The Logic Behind Legally Risky Tariffs

The latest regulatory developments on economic security & geoeconomics

By Paul Nadeau, Visiting Research Fellow, Institute of Geoeconomics (IOG)

U.S. Appeals Court Rules Trump Tariffs Are Illegal: On August 29, the U.S. Court of Appeals for the Federal Circuit ruled against President Donald Trump’s use of the International Economic Emergency Powers Act (IEEPA) to impose his April 2 tariffs and the tariffs on Canada in Mexico in March, affirming the decision reached by the lower courts earlier this year. The tariffs will remain in place for now since the litigation has been postponed until October 14 to give the Trump administration an opportunity to ask the Supreme Court to review the case.

U.S. Government Acquires Share of Intel: On August 22, Donald Trump announced that the United States would take a 9.9 percent equity share of Intel for $8.9 billion that will be drawn from the $5.7 billion in unpaid grants from the CHIPS Act and $3.2 billion awarded to Intel for the Secure Enclave program which were both Biden-era programs. Japan’s SoftBank also agreed to take a $2 billion stake in the U.S. chip manufacturer. The government’s share does not include a board seat. The arrangement is similar to the “golden share” that Trump received in Nippon Steel to let its acquisition of U.S. Steel advance and an arrangement where the U.S. Defense Department became the majority shareholder of MP Materials, a mining company, to increase its production of rare earth magnets.

U.S. Commerce Department Expands Range of Goods Subject to Steel & Aluminum Tariffs: The. U.S. Department of Commerce has increased the number of derivative products facing the 50 percent tariffs on steel and aluminum products to 407 following months of discussions between domestic U.S. steelmakers and the White House. Products covered include milk products, food preparation, petroleum-based products and industrial gases, a range of organic and inorganic chemicals, and more, and tariffs only apply to the steel and aluminum content of each product.

Analysis: The Logic Behind Legally Risky Tariffs

The first Trump administration disregarded the trade rules set out by the World Trade Organization; the current Trump administration is disregarding the trade rules set out by its own government. But last week, a U.S. appeals court affirmed the ruling of a lower court that the tariffs that Donald Trump imposed on April 2 under the International Economic Emergency Powers Act (IEEPA) are illegal and the lower courts have been decisive in arguing that Trump exceeded his authority when he imposed the tariffs. While the Supreme Court will almost definitely have the final word on the issue, there’s a question as to why the Trump administration would choose such a legally risky procedure for the cornerstone of their international economic policy.

The short answer is that IEEPA tariffs lets the Trump administration do what they want to do quickly, as broadly as possible, and at the sole discretion of the White House. This is consistent with the Trump administration’s three main goals in its international economic strategy: rebalance global trade, contain China’s economy, and to create conditions where the Trump administration can extract the greatest possible concessions from partners. Effectively, since the Trump administration sees trade deficits as a global problem, a global approach was needed to adequately respond.

The practical reason for this approach is that there are procedural advantages that the IEEPA offers compared to other possible tools to address trade deficits. As the U.S. Court of International Trade touched on exactly this in its rejection of the IEEPA tariffs, arguing that the Trump administration didn’t need to declare a national emergency to respond to trade through IEEPA since there is already a provision – Section 122 of the Trade Act of 1974 – that allows the president to use tariffs to address trade deficits. Yet Section 122 provisions put a hard cap of 15 percent on tariffs and only for 150 days. Furthermore, Congress would need to authorize further extensions – and it’s not necessarily a given that Congress would grant an extension since voting on that would force members to take a clear position on an unpopular issue in an election year, so it fails the test of giving the White House complete discretion over tariff levels.

Another possible tool would be Section 301 of the Trade Act of 1974 which allows the president to use tariff and nontariff measures to address discriminatory practices of foreign trade partners. While this seems like an ideal tool to address trade deficits, tariffs under Section 301 can only be imposed following an investigation into foreign trade practices by the Office of the U.S. Trade Representative. But 100 or more separate Section 301 investigations would be an incredible burden on the staff of the Office of the U.S. Trade Representative, taking time and effort that the administration would prefer to use for negotiations. Individual countries such as Brazil, India, or others may still be subject to Section 301 tariffs, but they would still be an impractical tool to tariff the globe, so these fail the test of giving the White House a quick tool to compel concessions in negotiations.

Finally, an ambition to remake the global trading system requires a tool that can be applied globally. Section 301 would be too piecemeal and too slow, so IEEPA tariffs offered an advantage in this dimension as well since Trump could declare trade deficits to be a national emergency and then apply the tariffs as broadly as possible. While the actual application of those tariffs continues to be shambolic, with tariffs applied to countries with whom the United States has a trade surplus or countries populated by penguins, but the basic logic holds. Blanket tariffs also let the Trump administration target transshipment from China more quickly and completely, something that they believed made the 2018 Section 301 actions against China less effective since China could simply reroute its exports to the United States via third countries. If tariffs were applied piece-by-piece in keeping with Section 301 processes, it would give exports from China a chance to reroute and evade tariffs, turning containment of exports into a game of whack-a-mole.

Despite the risks, both legal and economic, and despite the execution, there’s a logic to using tariffs under IEEPA since no other single policy tool offers what the Trump administration is looking for in pursuit of its ambitions. And as usual with this administration, it’s a tool that they’re willing to use at or beyond the limits of what’s legally possible. But for now, the IEEPA tariffs remain in place, and it should be remembered that even if the courts strike down this specific set of tariffs the Trump administration has more tools to apply tariffs that may not be ideal for their strategy, but could still get the job done. For foreign governments and firms, there’s a strong chance that the April 2 tariffs will be constrained by the courts or even lifted entirely; on the other hand, we’ll see what kind of tariff authorities Trump will try to claim next.

Disclaimer: The views expressed in this IOG Economic Intelligence Report do not necessarily reflect those of the API, the Institute of Geoeconomics (IOG) or any other organizations to which the author belongs.

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