Section 338: Trump’s latest tariff tool could send trade policy uncertainty soaring

Just when businesses thought they had enough tariff uncertainty to manage, another chapter emerges. By turning a nearly century-old provision of trade law into a working tariff tool, the administration has created a new source of uncertainty for companies making investment, hiring, and supply-chain decisions.

The provision in question is Section 338 of the Tariff Act of 1930. For the first time in history, a president has used this authority to impose tariffs. The Trump administration is targeting Canadian alcohol, motor vehicles, and dairy products in response to what it alleges are discriminatory trade practices.

These current tariffs themselves may be relatively modest in scope. The larger significance is that by turning this statutory relic into a live policy instrument, the administration has introduced a new layer of trade policy uncertainty that businesses cannot afford to ignore.

Section 338 gives the president authority to impose tariffs of up to 50 percent on imports from countries found to discriminate against US commerce. For nearly a century, the provision remained unused, which means that businesses had little reason to consider it when making investment and supply-chain decisions. 

With this latest move by the administration, businesses now face a new set of unanswered questions:

• How broadly could the authority be applied?
• What standards will determine when it is invoked?
• Which industries and trading partners could eventually be affected?

Those questions exist alongside a threshold legal uncertainty: whether Section 338 remains available as a tariff authority at all. As UCLA law professor Eugene Volokh has explained, later trade laws may have repealed Section 338 by implication, which raises a separate question about whether the provision can even be used today.

But setting that legal argument aside, the more immediate uncertainty for businesses is how aggressively the authority may be used and which industries or trading partners could eventually be affected.

The unanswered questions surrounding Section 338 matter because businesses base long-term decisions on expectations about future policy, not just current policy. When those expectations become less certain, firms may delay costly commitments until they have greater clarity about the policy environment.

Economists have long found that uncertainty can change business behavior by making waiting more valuable than acting immediately. Research on uncertainty shocks finds that greater uncertainty reduces investment and hiring, while broader measures of policy uncertainty are associated with weaker economic activity.

More recent work on trade policy uncertainty reaches a similar conclusion. A National Bureau of Economic Research review of the trade literature concludes that uncertainty surrounding future trade policy discourages investment and trade, reduces firms’ willingness to enter export markets, and lowers economic welfare.

A recent International Monetary Fund working paper similarly finds that trade policy uncertainty independently weighs on investment, trade, and output, even when distinguished from the effects of tariffs themselves.

This research helps explain why the effects of Section 338 are unlikely to be limited to the tariffs announced today. When firms cannot predict how trade policy may evolve, they may adjust their behavior even without direct exposure to a new tariff. Businesses do not wait for policy changes to become certain before adjusting their plans. The possibility of future trade actions can influence investment, supply-chain decisions, and other long-term commitments across the economy.

Whether it is opening a new facility, hiring workers, investing in equipment, or making long-term supply-chain commitments, businesses make a number of decisions that extend years into the future. Because many of those investments are difficult to reverse, firms often delay them when the future policy environment becomes less predictable.

Businesses adjust when government changes the rules, but the costs of those adjustments are real. Section 338 shows how trade policy uncertainty can become an economic cost in its own right. When businesses face less predictable rules, they must adjust investment plans, supply chains, and other long-term strategies.

Congress should reclaim its tariff authority and require a more transparent process for evaluating trade restrictions. With Section 338 tariffs, this concern is especially pronounced because the price is paid twice: once through the costs imposed by the tariffs themselves, and again through the uncertainty businesses face about what trade actions may come next.