Hold onto the trade policy merry-go-round a bit longer
Businesses and consumers across the United States have been dealing with economic uncertainty, persistent inflation, and rising producer costs following sweeping tariffs imposed by President Donald Trump since “Liberation Day.” That economic uncertainty is now coupled with legal uncertainty.
On August 29, a 7-4 majority of the US Court of Appeals for the Federal Circuit sitting en banc ruled in VOS Selections v. Trump that the tariffs imposed by President Trump under the IEEPA were not lawful. The court ruled that the “major questions doctrine” precludes interpreting IEEPA to give the president the unlimited tariff authority. Some legal background is in order.
Legal Background
Article I, Section 8 of the United States Constitution states: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, … but all Duties, Imposts and Excises shall be uniform throughout the United States.”
The President’s tariffs have been enacted pursuant to (a) International Emergency Economic Powers Act of 1977 (IEEPA), legislation that grants presidents authority to regulate foreign trade, such as through economic sanctions, during declared national emergencies, (b) Section 232 of the Trade Expansion Act of 1962, which authorizes the president to impose tariffs “following an investigation, that the quantity or other circumstance of those imports threaten to impair U.S. national security,” and (c) Section 301 of the Trade Act of 1974, which authorizes the president to take action, including tariffs, to in response to discriminatory trade practices that burden or restrict U.S. trade.
Examples of the IEEPA tariffs are the sweeping reciprocal tariffs imposed with nearly every global trading partner. Examples of the Section 232 tariffs include the tariffs on steel and aluminum. (The Tax Foundation breaks down the various tariffs here and provides their estimate of projected tax revenues and economic impact from the tariffs over the next decade).
IEEPA Tariffs Struck Down – For Now
Professor Ilya Somin, who filed the case along with Liberty Justice Center, explains the legal rationale in the case here. Broadly speaking, the Court ruled that Congress did not give specific authorization to the president to impose tariffs under IEEPA, thus the president did not have legal authority to impose such tariffs. The US Court of Appeals has stayed its ruling to October 14 to allow the government to appeal to the US Supreme Court.
Businesses will have to wait until mid-October or beyond to see if the IEEPA tariffs will continue. If the US Supreme Court strikes down the IEEPA tariffs, presumably the US Treasury would have to refund the tax dollars collected so far by the Trump Administration.
Broader Legal Implications
The legal implications of the case extend well beyond determining the limits to the presidential power to impose tariffs under IEEPA. President Trump has enthusiastically embraced the precedent set by recent presidents and is governing largely by executive order. Lately though, lower courts have identified limits to presidential powers on issues ranging from the deployment of National Guards to rescinding federal grants to Harvard University. (While a full constitutional analysis is beyond the scope of this essay, future writings may delve into the constitutional doctrines in play).
The Economic Effects
While the tariffs are impacting consumers and businesses abroad, American businesses, employees, and consumers are starting to feel the effects. The Wall Street Journal recently reported how businesses are so flummoxed by tariffs and price fluctuations that they no longer know how to price their goods and services. In a recent survey by the Dallas Fed, about 70% of Texas manufacturer respondents indicated tariffs have already negatively affected their business.
Negative Effects Beyond “Retaliation”
So far, few countries have imposed retaliatory tariffs on the United States. Nevertheless, US producers and exporters – like John Deere – are feeling the blowback from foreign markets.
American distilleries and winemakers have seen a decrease in sales in Canada by over 60%. This comes from a combination of official and unofficial boycotting of American products. In a recent filing in the United Kingdom, Levi’s identified rising anti-Americanism in foreign markets as a risk factor to UK sales.
Up until recently, US businesses have effectively absorbed the costs of tariffs rather than passing the cost onto American consumers. However, this is changing as the producer price index has spiked, now higher costs are being passed to consumers.
On top of this, the US labor market has softened as American companies have dramatically slowed hiring and laid off workers to cut costs. Given the fact that the US Supreme Court will likely rule on the legality of the IEEE PA tariffs soon, maybe employers will pause further plans of job cuts until the Court rules.
More Uncertainty in the Meantime
Even if the United States Supreme Court strikes down the IEEPA tariffs, there will be a continued period of uncertainty as we wait to see how the Trump Administration reacts. As mentioned above, President Trump has relied on at least two other pieces of legislation to impose tariffs. In all likelihood, he would reimpose many of these same tariffs under a different legal rationale.
The Section 232 National Security tariffs are on steadier constitutional footing. However, if a president were to declare an endless number of national emergencies there is a risk the Supreme Court would eventually draw a line and establish a clearer distinction between a legal pre-tax and a traditional concept of a “national emergency.”
So, American businesses and consumers will still be on the merry-go-round of trade uncertainty for a bit longer. To the extent that there is a rise of an anti-American sentiment abroad, it is unlikely that a US Supreme Court ruling alone will restore the goodwill that American businesses previously enjoyed.
Doug McCullough, Vanguard Legal PLLC, Partner