Viewpoint
May 30, 2025 | 14:46
May 30, 2025
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Trapped in a Tariff Purgatory |
| You would be forgiven if you felt at this moment like one of those steel metal balls ricocheting around the pinball machine, getting rudely slammed in every direction first by tariffs and tariff uncertainty as reciprocal tariffs are raised and lowered. Now businesses, consumers, and investors must contend with new judicial rulings that order the reciprocal tariffs removed one day and an appeals court that temporarily reinstates them the next (at least through mid-June while it weighs the Administration’s motion for a longer-term pause and other litigation over their legality continues to work their way through the courts). For those trying to keep up with the latest tariff twists and turns in order to plan and schedule the orders for your business, price your products, or manage your portfolios, the heightened uncertainty is enough to make one want to just wait it all out until we get more clarity on the new rules of the road. |
| After Liberation Day and at the height of the trade war between the U.S. and China, the average U.S. import tariff rate hit an eye-popping 26%, the highest in more than a century (i.e., higher than those during the Smoot-Hawley era of the 1930s). If left in place at that level for any considerable length of time, it is highly likely the U.S. economy would have ended up in recession and two-way trade between the U.S. and China would have effectively ended. Thankfully we got a temporary reprieve with the U.S.-China tariff truce that ended up lowering the average tariff rate by nearly half to a comparatively mild though still severe 14% for at least 90-days to allow space for a new bilateral trade deal to emerge. Then on Wednesday when the U.S. Court of International Trade found that the Trump Administration could not use the International Emergency Economic Powers Act (IEEPA) to levee its reciprocal and fentanyl-related tariffs the average U.S. tariff rate fell even further to just around 5% by our estimation, only to bounce back now to 14% as the appeals court reinstates them. All these moves in recent weeks to lower the tariffs or scale-back the Administration’s tariff powers near-term are helping to stabilize consumer and business confidence. We can see that in the latest Conference Board Consumer Confidence data for May. It jumped more than 12 points in May to its highest level since February and its biggest one-month gain since March 2021 (Chart 1). This is a bigger one-month gain than the 10-point increase we saw last October following the Federal Reserve’s surprise half a percentage point rate cut. A majority of the regional PMI indexes released so far for May have partially rebounded from their April lows, including the Philly Fed index, Dallas manufacturing index, Kansas City, and Richmond indexes (Chart 2). Investor confidence has also returned. U.S. and global stock markets have almost fully recovered their values prior to the Liberation Day tariffs (Chart 3). Yet it’s unlikely the average U.S. tariff rate will stay stable at these low levels in the weeks ahead. The President still has a large arsenal of tariff powers to draw on (see Sal's Thought). In short, the U.S. economy remains firmly trapped in a tariff purgatory that won’t be resolved anytime soon. Those hoping to return to the economic and financial environment that existed prior to Liberation Day will be sorely disappointed. Considerable economic damage has already been done. Harder economic indicators like May nonfarm payrolls, retail sales, and Q2 business investment will likely show the visible scars of that damage even as “softer” confidence measures enjoy this brief May respite. |
Tariffs’ Take |
| The One Big Beautiful Bill (OBBB) passed by the House of Representatives is now in the hands of the Senate. Heated horse-trading is anticipated among senators and between chambers as a common bill is crafted in time for July 4. Making the expiring 2017 tax cuts permanent, along with additional net tax reductions and spending cuts, resulted in a cumulative deficit of $3.1 trillion over the next decade, according to the Committee for a Responsible Federal Budget. Keep in mind that this is on top of the baseline deficit profile projected by the Congressional Budget Office, which totals $21.8 trillion out to 2035. What made this bottom line palatable for some House members was the fact that the bill didn’t consider the revenue stream from tariffs. A simple calculation shows just how reassuring this could be: a 10% average tariff applied on $3.3 trillion of goods imports (in 2024) generates more than enough cash to cover the cumulative shortfall (other things equal). Administration officials were touting this calculus to kick off the week to appease the Senate’s fiscal hawks and other naysayers. Then the U.S. Court of International Trade ruled that President Trump didn’t have the authority to levy comprehensive tariffs under the IEEPA. This was the justification for the fentanyl/border security duties on Canada, Mexico, and China, along with the 10% universal levy on nearly all nations and the currently postponed reciprocal tariffs on 57 countries. Recall, if the trade deal with the U.K. is any guide, it is the 10% universal levy that would have longevity. The Administration has already appealed the decision, and the tariffs will continue while the appeal is in process. If the appeal fails, there are other duties that could replace them (see Sal’s Thought). However, none of the other options for the universal tariff are both sweeping and long-lived. Top on the President’s agenda in the America First Trade Policy Memorandum signed on Inauguration Day was establishing a “global supplementary tariff”. Getting this off the ground—let alone getting the OBBB through the Senate without major modifications—now looks murkier. Note that the national security (‘Section 232’) tariffs on steel and aluminum along with automobiles and parts remain. And already being investigated for similar duties are copper, lumber, pharmaceuticals, and semiconductors. Energy and critical minerals are also on the agenda for future (time-consuming) investigations. Finally, it’s worth noting that in April (the latest data), $15.6 billion ($188 billion annualized) in customs duties were collected. This covered a full month of fentanyl-related and metals tariffs along with a partial month of automotive-related and 10% universal tariffs, in addition to the usual levies. This is up sharply from 2024’s $79 billion tally. The latter reflects the Trump 1.0-era tariffs on China and solar cells, along with the International Trade Administration’s 755 anti-dumping and countervailing duty orders. This week, getting well above the $300 billion mark became a taller task. |
Trade War Shifts to the Courts |
| Didn’t think it was possible, but the trade war just got more complicated. Some may say the potential legal setback could cap the worst-case scenario for tariffs. But others might counter that we are still likely to end up in the same place after going in circles, while the last thing we need is prolonged uncertainty. On Wednesday, the U.S. Court of International Trade ruled that all tariffs authorized under the International Emergency Economic Powers Act of 1977 are unlawful and must be withdrawn within ten days. If enforced, the ruling would reduce the average effective tariff rate on U.S. imports from roughly 14% to about 5%, still double the rate at the start of the year. China’s levy would remain the highest at around 10% (from previous duties), while many other countries, including Canada, would face low single-digit rates. And that’s a problem—at least from the perspective of an administration (and Congress) relying on import taxes to rein in the trade deficit, reshore manufacturing, and fill the budget shortfall. That’s why the White House quickly filed an appeal—which paid off when a federal appeals court allowed the tariffs to remain in effect until it makes a final decision. But even if the initial ruling is upheld, the administration has options to restore tariffs. First, it can appeal to a higher court, including the Supreme Court. Second, it could pursue similar tariffs under other trade acts that grant the President broad unilateral authority over trade policy and are more legally defensible than the IEEPA.
Bottom Line: The trade court’s ruling might only bring a temporary ceasefire in the trade war. Courts may delay tariffs but are unlikely to derail them. The average tariff rate will likely still land at around 10% or so—a fourfold increase. But the entry of the courts into the trade arena adds a new layer of uncertainty. Legal challenges may simply extend the battle, potentially delaying bilateral talks that were expected to bring some clarity. Until then, there’s little urgency to revise up our growth forecast or for the Fed to rush its next policy decision. |
