Trump Imposes More Unlawful Tariffs

Last Friday I wrote about bad economic news that cult leader, convicted felon, and failed President Donald Trump received, including a ruling by the U.S. Supreme Court that the reciprocal and fentanyl tariffs that have been Trump's favorite policy choice are unlawful. As expected, this sent Trump into a tizzy from which he has still not recovered. In that post, I suggested that Trump would find an authority other than the International Emergency Economic Powers Act – the legal basis for Trump's tariffs that the Court ruled did not provide authorization — but that no current law provided the type of authority that Trump desires. I speculated that "More than likely, Trump will simply impose tariffs, claiming authority that the law does not allow, and then wait for his action to be litigated in the courts." This is exactly what Trump did. While I was still writing Friday's post, Trump announced global tariffs of 10% based on authority provided by Section 122 of the Trade Act of 1974. However, a plain reading of Section 122 does not support a lawful invocation in current circumstances. Therefore, the newly imposed tariffs will almost certainly be contested in the courts and, more than likely, ruled unlawful.

Before going further, I want to make two points clear. First, Section 122 of the Trade Act of 1974 was obsolete before it was even enacted into law and, second, probably because of that, has not previously been invoked. Section 122 is titled "Balance-of-Payments Authority." To understand its purpose and why it has been obsolete from its moment of inception, it is important to understand some U.S. trade history. I am relying heavily on a guest post on the International Economic Law and Policy Blog written by Bryan Riley for this information, though I have confirmed everything through other sources. As Riley writes:

Under the Bretton Woods system that was adopted after World War II, most of our trading partners pegged their currencies to the U.S. dollar, which the United States would maintain at a value of $35 per ounce of gold. But, by the late 1960s, there wasn’t enough gold in Fort Knox to cover the growing volume of dollars held abroad. This created a problem that came to a head in 1971, when European nations and Japan began converting their dollar holdings into gold.

For those who have forgotten, balance of payments is the difference between all money flowing into the country and the outflow of money to the rest of the world. By the late 1960s, the United States was running into balance of payment deficit problems. As Riley notes, the large number of dollars being held abroad created fears that the U.S. didn't have enough gold to exchange for them.

The response by President Richard Nixon was to end the gold standard in August 1971. Nixon, due to fears that this would provoke a surge in imports from countries whose currencies were believed to be undervalued, imposed a 10% surcharge on imports. The import surcharge was challenged in court and soon abandoned when other countries agreed to strengthen their currencies.

In March 1973, the U.S. and other countries abandoned the system of fixed exchange rates. The value of the dollar was allowed to float. However, according to a report by Brookings, the U.S. continued to advocate for a fixed exchange rate. It would not be until October 1976 that the U.S. would fully abandon the gold standard.

The important point of all of this is that between March 1973 and October 1976, the U.S. was in a situation in which its currency was floating, but efforts were being made to reestablish a system of fixed exchange rates. It was in this environment that Section 122 of the Trade Act of 1974 was introduced on October 3, 1973. Section 122 was aimed at giving the President tools to address balance of payment problems that might arise in a fixed exchange rate system. However, because the fixed exchange rate system had already been abandoned before the introduction of the bill, it was obsolete upon arrival.

This brings us to Trump's invocation of Section 122. On February 20th, the same day that the Supreme Court ruled his IEEPA tariffs unlawful, Trump issued a proclamation titled, "Imposing a Temporary Import Surcharge to Address Fundamental International Payments Problems." According to the document, unnamed "senior officials" have informed Trump that:

fundamental international payments problems within the meaning of section 122 exist and that special import measures to restrict imports are required to address these problems.

Trump then announced a 10 percent surcharge on imports to the U.S. lasting 150 days, which is the length of time permitted by Section 122.

The problem with Trump's proclamation is that the U.S. does not face a balance of payments issue such as Section 122 was designed to counter. That is because, again, Section 122 was designed to address problems associated with a fixed exchange rate system, something the U.S. has not had since 1973. The Riley article mentioned above quotes economist Milton Friedman as saying, "a system of floating exchange rates completely eliminates the balance-of-payments problem. The [currency] price may fluctuate but there cannot be a deficit or a surplus threatening an exchange crisis."

In his proclamation, Trump lists a number of trade deficits, some of which would signal problems in a fixed exchange rate system, but are not now going to cause an exchange crisis. Trump likely has no understanding of any of this. He just wants his favorite toy back and demanded that his administration figure out a way to return it. This is what they have come up with. It's a gamble to see how long they can get away with it and whether or not the courts will go along with the charade.

In Trump's defense, as the tariff challenges that led to Trump's tariffs being overturned worked their way through the courts, decisions repeatedly referred to Section 122 as a more appropriate authority for the administration. However, even this is problematic for the Trump administration because government lawyers argued against this contention. Perhaps a bigger problem is that even if the Trump administration can convince the courts that Section 122 is not, in fact, obsolete, it would be hard to argue that the U.S. has a balance of payments issue with every country in the world. The most likely scenario is that the 150-day limit that Section 122 places on tariffs will expire before any court action concludes. Then, Congress will have to act to extend them. However, the Trump administration has argued in the case of U.S. Attorney interim appointments that it can simply reset the clock when time expires. Trump may try that same tactic with Section 122. So, that is something else that will likely have to be litigated.

On Saturday, the day after imposing 10 percent tariffs, Trump raised the tariffs to 15 percent. He did this via a "truth" on his Truth Social social media network that said:

Based on a thorough, detailed, and complete review of the ridiculous, poorly written, and extraordinarily anti-American decision on Tariffs issued yesterday, after MANY months of contemplation, by the United States Supreme Court, please let this statement serve to represent that I, as President of the United States of America, will be, effective immediately, raising the 10% Worldwide Tariff on Countries, many of which have been “ripping” the U.S. off for decades, without retribution (until I came along!), to the fully allowed, and legally tested, 15% level. During the next short number of months, the Trump Administration will determine and issue the new and legally permissible Tariffs, which will continue our extraordinarily successful process of Making America Great Again - GREATER THAN EVER BEFORE!!! Thank you for your attention to this matter. President DONALD J. TRUMP

It is notable that Trump is explicitly declaring a "truth" to be a formal method of making presidential declarations. Imagine the poor customs officials who are apparently expected to spend their Saturdays refreshing Truth Social in order to see whether they need to change their tariff systems "immediately." This is a perfect example of how "efficient" government is not always "effective" government. Also, Trump wrongly states that Section 122 has been "legally tested." This is not true. Section 122 has not even been invoked previously, let alone tested in court. Fundamentally, however, this post is simply another indication that we are being led by a mad king who shouldn't be anywhere near the presidency.

Trump has invoked a section of law that was never meant to be used in the manner that he is applying it. It is almost certain that he will be challenged in court, and Trump is very likely to lose unless the tariffs expire first. In the meantime, consumers should be aware of the financial damage being done to them. Contrary to Trump's repeated claims that tariffs are being paid by foreign countries, tariffs are, in fact, a tax on the American people. The Supreme Court has just said as much. Tariffs are paid by the importers, and almost all of the costs are subsequently passed on to the buyers: the American public and businesses. While those importers who have paid tariffs may eventually be successful in receiving refunds, those of us who have already paid for them through higher prices — you and me — will not receive anything back. We are out of pocket, having unnecessarily paid higher prices as a result of Trump's unlawful tariffs. This will continue to happen as Trump stubbornly continues to apply tariffs, lawfully or not.