Over the last five months, tariffs have fluctuated as deadlines have come and gone. Deals have gotten done, the frameworks of deals have been announced and for countries less willing to negotiate, the process has dragged on.
The initial market reaction was violent but short-lived, and ever since the equity market has remained strong. The most likely explanation is that “Liberation Day” was as bad it was going to get and achieved its desired outcome – bring parties to the table for negotiations. On April 1st, the average effective tariff rate was somewhere around 2.5-3 percent, on April 2nd it was estimated to be 25 percent, and it is now closer to 18.5 percent. Globalization still exists and will continue to; no country has the human capital or necessary resources required for self-sufficiency. However, the cost savings associated with globalization have certainly dissipated.
As of the August 1st deadline, the administration has had some successes. Notably, the European Union, Japan, South Korea and the United Kingdom have reached agreements by pairing negotiated tariff rates lower than initially announced with agreeing to boost investments in the United States, place large orders for capital goods (aircraft) and reduce barriers into their local markets. However, some significant trading partners are still in the negotiation phase and have had, at least temporarily, higher tariffs imposed. These include China, Canada (with USMCA exemptions remaining), Mexico (also with USMCA exemptions) and India. China and India have the added dynamic of non-economic factors such as fentanyl and India’s importing of Russian oil at play. It should be noted that China also received another 90-day extension.
The next phase of the tariff battles may prove more daunting for the administration as the adversary will be domestic rather than international. The efforts to level the playing field of international trade will have to face scrutiny in the United States court system as the authority of the President to undertake a wholesale change in trade policy without the approval of Congress will be called into question. To date, two courts have ruled against the administration on the merits of its broad use of tariffs. A three-judge panel at the U.S, Court of International Trade (CIT) ruled unanimously against President Trump on May 28th and on May 29th, a U.S. District Court ruled the International Emergency Economic Powers Act (IEEPA) does not allow the president to impose tariffs at all. Both rulings are being appealed. There is a fairly high likelihood that any decision on the authority to impose tariffs will ultimately be heard by the Supreme Court as the appeals process continues. In the interim, there is the possibility that the trade agreements that involved large scale foreign investment in the United States will be slow going as our trading partners wait for clarity on the legality of the agreements.
If the Trump administration loses at the Supreme Court and it is deemed the negotiated trade deals do not fall within its authority, there are other avenues that can be taken. For example, Section 232 of the Trade Expansion Act of 1962 allows the President to regulate imports that threaten national security. It is a possibility that this Act can be used to reimpose nullified tariff actions but will face some limits, that if recent history is a predictor, may also be tested.
