Mad king: Trump just lost his superpower

Donald Trump lost his superpower last week, with the US Supreme Court applying the kryptonite.

Since regaining the presidency last year, Trump has wielded the International Emergency Economic Powers Act (IEEPA) as a multipurpose weapon, using it and the tariffs he imposed to not just force countries into extremely one-sided trade deals, but as geopolitical leverage.

Whether it was to coerce countries – including, indeed particularly, former close US allies – into massive trade and investment concessions under the threat of punitive tariff rates, or punishing Brazil for imprisoning his friend and ideological ally, Jair Bolsonaro, threatening Switzerland because he didn’t like the tone of a conversation with its prime minister or European countries for not simply handing over Greenland, Trump weaponised IEEPA.

The apparent beauty of that legislation was that it seemed to give the president the unfettered ability to deploy tariffs whenever and however he liked, without any guardrails. It gave him king-like powers from the age when kings had unlimited powers.

It also promised a massive stream of revenue –$US3 trillion ($4.2 trillion) over a decade – to help fund the massive tax cuts in the One Big Beautiful Bill that passed through Congress last year.

The tariffs were also supposed to fund the $US12 billion of aid to farmers who lost their incomes when China responded to his tariffs by switching to other agricultural suppliers. They were supposed to fund $US2000 dividend cheques (still in the mail) to US households. Trump even said they could be used to abolish US income taxes.

Thanks to the Supreme Court, that revenue stream has not just been truncated, but up to $US175 billion of the revenue raised from it might have to be refunded to the US importers who paid it.

Trump does have other legislative heads he can turn to – and already has – to try to recoup some of those lost revenues, but none given him the ability to declare a tariff on a personal whim or in response to a perceived slight.

That was the superpower that frightened countries into succumbing to his demands rather than retaliating to his “Liberation Day” tariffs. It’s now lost and the aura of limitless and unchallengeable geopolitical authority created by his ability to levy tariffs unilaterally has been diminished.

The administration moved swiftly to the “Plan B” it concocted when, during the oral pleadings, it became apparent that the Supreme Court might not be as acquiescent as it had been in the vast majority of the Trump-related issues brought before it.

It immediately imposed a 10 per cent tariff, raising it quickly to 15 per cent, on all imports using Section 122 of the Trade Act of 1974. It foreshadowed a shift to other legislative cover when the 150-day limit of Section 122 tariffs expires.

The difficulty for the administration is that use of Section 122 might also be unlawful and would need to be approved by a Congress that is becoming more sceptical of tariffs if it was to be extended, while the other potential legislative heads involve lengthy and detailed investigations and, unlike Trump’s deployment of the IEEPA tariffs, have to non-discriminatory.

Countries surrendered to Trump’s demands and committed to massive investments in the US to lower their tariff rates and also to ensure that they either had a relative advantage against their trade competitors or at least no disadvantage.

Now, they all have to be treated equally and, should the administration move to other legislative mechanisms, not only would a detailed individual case for tariffs need to be made, but they might have to be product-specific rather than a general tariff on all imports from a particular country.

After the demonstrated success of the case brought against the IEEPA tariffs, they might also be vulnerable to legal challenge.

Section 122, for instance, was created in 1974, only a couple of years after Richard Nixon abandoned the gold standard. It was designed for an era of fixed exchange rates, a temporary fix for situations where the US faced a “large and serious balance-of-payments deficit.”

Today, where all America’s major trading partners have floating exchange rates, the US has no balance of payments deficit, with capital inflows compensating for its current account deficit. His new tariffs are probably as illegal as his first.

Given that they only last 150 days, it is probably unlikely, however, that they will be challenged.

More likely are legal actions to recover the IEEPA tariff duties already paid. More than 1500 of the estimated 300,00-plus importers who paid those tariffs have already filed suit, seeking their recovery. Hedge funds have bought rights to some of those potential refunds (at big discounts to their face value) to join that queue.

US Treasury Secretary, Scott Bessent, has estimated that $US175 billion of revenue is at stake and bemoaned that the administration could be tied up in the courts for years.

In lower court hearings, however, the administration assured the courts – to head off requests from importers for immediate relief – that, should the IEEPA tariffs be struck down by the Supreme Court the revenue would be refunded. If the administration honors its commitments to the courts – commitments that did stave off injunctive relief – that revenue will have to handed back to importers.

While Justice Brett Kavanaugh (a dissenter in the majority Supreme Court judgement) flagged the likely “mess” of a refund process, the US Customs and Border Protection Authority has established processes for refunds for overpayments, errors or returned exports and has an automated system for doing so. Refunding the illegal collections is not as daunting as it might appear.

His new tariffs are probably as illegal as his first.

For the administration, however, it would be unpleasant returning the $US175 billion. It would increase the $US1.9 trillion budget deficit expected this year and also increase the already-massive volume of government debt needed to be raised from the Treasuries market.

The Yale Budget Lab says that, if the tariffs are refunded, it would cost the government $US1.2 trillion of revenue through to 2035, add 0.6 per cent to the inflation index preferred by the Federal Reserve Board, halve the cost to the average household, relative to the impact of the IEEPA tariffs, to about $US780 and slice 0.1 percentage points off GDP, compared to 0.31 per cent before the court’s decision.

The administration will still have the revenue raised from its sectoral tariffs on products like steel, aluminium and autos (which the Tax Foundation estimates will amount to about $US635 billion over a decade) but nearly 75 per cent of Trump’s tariff revenues have been wiped out.

Some of that revenue will be recoupled from the new tariffs, but it is unlikely that it will be the full amount and Trump has lost his leverage for coercing countries into new investment commitments.

For the moment at least, other countries – most of whom have “framework” agreements rather than signed deals – aren’t signalling that they will walk away from their commitments, probably because Trump’s tariffs on steel, aluminium, auto and other commodities aren’t affected by the court’s decision.

Trump’s tariffs haven’t reduced America’s trade deficit in goods, which is at record levels, hasn’t reduced USA deficits or debt, which keep rising, and have harmed economic growth, inflation and manufacturing employment, which have created a cloud over the party’s prospects at this year’s mid-term elections.

If the Supreme Court has given the administration, and the Republican-dominated Congress, the ability to lessen the burden the tariffs have imposed on the average household, and lower-income households in particular, they should take it.

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