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It is a gross understatement to say that the Trump administration’s trade policies violate previously accepted norms—international as well as domestic. They also raise a host of serious legal questions. Examples abounded even before the president raised new ones with his unprecedented profit-sharing agreement with semiconductor companies Nvidia and AMD.
Are the blanket tariffs levied in February and March and on April 2 (dubbed by the president as “Liberation Day”), or their updated versions imposed on August 7, authorized by the International Emergency Economic Powers Act (IEEPA), the authority the president is claiming for these actions? The Court of International Trade found that they are not authorized. The Trump administration has appealed that ruling to the Federal Circuit Court of Appeals but will likely lose. Will a sympathetic majority of the Supreme Court ultimately find that President Donald Trump—having made tariffs the cornerstone of his international economic policy and declared a national emergency—has the authority to set tariffs at will, despite the US Constitution providing the president with no power over tariffs?
Was there any authority, either delegated by Congress or under the president’s constitutional power to conduct foreign affairs, for the president to enter into a recent series of trade agreements with about a dozen other countries? That is far from clear, as President Joseph R. Biden Jr. had let presidential trade agreement authority lapse in 2021. If there is no delegated authority, the trade agreements are based, as was President Biden’s Indo-Pacific Economic Framework (IPEF) set of agreements, solely on the policies of a single president, not likely to survive the end of an administration.
Are the plethora of declarations of national emergency justifiable under the Trade Expansion Act of 1962? Is there a sound legal basis for imposing restrictions on so many commodity and product groups—including steel, aluminum, copper, and autos and auto parts, as well as potentially timber and lumber, semiconductors and semiconductor manufacturing equipment, pharmaceuticals, trucks, commercial aircraft, polysilicon, unmanned aircraft, and wind turbines? Some of these, perhaps, but all of them? Courts and Congress have been deferential to presidential declarations of national emergencies, overturning none. However, the number of sectors now involved may change this record.
Trump's profit-sharing deal with Nvidia and AMD raises legal and policy questions
Against this background welter of trade interventions with serious and far-reaching economic consequences, two semiconductor companies, Nvidia and AMD, have agreed to a profit-sharing arrangement with the Trump administration in return for obtaining permission to export high-end chips to China. A question is whether this action will be tested in the courts at all. Who will have standing to sue and wish to do so?
The president suggested, and the CEOs of these companies agreed, that a share of the profits—15 percent—from their sales to China be turned over to the government, in return for the government allowing the exports to take place. All parties closely involved seem to be pleased with the exchange. The CEOs hope for additional sales to China. There is no hint that they resisted this deal, other than countering a presidentially suggested level of a 20 percent share of the profits for the government. The company’s shareholders do not appear to be harmed. The companies make additional sales. The Treasury receives unexpected revenue, and the net profits after paying for the export license get to be taxed as regular income, an additional benefit for the US Treasury. (Note: There may be a wrinkle in making these sales in that Chinese officials are reportedly upset by the US commerce secretary's announcement that the latest chips would indeed not be exportable to China, but that has nothing to do with whether the Trump deal with Nvidia and AMD was authorized in the first place.)
This deal is questionable in several respects, some legal, some policy.
There are four threshold questions: Where does the president get the authority to accept payment for an expected function of government, export licensing? Export controls are imposed under the Export Control Reform Act (ECRA). It forbids charging fees for licenses:
“No fee may be charged in connection with the submission, processing, or consideration of any application for a license or other authorization or other request made in connection with any regulation in effect under the authority of this subchapter.”
But for this prohibition, it might have been possible to impute authority in a licensing agency to cover its expenses in administering licenses. The Supreme Court just recently found that an agency would not be relied upon to interpret a law it administers. The same should be true of the president. However, due to the statutory bar, if the 15 percent of Nvidia and AMD's profits is a fee, it is not allowed.
Secondly, the Constitution expressly forbids the imposition of export taxes. The profit-sharing arrangement in economic terms is nothing more or less than an export tax. Calling it profit sharing does not change that reality. Would the Supreme Court regard it as something other than an export tax? That is, if the issue is litigated at all. It might be viewed as a business arrangement, and not a tax, with the government providing value in some form.
Third, the Constitution can be read as requiring that exporters should be treated equally. The Supreme Court has held that the Fifth Amendment's due process clause requires the federal government to provide equal protection under the law. Although the constitution prohibits US states from discriminating, “it would be unthinkable that the same constitution would impose a lesser duty on the Federal Government.” But who exactly is complaining? Perhaps at some point, other potential exporters might complain that they are not getting export licenses free of any contribution to the government. But that circumstance may or may not occur.
Fourth, how is the nation’s security safeguarded in this transaction, which is the basis for restricting exports? Are these chips any less harmful in the hands of an adversary if a payment is made to the US government to allow the sale? Either the chips should trade freely or be limited depending on potential for harm to the defense posture of the United States, not whether a share in the profits is taken by the government. The government might be called upon to explain why US national security interests are served by the deal.
How does the Nvidia-AMD profit-sharing deal differ from other US government involvement with private companies?
In the American system of governance, the government is not expected to be a partner in private businesses except in very exceptional circumstances. The Constitution guarantees the protection of private property. The norm: The government is not supposed to insinuate, suggest, or demand that it should become a partner of private businesses. Nvidia, the company that has the highest market capitalization of all private companies, can no doubt afford to share profits with the government. It was seeking permission to export to China, and all appearances suggest that the price for allowing it to do so was a share of its profits. The government became its partner, as a direct beneficiary of the export sales.
It could, of course, be argued that the government in fact already is a partner of business. Since 1913 and the adoption of the Sixteenth Amendment, the government has shared in the profits of all businesses via the income tax, both the corporate and the personal kind. If a business does well, the government does demand a share, mostly at a much higher level than 15 percent. And if an owner does not pay, there are criminal penalties. Is the Nvidia-AMD deal any different? There are important differences. The tax due is not a negotiated amount with individual taxpayers. It is applicable to all who are similarly situated. Notionally, in return for paying income taxes, every company and all employees get the benefit of an array of government services, roads, defense, pension guarantees, health insurance, and public health services, plus maintenance of a sound financial system.
There are other instances where government does gain from individual transactions with private companies. It sells land that it owns, and it auctions oil leases and rights to use the frequencies along the spectrum for telecommunications. However, in those cases a willing buyer is purchasing something the government owns legitimately.
Why then should there be any disquiet about the Nvidia-AMD deal?
In America, the government is not generally a private company’s business partner. Making a needed or desired service available but only for a share of the profits can easily become a form of coercion, however mild or welcome it may be. (Were there extortion for private gain, this would be barred by statute.) If further government involvement became a pattern, the American economy would no longer be operating as a free market but as a form of state capitalism. America’s primary economic criticism of China is of the higher degree of government involvement. The secret of America’s success has been to allow the private sector to flourish. When the government is your business partner, you may be favored by public policy decisions not available to others, but you may be less free as to how you operate your business. The trade-off is not free of risk.
Data Disclosure
This publication does not include a replication package.
