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Macro Perspectives: Don’t get too excited, tariffs are not going away

Anthony Willis

Senior Economist

Key Takeaways

Will the legal process undermine the US Administration’s efforts to impose tariffs on trading partners?
The US Administration is appealing the US Court of International Trade’s ruling that the President ‘overreached his authority’. What are markets making of the news and what will be the economic impact?
We explore the legal wranglings around the US Administration’s announced tariffs – is the US Court of International Trade’s ruling a permanent setback or an impediment?
The latest on a fast-evolving tariff landscape and the implications for economic growth.
Markets continue to take a ‘glass half full’ view on tariffs. Will legal wranglings in the US impact on optimism and what are the implications for economic growth?

Transcript

We have seen another big week of news with a court ruling calling into question the legal basis for many tariffs imposed since President Trump returned to the White House. We also saw the President threatening the European Union with a 50% tariff, though the fact this threat didn’t even last 72 hours added to the view that such numbers are used to bring people to the negotiation table rather than genuine policy.

The US Court of International Trade ruled that President Trump had “overreached his authority” in imposing tariffs without the approval of Congress. The judgement impacts levies imposed on 2 April, including the baseline 10% tariff, the 20% tariff on China, and additional ‘reciprocal’ tariffs on many countries which are on pause until 9 July. This also calls into question the basis of any negotiations underway with the US, and of course the ‘deals’ already struck, with the UK for example. Other tariffs will remain in place – those that have been implemented via the correct legal processes on steel, autos, aluminium and the tariffs on China from 2018.

The appeal posted by the US Administration last Thursday was successful – a higher court has now stated that the tariffs can remain in place and duties collected until the appeals process is completed. The Administration has said it will ask the Supreme Court for “emergency relief” as soon as possible.

The US Constitution (Article I, Section 8) gives Congress alone the power to set tariffs, but the Trump Administration used the 1974 International Emergency Economic Powers Act (IEEPA) which allows the President to impose tariffs if there is a declared national emergency. Trump declared such an emergency on 2 April, claiming the current trading structure was an “unusual and extraordinary threat” to the US economy and to national security. However, if the US government is unable to justify a trade deficit as a ‘national emergency’ then it means that the tariff process may be significantly delayed by trade investigations, reporting and Congressional approvals.

The immediate question is if this ruling represents a permanent setback to the Trump Administration’s plans or more of an impediment. Arguably, it is the latter. Even if the courts ultimately declare that the IEEPA is not a valid framework for the imposition of tariffs, there are other avenues the Administration can pursue to achieve their policy goals. The Trade Act of 1974 offers some options given it was designed to enable the President to impose temporary tariffs to address “large and serious United States balance of payments deficits”. Section 122 of this Act gives limited powers to impose tariffs of up to 15% for up to 150 days before seeking further authorisation from Congress.

Section 232 tariffs, which are already in place on steel, aluminium, and autos, also remain a valid policy tool. Indeed, President Trump is set to increase the 25% tariff on steel and aluminium to 50% later this week. Section 232 ‘investigations’ are already underway in other sectors including pharmaceuticals and aerospace.

The Tariff Act of 1930 also empowers the President to impose tariffs if US businesses are suffering “unfair discrimination” at the hands of a foreign power. Such tariffs are capped at 50%. There is a suggestion also that the tariffs could be added to the showpiece tax bill making its way through Congress to enact the tariffs. This could turn into a very drawn-out process – and this alone means persistent uncertainty will continue to weigh on corporate decision making and investment, prolonging the headwinds to economic growth.

President Trump also threatened to impose a 50% tariff on imports from the European Union, the journey from escalation to de-escalation took just 72 hours, as a threat of a 50% tariff effective from 1 June came and went in the space of a few days. The announcement appeared to be the result of frustration with the speed of negotiations with the EU rather than a firm policy commitment, though the threat clearly focussed minds in the EU to push forwards with the next stage of talks. The market reaction was also somewhat muted given the size of the tariffs proposed, reflecting perhaps the degree of scepticism to which tariff announcements are now treated.

Equity markets are continuing to take a ‘glass half full’ view of tariffs, even before the news calling into question whether they have any legal basis. Now we face further uncertainty over the timing of talks or what can be negotiated if the legal process undermines the majority of tariffs. The prevailing view, notwithstanding the legal uncertainty, is that we would see agreements to reduce tariffs towards the baseline level of 10% for many of the US’s key trading partners over the coming weeks leading up to the closure of the 90-day window for negotiations in early July. But that timescale now must be questioned. Financial markets will take some comfort if the tariffs are indeed being kicked down the road, but the Trump Administration’s belief in tariffs as a policy tool remains unchanged and the persistent uncertainty will still be detrimental to economic growth.

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Macro Perspectives: Don’t get too excited, tariffs are not going away

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