The Tariff Trolley Problem

The Supreme Court's damned if it does, damned if it doesn't

A piece I wrote for The Royal United Services Institute for Defence and Security Studies that came out today is re-printed below.

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President Donald Trump has upended the global trading system by implementing a tariff regime that has ballooned America’s effective tariff rate from 2% to over 17%. For the legal power to issue the majority of his tariffs, he relied upon the International Economic Emergency Powers Act of 1977 (IEEPA). No previous President has issued tariffs via IEEPA, and, after litigants challenged the legality of the President’s authority to do so, the Supreme Court of the United States must now rule on the question.

In that sense, the Supreme Court is now stuck in a classic trolley problem. The Supreme Court must either pull the lever to change course to a path fraught with short-term uncertainty, invalidating the foundation of America’s current tariff regime and dramatically resetting President Trump’s policy agenda. Or, if it does nothing, America’s existing high-tariff regime will not only endure for the rest of the Trump presidency but likely for years to come, confirming the ability of America’s presidents to usurp Congress and gain unilateral power to impose international taxes and tariffs. Either way, this is a choice of enormous global economic consequence.

Putting The Wheels in Motion

Within days of taking office for a second term, President Trump set off to upend the global trading system. On 1 February, he announced ‘trafficking’ tariffs on Canada, China and Mexico, citing the need to stop drug trafficking and illegal migration. On 2 April, so-called ‘Liberation Day’, he went further, announcing a ‘reciprocal’ tariff on 185 countries and territories along with a 10% universal tariff, this time citing the need to lower the national trade deficit.

Many of these tariffs have now been in place for the better part of a year and firms and foreign governments have adapted to a new normal. However, the President may not have had the legal authority to issue them in the first place. And the problem is, there’s no easy way to turn back.

Emergency Economic Powers

When announcing both the trafficking and reciprocal tariffs, the President invoked authorities under IEEPA. The law grants the President the authority to ‘deal with an unusual and extraordinary threat which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States.’ To take action, the President must declare a national emergency related to the threat.

Since the law’s passage under President Jimmy Carter, every President has invoked IEEPA. In the first instance, President Carter froze Iranian government assets in response to the Iran Hostage Crisis. More recently, President Joe Biden issued wide-ranging sanctions against Russia in response to its 2022 invasion of Ukraine. IEEPA serves as the foundation for much of America’s economic statecraft, including sanctions, the outbound investment programme, data security restrictions and controls on information and communications technology.

In none of the dozens of previous uses of IEEPA has a President tried to use the law to impose tariffs. Today, President Trump is relying on a provision of the law authorising the executive to ‘regulate . . . importation’ of ‘property in which any foreign country or a national thereof has any interest.’ He argues that the phrase ‘regulate . . . importation’ in the IEEPA statute grants him power to issue tariffs to deal with declared emergencies, which, in this case, are fentanyl trafficking, illegal immigration and the trade deficit.

Within weeks of the reciprocal tariffs, plaintiffs brought multiple suits challenging the legality of the IEEPA tariffs. On 28 May, in V.O.S. Selections, Inc. v. Trump, the United States Court of International Trade (CIT) found the IEEPA tariffs illegal because the law does not permit a president to issue ‘unlimited tariffs’ and because the specific tariffs in question did not relate closely to fentanyl trafficking or illegal immigration. One day after the CIT’s ruling, in Learning Resources, Inc. v. Trump, the US District Court for the District of Columbia went further, concluding that IEEPA ‘does not authorize the President to impose tariffs.’

Both the CIT and the District Court ruled in favour of plaintiffs and issued preliminary injunctions. However, upon appeals from the Trump administration, both injunctions were stayed, allowing the tariffs to remain in place pending appeals. That means for months, the tariffs reshaped the global economy: the train was put into motion.

The Supreme Court will hear oral arguments on both cases on 5 November and its decision will likely come in the months that follow. This decision won’t come in a vacuum; the Supreme Court will be clear-eyed on the economic consequences of its choice.

Option 1: Pull the Lever

One choice for the Supreme Court is to side with the lower courts, ruling that IEEPA does not grant the President the power to impose tariffs. Because the tariffs have been in place for months, their invalidation will cause ripples throughout the American and global economies in the short-term.

