Trump’s new tariffs will look nothing like the old ones

Will America’s new tariff rate settle at 10 per cent, 15 per cent or something even higher? It’s an uncertainty-generating unknown, both for the US and its trading partners.

After the Supreme Court’s demolition of Donald Trump’s hotchpotch of reciprocal tariffs last week, the US president initially announced a new 10 per cent tariff rate on all imports to America, before quickly posting on his Truth Social platform that the rate would be 15 per cent.

However, when the new tariff rate was enacted on Tuesday by US Customs and Border Protection, it was 10 per cent. The administration said the higher rate was still being worked on. Fifteen per cent is the maximum rate allowed by Section 122 of the Trade Act of 1974, the legislative cover for the reworked tariffs.

“Right now, we have the 10 per cent tariff. It’ll go up to 15 per cent for some, and then it may go higher for others, and I think it will be in line with the types of tariffs we’ve been seeing,” the US trade representative, Jamieson Greer, said in an interview with Fox Business on Wednesday.

The question mark over what the rate will be within the 150-day period before the Section 122 tariffs would need Congressional approval to be extended, and what will happen beyond the 150 days, adds to the confusion caused by the Supreme Court’s declaration that the reciprocal tariffs, imposed using the International Emergency Powers Act (IEEPA), were illegal.

Some of the countries with which the administration had agreed, but not yet signed, trade deals negotiated under duress – using leverage that the court deemed illegal – have already backed off, awaiting what the final shape of Trump’s tariffs might be. The European Union, India and Taiwan were on the verge of ratifying their deals, but have now deferred their formal endorsement.

Others, like Japan and South Korea, which struck deals sheltering them from the full effects of tariffs the administration imposed, using legislative heads that weren’t tested before the court – Trump’s sectoral tariffs threatened their auto exports – are planning to stick with what they’ve got.

For the Trump administration, the $US175 billion ($245 billion) of duties it says it has collected from the IEEPA tariffs will have to be refunded to the companies that paid them. So in effect, Trump’s “beautiful” reciprocal tariffs may have raised no revenue at all since he began imposing them in April last year.

There’s also a question mark over the Section 122 tariffs introduced on Tuesday and the revenue they collect, given that the section, introduced when many exchange rates were still fixed, relates to a “large and serious” balance of payments deficit.

In an era of floating exchange rates, the US has no balance of payments deficit, with capital flows balancing out any trade deficit.

In effect, Trump’s ‘beautiful’ reciprocal tariffs may have raised no revenue at all since he began imposing them in April last year.

Already, some of those groups that mounted the successful challenge against the IEEPA tariffs are considering whether to take action against their Section 122 replacements.

While any legal action would probably be resolved well after the 150-day lifespan of those tariffs, the Trump administration would face the prospect that it might also have to return any revenue raised during that period, which could be anywhere from $US100 billion to $US150 billion.

It has described Section 122 as a “bridge” to a more permanent and less challengeable tariff regime, with Trump saying the new levies would be “a little more complex, but they’re actually probably better, leading to a solution that will be even stronger than before.”

Whether or not the “solution” is better or stronger, and whether the eventual results for the US and the countries targeted with the new tariffs are similar, the new regime will be very different to the one it replaces.

The “centrepiece” of the new tariff regime, according to Greer, will be Section 301 of the Trade Act, a section that was used in the first Trump administration to impose tariffs on China. It empowers the president to retaliate, via tariffs, against the unreasonable and unjustifiable trade policies of a foreign government.

The section was first enacted more than 50 years ago in response to fears at the time that Japanese imports were going to decimate US industry, while Japan’s own markets were subsidised and protected from imports – similar to the concerns that led to Trump’s 2018 tariffs on China.

The reason that the administration didn’t use Section 301 when Trump decided to declare a trade war on the rest of the world last year is that it requires extensive investigations of the target country’s particular conduct to determine whether it is unfair and harms US trade.

It also requires consultations with the government concerned, as well as formal dispute-setting proceedings where there is a trade agreement in place and says that US action should be proportionate to the burden or restriction placed on the US by the offending country. The legislation requires that Section 301 actions terminate after four years.

While it is doubtful that the Supreme Court would second-guess a presidential declaration that certain foreign trade practices are harmful, the process of investigating foreign trade practices is time-consuming, involves at least some consultation with third parties (who can make submissions to the agency undertaking the investigations), includes some congressional oversight and has to be done on a country-specific basis.

It certainly doesn’t give Trump the ability that he claimed under the IEEPA tariffs to use them to try to coerce governments on non-trade issues, like the punishment of Brazil for imprisoning Jair Bolsonaro, or Europeans for not handing over Greenland. He can’t announce them on a personal whim – there’s a very detailed statutory process.

It is improbable, probably impossible, for Trump to replicate last year’s “Liberation Day” stunt when the 150-day limit to the Section 122 tariffs is reached and announce a new rate structure for the 180-odd countries covered by the previous regime.

Section 301 was not designed as a mechanism for imposing permanent global tariffs and, should the administration try to make it into something that Congress didn’t intend, it might well be vulnerable to yet another legal challenge.

Trump seems to be under the misapprehension that the court has already ticked off the use of his non-IEEPA legislative options.

“While I am sure they did not mean to do so, the Supreme Court’s decision made a president’s ability to regulate trade and impose tariffs more powerful, and more crystal clear, rather than less,” he said in the wake of the court’s ruling.

“I can charge much more than I was charging,” he said, claiming that he could still “destroy” foreign countries – even though there is the concept of proportionality embedded in Section 301.

In fact, while Justice Brett Kavanaugh did (in his dissenting judgement) cite a number of alternative laws that could be used to impose tariffs, neither he nor the rest of the court opined on the legality of the different ways in which Trump might try to use them.

Trump claimed in his State of the Union address on Wednesday that his tariffs would eventually replace US income tax. He continues to maintain that they can wipe out income tax, pay for $US2000 dividend cheques to American households, fund the $US1.8 trillion US budget deficit, finance greatly increased military spending and provide $US12 billion of compensation to farmers for the impact of his trade war.

He has an uneducated understanding of how tariffs work – they are essentially a domestic tax on Americans’ consumption, not a tax on foreign exporters as he claims — and of their limitations as a revenue raiser.

At best – assuming the tariffs don’t work as intended and shrink imports and consequently the revenue they generate – they would raise roughly $US300 billion a year. Last US financial year, income taxes generated $US2.6 trillion of revenue.

In the context of government revenues of about $US5.25 trillion a year, Trump’s tariff takings are inconsequential and completely out of whack with the degree of damage they have caused to America’s standing with the rest of the world and, via an increased cost of goods, to America’s own economy. Yet, he persists.

There’s a quote attributed, probably erroneously, to Benjamin Franklin, who is reported to have said that “we are all born ignorant, but one must work hard to remain stupid.” Quite.

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