The Commerce Department on May 4, 2020, announced a new investigation under Section 232 of the Trade Expansion Act of 1962, examining whether “laminations for stacked cores for incorporation into transformers, stacked and wound cores for incorporation into transformers, electrical transformers, and transformer regulators are being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security.”

This investigation should be of interest to electric utilities and other electricity suppliers, as well as other firms whose services require the use of electrical transformers.

Section 232 and its process

Section 232 is a powerful tool. As described in a recent Covington Alert, Section 232 gives the President broad discretion “to adjust the imports of the article and its derivatives so that the such imports will not threaten to impair the national security.” “National security” is described expansively, and closely linked to economic security.

Because Section 232 includes few constraints on the executive, it remains controversial. It survived a recent constitutional challenge, as we explained in this article. The U.S. Court of Appeals for the Federal Circuit upheld the constitutionality of the law, but the plaintiff in that case, the American Association for International Steel, has petitioned the Supreme Court for review. A response to the certiorari petition is due on May 26, 2020.

As a process matter, the Commerce Department’s announcement marks the start of a 270-day investigation conducted by the Department’s Bureau of Industry and Security (“BIS”). Regulations require BIS to consider the following factors:

  • Quantity of the article in question;
  • Domestic production needed for projected national defense requirements;
  • Capacity of domestic industries to meet projected national defense requirements;
  • Existing and anticipated availabilities of human resources, products, raw materials, production equipment and facilities, and other supplies and services essential to the national defense;
  • Growth requirements of domestic industries to meet national defense requirements and the supplies and services including the investment, exploration and development necessary to assure such growth;
  • Impacts of foreign competition on the economic welfare of any domestic industry essential to U.S. national security; and
  • Displacement of any domestic products causing substantial unemployment, decrease in the revenues of government, loss of investment or specialized skills and productive capacity, or other serious effects.

BIS will also consider “other relevant factors that are causing or will cause a weakening of [the] national economy.”

Regulations require the Commerce Department to notify the Department of Defense of an investigation, but not necessarily to “coordinate” with the Secretary of Defense. Indeed, the two departments can reach opposing conclusions about appropriate policy responses, as they did during the Section 232 steel investigation.

The regulations also require BIS to provide an opportunity for industry to submit comments, and they allow BIS to convene a public hearing. Although the regulations also permit Commerce to “vary or dispense with any or all of the procedures” in certain emergency situations, we do not expect Commerce to invoke this exception. The announcement explicitly states that Commerce “will provide the opportunity for public comment.”

The Commerce Department is allowed to take up to 270 days for the investigation, but it is not required to do so. With the presidential election less than 190 days away, the Administration may have strong political incentives to accelerate this investigation. In 2018, a bipartisan group of “steel-state Senators” sent a letter to the President asking him to include precisely these materials in the package of steel-related trade remedies. The states they represent – Ohio and Pennsylvania – are key electoral battlegrounds, and the President may view this investigation as an opportunity to deliver economic benefits to voters in those states.