Last week, the Supreme Court ruled that President Trump acted illegally when he imposed new tariffs on nearly all countries exporting goods to the United States. Trump argued that he had reviewed every trade agreement the U.S. had with other nations. He concluded that they were disproportionately favorable to our trade partners and harmful to American interests. He wanted swiftly to rectify this imbalance.
The staggering annual trade deficit, approaching $1 trillion, reflects a significant outflow of potential wealth from the U.S. The source of this trade imbalance lies in the agreements forged years ago.
In the wake of World War II, the U.S. sought to support global economic growth by forming trade agreements that allowed nations to sell their goods in America with only minimal tariffs, typically 2.5%. Many countries seized this opportunity to boost their exports and grow their economy.
Developing nations, however, argued that they needed to safeguard their infant industries from U.S. competition. In doing so, they imposed steep tariffs, sometimes as high as 30%, 50%, or even 100%, on American products.
These exorbitant fees drove U.S. prices up, making it nearly impossible for American goods to compete in those markets. As a result, countries could sell billions of dollars’ worth of goods in the U.S., while American producers struggled to secure sales abroad.
Even with Trump’s tariffs, last year the U.S. imported a staggering $4.3 trillion worth of goods and services, compared to only $3.4 trillion sold by American producers internationally.
Recognizing this precarious situation as a national emergency, Trump invoked the International Emergency Economic Powers Act (IEEPA) of 1977, allowing him to declare a national emergency to counteract “unusual and extraordinary threats” to our national security, foreign policy, or economy. He identified the ongoing trade imbalance as one such threat.
Trump took swift action by unilaterally imposing significant tariffs on our trading partners and threatening even higher tariffs if agreements were not renegotiated. His strategy paid off handsomely. Most countries, along with the entire European Union, eventually agreed to new trade deals, which not only raised the tariffs they would pay on goods sold in the U.S. but also drastically reduced or eliminated tariffs on American exports.
These new trade agreements have the potential to sharply decrease imports. Many foreign companies are now investing trillions of dollars into U.S.-based production, effectively sidestepping the tariffs altogether.
As foreign markets open to U.S. manufacturers, we will see a substantial increase in exports, which will grow the economy and reverse our negative trade balance.
Of course, some consumers and small businesses in America decried the higher costs of imported goods resulting from the tariffs. But that was precisely the aim; if imports become too expensive, savvy entrepreneurs will explore alternative supply chains, hopefully filled by other US entrepreneurs taking advantage of the situation.
While complaints about increased prices on certain imported goods are valid, it’s essential to recognize that these higher costs were counterbalanced by falling prices on other essentials, such as energy. As a result, inflation, which stood at 2.9% when Trump took office, has dipped to 2.4% today.
Clearly, the inflationary pressures created by tariffs have been more than offset by reductions in other areas.
However, the Supreme Court held that tariffs were not explicitly mentioned in the IEEPA. Although the president has the authority to “regulate” foreign trade and impact the “importation” of goods, the law did not explicitly grant him the power to impose tariffs, which the Court likened to a tax that only Congress can levy. Thus, they deemed Trump’s actions illegal.
So, what’s next?
The Supreme Court did not address the fate of the hundreds of billions collected from the tariffs already imposed. The reality is, despite various studies, it remains nearly impossible to determine how much of the tariff burden fell on consumers versus businesses in the supply chain.
In a technical sense, SCOTUS may have been correct. Yet, from a commonsense standpoint, their ruling misses the mark. The needs of our economy and national security demand a more encompassing opinion of the IEEPA. This is especially true considering the toxic and counterproductive Congress today.
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