Trump's tariff troubles
The Court of International Trade waited until the market's close on Friday afternoon before ruining the administration’s Labor Day weekend. The court judges said the president had exceeded his authority in using the Emergency Powers Act to levy reciprocal tariffs on the world. Is this a good or a bad thing?
It depends on where you sit. The court did not halt the tariffs but instead ruled they would remain in place until mid-October. In a 7-4 decision, the appellate court backed a lower court's decision finding that the law Trump used to justify his policies, the International Emergency Economic Powers Act, did not give him the power to impose tariffs, duties, or the power to tax.
The president responded by calling for an immediate hearing by the Supreme Court. "It's an economic emergency,” he exclaimed, "If we don't win that decision, you'll see a reverberation like maybe you've never seen before." While the administration appeals to the Supreme Court, the hope is that the courts will allow tariffs to continue to be collected until the Court hears the case.
Who ultimately wins the high court case is a toss-up. Republicans appointed six of the nine justices and have backed several recent questionable initiatives by this administration, but not all decisions have been in Trump's favor. Historically, the Supreme Court has been critical of presidents whom they perceive have overreached on policies not directly authorized by Congress. In this case, the appeals court ruled that imposing tariffs is not within the president's mandate and that "the power of the purse belongs to Congress."
However, make no mistake, the Trump administration does have several backup plans. In response to Friday's ruling, U.S. Treasury Secretary Scot Bessent said he is preparing a legal brief for the solicitor general that stresses the need to tackle long-standing trade imbalances and curb fentanyl entering the U.S. If that fails, there are other options in the works.
Several months ago, after the first ruling against the use of IEEPA, the president's team crafted a two-prong response to a loss in the courts. The first would be a stopgap measure that would impose tariffs under a provision of the Trade Act of 1974. The action would impose up to a 15% tariff for 150 days that would address trade imbalances with a wide swath of countries. The administration might also consider using the Smoot-Hawley Tariff Act of 1930. That has a provision that allows tariffs on nations that discriminate against the U.S.
The second step would involve going through Congress, although this would take longer and require a great deal of negotiating. But in the end, tariffs would still survive as one of the pillars of the Trump Administration. The Congressional process would require a lengthy notification and comment process (a polite term for back-room horse trading) among the nation's legislators.
It is the traditional method of implementing tariffs within government, which has been used many times in the past. The downside to this approach, however, would be that individual politicians would no longer have the cover of a president to blame for the tariffs. Given that the polls suggest that many voters are against these tariffs, voting for tariffs in the face of dissatisfaction could be political dynamite for members of Congress and senators in states that will suffer the brunt of many of these tariffs.
In the meantime, as this tariff drama unfolds, American businesses have no way of determining what costs to eat and what to pass through to customers for their imported goods. Companies are in a political and economic limbo. Overseas, U.S. trading partners, of which there are dozens, face a lengthening period of indecision on how and when to trade with the U.S. The longer this situation persists, the less likely countries will be to trade with us. The confusion will undoubtedly create economic fallout and slower growth.
If the tariffs were to be overturned, the results would have both negative and positive effects. The president is predicting a 1930s-style Depression will happen without his tariffs. No one in their right mind is predicting that. In many ways, the reverse might be true. Consumers will benefit from paying less for imported goods than they would otherwise. Many American businesses would see their costs drop and profits rise under the same reasoning. The inflation rate would likely be lower, which would be a real shot in the arm for most working-class people. On the negative side, some companies that have benefited from tariffs thus far would see a reversal in their fortunes, but they are few and far between.
From a big-picture economic view, the existing tariffs are a tax and, as such, have generated more than $300 billion in government revenues thus far, which reduced the country's deficit by a like amount. If tariffs go away, what happens to the deficit?
Well, Trump and the ruling party could call a spade a spade. They could finally admit that without the tariff taxes, the only straightforward approach to reducing the deficit would require an across-the-board tax hike. We already know that is not going to happen, so the deficit will climb based on the spending that is coming down the pike, thanks to the passage of Trump's latest spending bill. Worse still, what if the courts rule the money must be returned?
Treasury Secretary Bessent has warned that rescinding the tariffs would be a "dangerous diplomatic embarrassment." The only embarrassment I see is that an over-confident administration thought they could shortcut the system and succeed. They did the same thing with DOGE and with several other initiatives. Hopefully (but not likely), the administration can learn a lesson or two from this drama. "Rome was not built in a day," nor will this country be transformed in a matter of months, no matter how much some would like it to be.
Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401, email him at billiams1948@gmail.com, or visit his website at www.schmicksretiredinvestor.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.