Trump is right. Ending tariffs would be an economic disaster, at least for him. Any damage to America would be his own fault.
It would not, as Trump claims, turn America into a third world country. That is a typical Trumpian hyperbole.
But the sudden and dramatic end of tariffs would definitely damage Trump’s vision of the future American economy. And that in turn will hurt Trump politically. Whether it would also be bad for the rest of the world… well, we’ll have to wait and see.
The prospect of the sudden end of tariffs was raised by the decision of the Appellate Court last Friday to support a lower court’s judgement that the tariffs were unconstitutional.
The Appellate Court, however, has given Trump a possible out—The Supreme Court. The Administration has until October 18 to appeal to the ultimate judicial authority and, of course, the court is packed with conservatives,
But that may not be enough. Trump imposed the tariffs under the 1977 International Emergency Economic Powers Act (IEEPA). The IEEPA gives the president sweeping powers to declare an emergency and to use economic actions to deal with it.
These include such measures as sanctions and freezing assets. However, nowhere in the Act does – ruled the Appellate Court by 7 to 4—is the president given the power to impose tariffs. That is “a core Congressional power.” This means, according to two levels of the judiciary, that the tariffs are unconstitutional and should be reversed.
So far Trump’s tariffs have raised more than $210 billion dollars. By time the Supreme Court rules on their legality the figure will be around $300 billion.
If the tariffs are illegal than those who paid them can sue the government—plus interest and possible damage to business—for the money that they lost.
But that is not all. Tariffs are at the heart of Trump’s long-term economic policy and linked to his Big Beautiful Bill (BBB). According to some estimates, the sweeping tax cuts in the BBB could increase the federal deficit by $5.2 trillion over the next ten years. Tariff revenues are meant to more than offset those losses.
In fact, according to Trump, his plan is to eliminate income tax completely and replace it with revenues from tariffs.
Now, here is the rub. The BBB is completely and totally ironclad legal because it was passed by Congress as stipulated in the constitution. Unlike the tariffs, it cannot be reversed. The tax cuts which are at the heart of the BBB are permanent.
This means that Trump has constructed a perpetual economic edifice on foundations which may be declared illegal. If tariffs are declared unconstitutional, the only way he will be able to pay the $800 billion a year allocated immigration control and the $150 billion extra a year for defense is by borrowing money. Republicans—and many Democrats—think the federal deficit is already too high at $1.9 trillion.
There is, of course, the possibility that Congress would vote to give the president the power to impose tariffs. This is unlikely even with a Republican-controlled House of Representatives because the lower house of Congress jealously guards its control of the nation’s finances.
Losing the tariffs war would have other effects. In addition to paying tariffs, many countries have agreed to invest trillions of dollars in US industries and many American companies have promised to return factories to US soil. Japan and the EU have between them agreed to invest $1.1 trillion in the US. Scores of companies have concluded that it is financially—and politically–advantageous to move production to America.
With the end of tariffs Trump is less of a political threat and it is cheaper to keep production outside high labour-cost America. In short, investment promises are tied to tariffs.
Politically, of course, the end of tariffs would make Trump look foolish. But then, that is exactly what he is. Donald Trump has built an economic policy predicated on powers which it very much looks as if he may not have. He has also failed to think through the consequences of an action—one the first principles of leadership.
But what impact will this have on Trump politically. As far as his base is concerned—not much. MAGA has no alternative to Trump. It will hurt him with swing voters, especially those in the low-income Hispanic and Black communities who are already being hit by his economic policies. This could mean a boost for the Democrats in the mid-terms which would curtail Trump’s power in the second half of his administration.
As for the rest of the world, most international leaders already regard Trump as a fool. Many of them will heave a sigh of relief that the tariffs are blocked. But they also know that Trump hates being thwarted. They will thus be concerned about what this most mercurial of presidents will do if his tariffs are blocked by the Supreme Court.
* Tom Arms is foreign editor of Liberal Democrat Voice. He also contributes to “The New World” magazine and lectures on world affairs. He is the author of “America Made in Britain,” two editions of “The Encyclopaedia of the Cold War” and “The Falklands Crisis.”
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9 Comments
Just one quibble, Tom. The effects of the BBB are not necessarily permanent. If congress so decides they can introduce different tax measures and scrap those of the BBB.
Thank you for a timely article!
If, as it seems, the U. S. A has a sovereign currenccy and so can create money, why does it need to borrow?
“If, as it seems, the U. S. A has a sovereign currency and so can create money, why does it need to borrow?”
It could create money without limit, but as I understand it that kind pf thing usually leads to significant inflation.
