Tariffs: What could Trump do?

Wed 07 Mar 2018

Donald Trump roiled markets on Friday by announcing on Twitter:

He has since confirmed that he plans to impose tariffs of 25% on steel imports and 10% on aluminium. The move has been widely met with criticism, not just from Democrats but from many members of the Republican Party, including the House Speaker Paul Ryan. After all the Republicans consider themselves the party of business, with tariffs historically a policy of the Democrats.

With the EU having already responded by saying that US products from whiskey to motor bikes would face retaliatory tariffs, and Trump responding by saying EU cars would then face tariffs, it needs to be understood how far the President can act without the backing of Congress.

Firstly it should be understood that Article I of the US Constitution gives Congress, not the President, the power to impose and collect taxes, tariffs, duties, and the like, and to regulate international commerce. However there have been numerous laws over the years approved by Congress that give the President the power to modify tariffs under certain circumstances.

For example, under the International Emergency Economic Powers Act of 1977, certain importation/exportation powers were given to the President if he first “declares a national emergency … to deal with an unusual and extraordinary threat.”

The actual legislation Trump is expected to use for the steel and aluminium tariffs is Section 232 of the Trade Expansion Act of 1962. The provision allows him to unilaterally impose trade remedies if the Commerce Department finds that imports “threaten to impair” U.S. national security.

An issue for Trump is, that like many of his decrees surrounding immigration, this tariff could end up being challenged in court. Unlike his decrees on immigration, however, we believe any court challenge would likely take a significant amount of time to see a ruling. Those decrees were often ruled unconstitutional where courts in liberal states considered themselves to have jurisdiction over the immigration decrees. It is more likely in this case that the U.S. Court of International Trade would have sole jurisdiction, in which case there is less likely to be a single liberal judge that can scupper the tariff in a short space of time.

Alternatively, given there appears to be bi-partisan distaste for the measure, Congress could pass new legislation that would require the president to seek a vote of Congress to certify his claim that dependence on imported steel is a national security threat. Of course Trump could then try to veto the legislation, but Congress can override a veto by passing the act by a two-thirds vote in both the House and the Senate. However the likelihood of Republicans wanting to undermine Trump in the lead up to midterm elections where they are already expected to be scrapping to keep control of the House and possibly the Senate is likely to be close to nil.

So in practice, unless Trump can be persuaded to change his mind (which isn’t so far-fetched given Gary Cohen, his economic advisor, has resigned over the issue), we should expect to see these tariffs come into effect fairly soon and can expect them to be in place for the foreseeable future.

Notably George Bush Jnr put tariffs of up to 30% on steel imports from around the world, which according to one estimate commissioned by CITAC, a trade association of businesses that use raw materials, cost c.200k jobs across US manufacturing – more than the entire number of jobs in the entire steel industry at the time. The reason is that tariffs such as these tend to be inflationary, only benefiting firms that produce the tariffed item and increasing the costs, and so likely the profitability, of businesses that use it (of which there tend to be many more ). In fact the move could really backfire on Trump by making non-steel manufacturers less competitive globally, while increasing prices across the board for consumers. Those areas of the ‘Rust Belt’ he is attempting to help, he could well hurt with these policies.

Yet these policies won’t just hurt the US; those countries that were exporting steel and aluminium to the US can expect to see reduced corporate profitability and job losses, while their retaliatory tariffs would also be inflationary. The bottom line is that trade wars are bad for the global economy and a risk to global market performance, one which we have been highlighting for some time.