First, there are immediate changes to the US economic picture. IEEPA tariffs account for 71% of the tariffs issued by the Trump administration this year. Without them, today’s average effective tariff rate in America would drop from 17.4% to 6.8%. Inflation would moderate, with projected 2025 short-run price hikes slowing from 1.7% to 0.5%. Long-term real GDP would increase $95 billion annually.

Second, the US fiscal picture will deteriorate at a time of a growing global debt crisis. Treasury Secretary Scott Bessent has warned that the invalidation of IEEPA tariffs would force the Treasury to return tens of billions of dollars of collected revenue, a number that only increases the longer the Supreme Court takes to make its ruling. Over ten years, economists have projected IEEPA tariffs to bring in $1.7 trillion in federal revenues. The Trump administration has argued these revenues would offset the estimated $3 trillion it added to the debt through its tax bill.

Third, there will be uncertainty in President Trump’s approach to his policy agenda, including for the domestic economy, foreign policy and national security. With the tariff as a hammer, the President views every problem as a nail. To reindustrialise America, tariff foreign competition. To end the war in Ukraine, tariff India. To induce greater NATO spending, tariff allies. Without the ability to use IEEPA, the President’s agenda could be hamstrung. There are a handful of other authorities permitting the use of tariffs, but each comes with requirements that limit the expansive approach the President has pursued under IEEPA, though the administration certainly may test the bounds of these authorities.

A road to certainty would be for Congress to pass a law granting the President broad authority to issue tariffs. However, even congressional Republicans may be wary of voting on unpopular tariffs and giving future Democratic Presidents this authority. Moreover, there’s an open question if it would be legal for Congress to provide the President this broad authority or if doing so would violate the nondelegation legal principle, which limits Congress from delegating core legislative authority to other branches of government.

Option 2: Do Nothing

If the Supreme Court, on the other hand, permits the President to issue tariffs under IEEPA, it will shape the future of US international economic policy in both predictable and unpredictable ways.

First, President Trump’s tariff regime can remain in place for the course of his administration and will likely extend for years beyond. President Trump has given no signal of lowering tariffs significantly below today’s average rate of 17.4%. In fact, achieving his purported goals of broad tariffs —reindustrialisation and lowering the trade deficit – requires a long-term commitment to the policy.

That’s why even if President Trump’s successor is free-trade oriented, it will be challenging to unwind the tariffs. Tariffs are like a pressure valve – you can’t release them too fast without causing destabilisation. With the legal stability of Trump’s tariff regime over the next three years, more companies and whole industries will make investment decisions. Rapidly reversing the Trump tariff decisions to Biden-era levels of 2% could leave Trump’s successor politically responsible for any offshoring and in opposition to constituencies like unions. History shows that after a spike in tariff rates, winddowns have been gradual.

Second, if the Supreme Court agrees with the President’s reading of IEEPA, the President could hold the power to issue any tax with an international nexus that relates to any situation the President deems a national emergency. It’s not hard to extrapolate how President Trump – or his successors – could use this.

As Greg Ip postulates, President Trump could declare offshoring an emergency and apply a surtax on the profits of companies that offshore jobs. Peter Harrell offers more policies that may be legal under President Trump’s IEEPA logic: a carbon border tax, a tax on inbound and outbound investment flows, a digital services tax on big tech companies, a stock trading tax applied to the shares of any company with a single foreign shareholder. In just a few months, President Trump has demonstrated the breadth by which he plans to use tariffs. A future President will have other priorities and will also be empowered by this pending decision to act on them without Congressional approval.

An Impossible Choice

By moving fast with dozens of tariffs, President Trump has been able to put his stamp on global trade long before the legality of his actions could work through the methodical legal process. He’s left the Supreme Court in an unenviable position: face the fallout of potential short-term economic chaos or cement a long-term restructuring of America’s economic policy. And to go against the President would fuel his arguments of a rigged judiciary while to placate the President would crack open the Pandora’s box of executive authority a little more. Like any trolley problem, neither choice is good.