@ Steve,
“If, as it seems, the U. S. A has a sovereign currency and so can create money, why does it need to borrow?”
All money is an IOU. So anyone creating it, or writing out an IOU, is effectively borrowing.
The sale of government bonds, which the mainstream considers to be borrowing, is just the exchange of one type of govt IOU for another. The purpose is to set interest rates in the economy. Short term interest rates are set by a decision of the monetary committee in the BoE. Longer term interest rates are set by the activities of the BoE in the bond market.
The Government (this includes the BoE) can have whatever level of interest rates it likes. 0%, 5%, 10% or whatever.
The problem will be the effect on the value of the currency on the forex markets if it sets them at too low a level.
Canada has a sovereign currency which it manages well AND has stable legal and political systems.
Such seems to demonstrate that competent management of a sovereign currency backed by appropriate and secure political and legal systems results in a sound and dynamic economy without the avoidable excessive costs of borrowing.
“The Canadian dollar is popular with central banks” because of the above plus other factors which may be found by using the A. I Mode.
“If, as it seems, the U. S. A has a sovereign currency and so can create money, why does it need to borrow?”
When the government issues bonds (borrows), it isn’t “finding money.” It’s swapping dollars for interest-bearing securities. From an MMT perspective, Treasury debt is simply a way of giving people a safe, interest-bearing place to store dollars. If the U.S. stopped issuing debt tomorrow, the government could still spend — but it would leave more reserves in the banking system.
Why keep borrowing, then? MMT argues that the persistence of borrowing is largely political and institutional: It disguises the fact that the government is creating new money when it spends. It provides Wall Street and global investors with a steady supply of safe assets. It supports the Federal Reserve’s interest-rate targeting (though MMTers say this could be done differently without debt issuance).
The real limit on government spending is not “running out of money,” but whether the economy has enough real resources (workers, factories, materials). If the government spends beyond the domestic economy’s capacity to absorb it, you get inflation. Thus, debt levels aren’t the issue — inflation and resource use are.
Currently, the USA has a problem with rising costs of borrowing in debt markets, inflation, weak job growth and paying for imports. Tariffs are already exacerbating all of these problems. The UK similarly is experiencing economic difficulties with rising costs of debt issuance despite 5 recent rate cuts by the Bank of England and a stagnant economy.
The problems lie with the skewed distribution across the population of income, wealth and consumption in both the US and UK. The solutions lie with fiscal and tax reforms aimed at addressing underlying wealth inequality. Trumps tariffs and BBB are exacerbating these problems of skewed income and wealth distribution in the USA. The UK faces steep tax rises in the upcoming budget to offset increased government spending since Labour’s return to power and keep inflation (and hence borrowing costs) under control.
Trumps basic problem is his self belief. Unintended consequences coming home to roost.
Might it be that types of capitalism may be usefully differentiated?
Between the end of World War 2 and the govrnments of Reagan and Thatcher, we had a form of Symbiotic Capitalism which kept the pay of regular citizens connected with that of (senior) executves and provided services and infrastructures which brought benefits to regular citizens and their children. Such included affordable housing, genuinely accessible health care and no direct cost tertiary education.
Such, and more. have been reduced to removed since the governments of Reagan and Thatcher, which introduced Parasitic Capitalism which has also disconnected the pay of regular people and that of (senior) executives etc and distorted the tax system to benefit the wealthy.
Parasitic Capitalism can be called Austerity or Neoliberalism.
Mr. Arms helpfully provides information on Mr. Trump’s actions to make predatory capitalism more predatory at a greater speed.
“Trumps basic problem is his self belief…..”
It’s not just Trump. There’s a widespread misunderstanding of the effects and nature of Tariffs, and the relative benefits of exports and imports.
We see this in Europe too. The rules of the EU dictate that the only way to keep a healthy economy in the EU is to have a trading surplus. This keeps the economy well topped up with euros. The other option is to borrow them from the ECB but this is highly discouraged, to say the least.
Not everyone can do this of course. Others, both inside and outside of the EU, including the UK and USA, end up running deficits. This gives Trump the justification he needs for misguided policies.
@ Steve,
“Between the end of World War 2 and the governments of Reagan and Thatcher, we had a form of Symbiotic Capitalism..”
The Western ruling classes were worried about Communism taking hold after WW2. They had to be on their best behaviour! As this concern receded in the 70s …..
@ Joe,
I’m more in agreement than you might think. Except I’d include concerns about exchange rates in the argument. We could have zero interest rates next week. We aren’t beholden to the gilt markets. The pound would fall though –possibly a lot. This is something that we could move towards but take more time about it.