"AH-YEE-PAH!"
It’s standard trade jargon, but it’s also the flustered cry of investors struggling to make sense of future U.S. policy.
Last week’s Supreme Court ruling in Learning Resources Inc. v. Trump decisively held that the International Emergency Economic Powers Act (IEEPA for the cognoscenti) does not grant the president the power to impose tariffs. But for every reason investors should cheer this unintentional endorsement of free trade, there are worries about the path ahead.
America’s investment outlook is better than it might have been with a less decisive ruling, but only slightly. Much will depend now on the decisions of Congressional Republicans and key foreign trade ministers. Meanwhile, consider the uncertainties.
The decision is good news because it means immediate tax relief, but it’s bad news because none of the companies that have paid IEEPA tariffs will get their money back anytime soon.
It’s good news because uncertainty around this decision is over, but it’s bad news because it has opened a whole new set of questions, ambiguities and risks.
It’s good news because the American political system of checks and balances, which seemed to be unraveling under the strain of an ambitious president and a docile legislature, has regained some temporary balance. But it’s bad news as that same president launches withering, personal attacks on the justices who voted against him and vows again to stretch his powers in novel directions. Indeed, the immediate announcement of 15% tariffs (raised from an initial 10%) under Section 122 of the 1974 Trade Act is a novel interpretation of a rule meant to address large balance-of-payments imbalances and is likely to draw more court challenges.
It’s good news because it takes America a step back from an economic model that imposes a tax burden that falls disproportionately on the poor, fuels political corruption to secure exemptions and blunts America’s competitive edge. But it’s also bad news, because it’s only a brief step in the right direction, since Trump has promised what he says will be an even larger wave of trade distortion through powers he held all along.
It’s good news that it limits one of the least efficient ways to raise revenue. But it’s bad news since Congress seems unlikely to fill the new hole in the budget with more sensible tax alternatives.
It’s good news because it effectively disarms the president from random tariff threats that kept everyone on edge and were only distantly related to trade or national security (for example, Brazilian justice, dollar primacy and Greenland). But it’s bad news that none of this seems likely to rein in his enthusiasm for dire threats. In his press conference after the Court’s decision, Trump mused that the law still allows him to cut off all trade with a country if he so chooses.
It’s good news because allies won’t be forced into uneven trade agreements and investment commitments under threat of capricious tariffs. But it’s bad news because they may feel they have more scope to retaliate. European politicians are already reconsidering their strategies.
It’s good news because Congress is getting a powerful nudge from the Court to reclaim its constitutional responsibilities over revenues and trade. It’s bad news because it triggers a fresh scramble of lobbyists and donors seeking to rewrite tariff lines.
It’s good news because the political cycle suggests this marks the peak of tariffs, and this Congress has a growing number of members who realize just how unpopular tariffs are. But it’s bad news, because if the midterms put sensible trade policy in the hands of Democrats, there won’t be much sensible trade policy. (Indeed, much as Russian interference in the 2016 election turned Democrats into pseudo-national security hawks on Ukraine, Trump’s embrace of tariffs has turned them into faux free traders.)
America’s investment outlook is better than it might have been with a less decisive ruling, but only slightly. Much will depend now on the decisions of Congressional Republicans and key foreign trade ministers.
It’s good news because the stock market seemed to take it as good news after a week of disappointing economic data. Perhaps there was a little relief that last year’s most extreme and disruptive tariff threats have been removed from the president’s quiver. But it’s also bad news, as the bond market initially sold off, perhaps on worries about lost government revenue or fresh uncertainty around future trade deals. Possibly both.
Two key players will determine if the good news outweighs the bad in the months ahead. The current Republican majority in Congress will need to endorse and extend the president’s next wave of tariffs. Will members in tight re-election races fear voter dissatisfaction with tariffs more than they fear losing Trump’s endorsement? And key foreign trade partners will show if they can now resist Washington’s most extreme demands. Will they slow-walk the implementation of the frameworks they have already agreed on, or will they trigger a new trade war?
I know what you’re thinking as you sort through the alternatives.
“Ayeepah!”
Excellent and sobering reminder of the uncertainty, Christopher. Just one tangential note: you correctly note that the burden of tariffs falls disproportionately on the poor (in other words, a regressive tax, for the cognoscenti). That is true for all consumption taxes. And if our governments keep spending more and more, there is no alternative to some form of consumption tax to balance the books -- Europa docet. If we don't get some spending discipline back, we might be 'trading' tariffs today for a VAT tomorrow. A VAT would be far more efficient and less vulnerable to lobbying and distortions -- but it would also fall disproportionately on the poor.