More tariffs, but less chaos, over the coming months
The loss of IEEPA tariff powers shifts the pathways available to the U.S. administration to employ tariffs as a coercive negotiating tool, creating additional short-term uncertainty, but ultimately providing a more trackable way for business leaders to anticipate significant changes in tariff levels.
On February 24, a new “10% ad valorem import duty on articles imported into the United States” went into effect, directed by U.S. President Donald Trump in response to the Supreme Court ruling that the executive branch did not have the legal right to impose sweeping tariffs under the International Emergency Economic Powers Act (IEEPA). The administration had imposed what it called reciprocal tariffs on many countries around the globe, generally ranging from the teens through the 30+ percent rates. The Trump administration had asserted that IEEPA provided legal justification for the President to implement tariffs, which were used as a bargaining tool by imposing high tariff rates, and only reducing them when a trade partner acceded to particular U.S. demands.
The Court ruling was not entirely unexpected (aside from its specific timing), as most scholars also interpreted both the text of IEEPA and the general concept of the “power of the Purse” residing in the legislative branch, as affirming that, aside from very clear delegations to the executive, tariff policy (a form of taxation) was the sole purview of the Congress. Although the Trump administration vocally protested and denigrated the Supreme Court ruling, it quickly shifted tactics to use other, more legally sound, tools to reimpose tariffs and warn of future additions. The 10% ad valorem import duty (tariff) was issued under section 122 of the Trade Act of 1974, which limits such actions to a maximum of 15% for a maximum of 150 days, with anything further requiring Congressional approval.
Although Trump quickly threatened to raise global tariffs to the maximum 15%, the actual order remained at 10% with several exemptions for certain critical minerals, agricultural goods and fertilizer,
pharmaceuticals, and select electronics, among others. Following the imposition of new tariffs, US Trade Representative Jamieson Greer noted that the administration would selectively impose the maximum 15% tariff rate where it felt it was appropriate, re-adding some uncertainty to international trade and by default retaining the 5 percentage point addition as a short-term negotiating tool. The administration also launched several Section 301 investigations (“Relief from Unfair Trade Practices” in the Trade Act of 1974), which allows new tariffs, withdrawal from violated trade agreements, or negotiated agreements with the targets of investigations. The administration is also enacting Section 232 investigations (authorized in the Trade Expansion Act of 1962), which target trade practices that violate national security, a term with a very broad interpretation by the administration.
The use of section 122, 301, and 232 authorities, each of which allows the executive branch to implement sanctions, returns the administration to more recognized powers, and provides some limits on the pace and scope of sanctions, as well as the speed with which they can be implemented or removed. Despite these structural limitations, the powers do not ultimately constrain the President from ultimately implementing high tariff levels, or using threats of new tariffs (often by initiating an investigation) as a way to coerce shifts in trade behavior by other states. Countries that revised or signed trade agreements with the United States due to pressure from the IEEPA tariffs may find themselves willing to keep the slightly higher tariff levels negotiated under the trade deals than pursue new negotiations, as the latter path may ultimately trigger either higher tariffs in the long term, or engender additional economic or political targeting by Washington.
For South Korea, Japan, and Taiwan, we do not expect a significant move to renegotiate current tariff rates, or to publicly renege on additional promises of investment flows into the United States (promises that were already based on flimsy enforcement or little new economic action). For others still in the final phase of negotiations, or about to start a new round (the European Union, for example, or Canada and Mexico), the shift in tools may provide a small amount of additional space for negotiations, but given the near-term political impact of the Court ruling, that space may be small as the administration may want to showcase what it believes are the full powers still residing in the Executive.
The Supreme Court ruling, then, does not necessarily end the sense of uncertainty over U.S. tariffs. Rather, it shifts attention to a more structured set of tools available to the administration, but the application of those tools remains uncertain. One near-term influence on the administration may be the November elections, and perceptions of domestic voter concerns with the state of the economy. The Section 122 tariffs expire in July, several months before voting, and significant broad-based tariffs under Section 301 or 232 powers may prove unpopular. In the longer term, the administration appears increasingly to see tariffs as a revenue-generating tool, rather than a mere negotiating tool. This suggests that even if there are selective changes in tariff policy based on select trade agreements, Washington intends to maintain a relatively higher overall tariff rate than in recent decades, but one that, ultimately, may be more stable, and thus easier to cost into overall trade and investment plans in the future.
This strategy stands in contrast to a desire to create policy uncertainty at the borders, which is very
effective in driving capability on-shore, since such uncertainty makes business planning extremely risky. Even with relatively high but stable tariffs, it will remain economically advantageous to keep a lot of manufacturing off-shore. This is due to differential costs and to the availability of manufacturing infrastructure, skills, and subsidies overseas that do not exist in the United States.