A Supreme Court ruling striking down the reciprocal tariffs won’t end CEO stress.
Warren P. Browne, an adjunct professor of economics and international trade at Lawrence Technological University’s College of Business, provides insight on a ruling of the Supreme Court regarding tariffs.
Tariffs: Far From Over
Many executives at U.S companies hoped the commercial whiplash inflicted by tariffs would come to an end after trade “deals” were completed. This remains wishful thinking.
In the interim, executives have done a remarkable job of mitigating the impact by absorbing a high percentage of the tariff cost or pushing it back on their suppliers. Goldman Sachs recently estimated companies have only passed 37% of the tariff cost onto consumers, thereby hurting current operating margins and shareholder value.
Students who take International Trade at LTU know tariffs are a tax on imported goods, and the tax is ultimately paid by consumers. A study conducted by Amiti, Redding and Weinstein in 2020 concluded this passthrough happens in the majority of cases over the long-term. But are there exceptions to the tax? Yes, for example, when export and domestic companies absorb some of the cost increase—a situation that exists in today’s market. One thing is certain: Export countries do not pay the tariffs despite continued proclamations by the President of the United States.
Many businesses, especially those relying on imported products, hoped the increased tariffs were a temporary negotiating tactic of the Trump administration. Hope was not a strategy here.
Realistically, help could come from a petition submitted by small businesses and a group of states to the U.S. Supreme Court arguing the President does not have the authority to implement reciprocal tariffs under the 1977 Emergency Economic Powers Act. Part of the argument is based on Article 1, Section 8, of the Constitution: Congress has the right to “lay and collect taxes,” and tariffs are a tax [Refer to footnote 1].
Court Rulings Won’t End the Turbulence
These tariffs have been applied to almost every major trading partner and oddly to Canada and Mexico where the U.S. has a free trade agreement negotiated by President Trump. The intent of the increased tariffs is to offset the negative trade balance with 90 countries—a tall task [Refer to footnote 2].
Reciprocal tariffs are different from the Section 232 tariffs of the 1962 Trade Expansion Act (national security) which were implemented in product categories like lumber, steel, aluminum, and copper.
Even if the court rules against the administration’s tax overreach, they may look for a reconfiguration of many of the reciprocal tariffs as national security issues, where the President has much broader discretion to raise tariffs. Additionally, some of the reciprocal tariffs have changed as a result of trade negotiations. The unwinding could add additional trade whiplash.
The U.S. automotive sector, an important part of the economy, has also experienced significant turmoil due to the increased tariffs. The auto industry tariffs, implemented by the administration under Section 232, will remain in place for quite some time. Consequently, the continuing supply chain disruption will be serious and hurt vehicle sales, production, and employment over the next few years—the exact opposite of the outcome promised by the Trump administration.
United States companies have experienced torturous tariff turmoil for the past 10 months. Arguably, the current administration has also destroyed a considerable amount of goodwill with major trading partners. Moving forward, U.S. consumers will face additional price increases when cost absorption becomes more difficult and prices start to increase.
Let’s hope policymakers ultimately recognize the current approach needs quite a bit of fine tuning to avoid inflation and stagnation.
Footnotes:
- Learning Resources, Inc. v. Trump
- The Senate recently voted to rescind the tariffs on Canada
- National Bureau of Economic Research, Working Paper 26610
