The Trump Tariffs: The Current State of Play

The August 1 deadline has passed and for the most part Trump has landed on country-specific tariffs—either by agreement or fiat. Brazil was hit with the highest tariff (50%), which was imposed for political reasons, not economic. Almost everyone—especially the Swiss—were shocked by the 39% tariff on Switzerland, which is especially damaging because of the 15% tariff on the European Union. . Apparently, Trump is not a fan of Swiss watches. Canada and Mexico face a complex set of tariffs. Canada has a huge 35% tariff, and Mexico has a 25% tariff, but goods that qualify for the USMCA free-trade agreement are exempt from these tariffs—which are a large and growing percentage of Canadian and Mexican imports.

Now that the dusk has settled—for now—a few observations are in order.

First, while Trump has touted “trade deals” with several countries, most notably the U.K., EU, Japan, and Korea, these are press releases, not “deals.” Trump makes claims about these countries promises to purchase more goods from the U.S. and to increase their investment in the U.S. that sound great, but on closer appearance these seem like unenforceable. Japan and the countries in the EU don’t themselves buy oil and gas, private companies do. Th claim that Japan and the EU will buy more gas from the U.S. is not a promise—its simply a prediction of how the private sector will act. It is telling that other than press releases, we have no written agreement.

So what is going on? The countries that have done “deals” with Trump realize that all Trump really cares about is the optics. It does not matter if the “deal” is not formal or even enforceable. All that matters is that Trump has something he can trumpet to his base.

Second, as I wrote back in April it is doubtful that the legal basis for these tariffs—the International Emergency Economic Powers Act (IEEPA)—will stand up in court. The Court of International Trade in a decision by a three judge panel that included Judges appoint by Trump, Reagan and Biden—ruled that IEEPA does not confer “such unbounded authority” and issued a permanent injunction setting aside the challenged tariffs. The challenged tariffs were the fentanyl-related tariffs against Canada, Mexico and China, and the “reciprocal” tariffs issued against the entire world. The cases were brought by a few small businesses, as well as several States.

Oral argument of the appeal of this decision was held in the Court of Appeals for the Federal Circuit, and this did not go well for the Trump Administration. Court watchers expect the court to uphold the Court of International Trade decision.

What about the Supreme Court? I expect that Court will also find that IEEPA does not give Trump authority to impose tariffs using this statute. Critical to this issue is the U.S. Supreme Court's recent decision in West Virginia v. EPA, where the court said that where there is something extraordinary about the “history and breadth of the authority” an agency asserts or the “economic and political significance” of that assertion, courts should “hesitate before concluding that Congress meant to confer such authority." In that case, the Court applied this principle to reject the EPA's claim for authority over an issue of "vast economic and political significance" where Congress has not clearly empowered the agency with power over the issue. During the Biden Administration, the Court used this doctrine to strike down several claims of authority--most notably in striking down the Biden Administration's plan to forgive student loans.

It is not difficult to make the case that the extraordinary Trump tariffs--imposing a massive increase in tariffs globally-- is of vast economic and political significance and there is little evidence that Congress clearly gave such sweeping authority in IEPPA.

If the decision is upheld, does that mean that there will be no Trump tariffs? No. The trade laws provide other tools that Trump can use. These tools, however, will require Trump to follow a process and the resulting tariffs will be limited. Section 122 of the Trade Act of 1974, for example, grants the President authority to impose restricted tariffs in response to “fundamental international payment problems,” including “large and serious balance-of-payments deficits,” and unfair trading practices. Section 122, however, sets specific limits on the President’s authority to respond to balance-of-payments problems, such as a 15 percent cap on tariffs and a maximum duration of 150 days.

In any event, a Supreme Court decision holding that IEEPA does not allow tariffs would be a huge blow to Trump’s insistence on tariffs.

Third, ignore statements by the Trump Administration that the critics have been wrong about the economic effects of the tariffs because we are not in a recession. This is obviously a low bar for “success.” More importantly, it overstates what economists have been saying about the tariffs. As Paul Krugman notes, most of the estimates of the effect of the tariffs on GDP were a long-run real GDP reduction of 0.4 percent. This is a big deal, but it won’t by itself put the economy into a recession.

Still, this will mean economic pain—less growth, higher costs, and less employment—exactly what we are seeing in the most recent GDP, inflation and employment numbers.