A proposed, cumulative, penalty on Chinese shipping in the U.S. might be unconstitutional, several submitters to the U.S. Trade Representative Office have said. For example, internationally-regarded shipping expert, John D McCown, wrote in his submission that “the courts may very well determine that the proposed actions if implemented are not even legal”.
If so, that would render any executive order subject to legal challenge and it could be struck out by a court
A lot of “ifs” as no-one can ever know the true legal status of a particular law until it has been tested and decided on by a judge. We’re going to run through a bit of the legal thinking here, but we’re not U.S. lawyers (or lawyers) and this should not be taken as legal advice. Anyone looking for legal advice ought to consult with an appropriately qualified U.S. lawyer who specialises in this area of law.
Constitutional bar
First up, the U.S. Constitution flat out prohibits any taxes or duties being laid on articles exported from any state in the U.S. “Articles exported” here means goods exported from any state in the U.S. to overseas (see U.S. Constitution, article 1, section 9, clause 5).
“So what?”, you might say, arguing that the penalty isn’t a tax, or a duty, and it’s not being put upon goods being exported. It’s a penalty being put on China-connected shipping calling in the U.S.
Well spotted, we will make a lawyer out of you yet.
The words of this particular clause of the U.S. Constitution have been interpreted by judges multiple times over the years and, as can be seen in a lot of law, the words in this context have a broader meaning than they might first appear.
Words, words, words
Trying to work around the language in the Constitution is a no-go. As pointed out by Erik M. Jensen, Coleman P. Burke Professor Emeritus of Law at Case Western Reserve University School of Law, in his article “Common Interpretation”, where he writes “Congress can’t circumvent the prohibition by taxing surrogates for exports; substance controls over form”.
So, firstly, what is an export? It’s the transportation of goods from the U.S. to foreign countries; exporting from the continental U.S. to overseas territories of the U.S. doesn’t count (see e.g. Dooley v United States).
Next, what’s an excise tax? It’s a requirement for a financial payment levied upon a “particular use or enjoyment of property or the shifting from one to another of any power or privilege incidental to the ownership or enjoyment of property” (see FERNANDEZ v. WIENER, Supreme Court 1945).
What is and is not a tax or a duty on exports? Well, it’s not just a levy imposed on the exported goods – as you may have thought from the wording of the Constitution. An excise duty or tax is actually any financial imposition that is so closely functionally connected to the goods, or are such a burden on the export of goods that it might as well be a tax on the exported goods.
Many excise taxes / duties have been struck down already
In United States v IBM (1996) the Supreme Court ruled that a tax on insurance premiums paid to foreign insurers for insuring exported goods was an export tax and therefore unconstitutional. In Thames & Mersey Marine v United States (1915) the Supreme Court held that a tax on insuring exports was unconstitutional. Taxes on foreign bills of lading (See Fairbank 1901) and also on charter parties for the carriage of goods to foreign ports have been held by the Supreme Court to be taxes or duties on exports, therefore unconstitutional, and therefore void (Hvoslef 1915; this case is particularly interesting as the Supreme Court said: “a tax on these charter parties was in substance a tax on the exportation; and a tax on the exportation is a tax on the exports”).
In the United States Shoe Corporation (1998), a Supreme Court case, a “Harbor Maintenance Tax” was levied on exporters, importers, and domestic shippers to pay 0.125 per cent of the value of any cargo through U.S. ports. It was imposed at the time of loading and unloading and collected for the purpose of raising funds to pay for harbor maintenance and development. The U.S. Government argued that the monetary imposition was a “user fee”. The Shoe Corp argued it was an export tax and objected on the grounds of a lack of constitutionality and ultimately won. The Supreme Court ruled user fees are valid but the Harbor Maintenance Tax wasn’t a user fee, it was a tax on exports, which was unconstitutional and therefore void.
Incidentally, you may have noticed that the broad overall principle of the Shoe Corp case isn’t a million miles away from what’s proposed in the current (as drafted) USTR proposal. In Shoe Corp, the Feds tried to impose a rule requiring the payment of money (which they called a “user fee”) on international trade and that payment also functionally fell upon exports. The purpose was to raise money to fund a broader public policy (in this case, dredging). In the USTR proposal, the Feds might try to impose a rule requiring the payment of money (which they are calling a “penalty”) on international trade and that payment also functionally falls on exports. The purpose would be to raise money to fund a broader public policy (in this case, changing world market dynamics and to fund domestic shipbuilding).
Anyway, you could argue that calling that financial imposition a “Harbor Maintenance Tax” in the Shoe Corp case was a dead giveaway that the financial imposition was, in fact, a tax and was not, in fact, a user fee. The Court’s thinking is particularly interesting if applied to the current USTR proposal.
In Shoe, the Supreme Court upheld an earlier decision (“Pace v Burgess 1875“) that for a financial imposition to be a “user fee” there must be a connection between the service provided by the Government and the compensation it receives from providing that service. The value of export cargo in Shoe did not correlate with the harbor services, facilities, or benefits usable by the exporter. Commenting on the case, Cornell Law School writes that: “The Court’s holding does not mean that exporters are exempt from any and all user fees designed to defray the cost of harbor development and maintenance. It does mean, however, that such a fee must fairly match the exporters’ use of port services and facilities”.
Applying it all to the USTR proposal
Alrighty, let’s put it all together and, note, this is the bit where it gets all speculative.
The USTR wants to put a huge fee on China-related ships / shipping for the purpose of changing the market dynamics of the world shipping fleet and to fund the revitalisation of the U.S. shipbuilding industry.
It could be argued that the USTR’s proposal for a financial imposition is so functionally connected to the export of goods (because ships, just like various marine insurance policies of different kinds are functionally necessary to export goods) and would be such a burden on the export of goods that it might as well be a tax on exported goods, given that the penalty will be in substance a tax on the exportation process which is equivalent to a tax on the exports.
Even though the penalty would in theory be used to fund U.S. shipbuilding, that purpose is so far removed from any facilities or benefits available to the exporter, and is so far divorced from being any kind of recompense to the U.S. Government for the services it has provided, that it could be argued that the penalty is not a user fee.
It is arguable that the USTR proposal to penalise China-connected shipping is (or would be) unconstitutional and would therefore be void.
Unfortunately, the only way to know if the proposal is, or is not, unconstitutional is for the Executive Order to be signed, enter into force, be subsequently challenged in court, and for a final legal determination to be made.
Until then, we will have to wait and see.
