bond argued for USTR. She explained that USTR’s “first action” aimed to predict a tariff schedule sufficient “to obtain elimination of [investigated] practices.” But, she argued, because China “doubled down and imposed a $50 billion defensive measure,” USTR’s incorrect “predictive judgment” made the tariff “no longer appropriate,” inviting its second action.
One judge asked “what exactly increased” between the initial tariff action and USTR’s subsequent action. Bond highlighted “the increase on the burden of U.S. commerce,” which arose out of China’s investigated and “ongoing” practices. When the judge suggested that “ongoing . . . is not an increase,” Bond asserted that China’s retaliatory tariff “was part and parcel” to the acts “that were investigated.” In other words, she explained, “[n]ow not only are U.S. companies reckoning with [unfair] technology transfer[s],” but “they’re also reckoning with . . . higher tariffs on their exports to China.”
The judge critiqued the government’s argument, noting it failed to “specifically tie an increase in burden” on the U.S. economy “regarding intellectual property” rather than the economy generally. Bond addressed this critique in two parts. First, she explained, “by defending the practices through retaliatory measures,” the retaliatory measures “are inherently part and parcel” of the practices. Second, she continued, the investigated practices were “broad”: “technology transfer was achieved through a number of ways,” including “threat of retaliation.”
Another judge returned to the question of justiciability, asking whether a court could hold that an “increase is so dramatic that it is no longer a modification” but, instead, “is a completely new action under the guise of a modification.” In response, Bond focused on the relevancy of deferential review, “particularly in [the] area of foreign affairs.” She also contended that the term “modification” “has no upward limitation,” but instead “is open-ended in both directions.”
In rebuttal, Shah suggested “the government, neither in [its] brief nor [at oral] argument . . . dispute[d] that a seven-fold increase in tariffs is not a minor or incremental change.” Next, he argued, China’s retaliatory tariffs were not “part and parcel” of the underlying problem. In summary, he continued, because USTR’s action must be based on the specific “investigated practices,” its action belies “the plain text” of subsection B.
We will continue monitoring this case and report on developments.