Focus
March 27, 2026 | 13:43
Tales from the Tariff Trenches
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Tales from the Tariff TrenchesThe Administration is scrambling to find replacements for IEEPA tariffs that were ruled unlawful. The alternatives will likely come up short over time. |
|
In February, the Supreme Court ruled that tariffs justified by the International Emergency Economic Powers Act of 1977 (IEEPA) were unlawful. Up until then, this had been the basis for most of the duties introduced by the Trump Administration: the ‘fentanyl’ tariffs on Mexico, Canada, and China; the country-specific ‘reciprocal’ tariffs on scores of others, the 10% global base tariff, along with the ‘geopolitical’ tariffs on Brazil and India. IEEPA was embraced by the Administration because tariff actions did not require formal investigations or congressional oversight, and many situations could be construed as an international economic emergency. In his post-ruling press conference, the President cited all the ‘lawful’ tariff remedies that had been and continue to be available. “Those statutes include, for example, the Trade Expansion Act of 1962, Section 232—all of these things I know so well—the Trade Act of 1974, Sections 122, 201, 301, and the Tariff Act of 1930, Section 338.” In the past month or two, there have been developments on four of these five tariff fronts. The 96-year-old duties—the infamous Smoot-Hawley tariffs—have been left alone. Below we briefly survey what has been happening. Section 122This section gives the President the authority to impose tariffs when it is determined (by the President) that there are “fundamental international payments problems.” The tariffs can be as high as 15% and last as long as five months, although Congress can extend them. The Trump Administration announced (on February 20, the day of the ruling) that effective February 26 (and until July 26), a 10% Section 122 tariff would be imposed, with lots of country and product exemptions, along with threats it could be raised to 15%. The action was expected, but was still controversial. |
Section 122 tariffs have never been used before. This is because the balance of payments problems envisioned by the legislation have not existed (for the U.S.) since the shift to a floating exchange rate regime in March 1973 [1]. Nevertheless, the President’s Proclamation asserted that one existed, pointing to a deteriorating current account balance among other things. The current account is a measure of the balance of international payments, and it has four key components (the figures refer to the four quarters ending 2025 Q4) (Chart 1). First are the familiar goods trade balance, with its $1.24 trillion deficit (or net payments), and the services trade balance, with its $329 billion surplus (net receipts). Next is the primary income balance that generates net receipts of $10 billion (surplus). This includes the returns on investment (interest, dividends) and labour (wages). Finally, there is the secondary income balance that generates net payments of $217 billion (deficit). This includes things like remittances and foreign aid. |
|
The goods trade deficit is the largest contributor to the current account shortfall, with both balances rebounding from their record deficits hit in 2025 Q1 (due to tariff front-running). However, one reason America has a record-sized trade deficit is because it has a record-sized economy. As a share of GDP, the goods trade deficit has been somewhat stable over the past 10 to 15 years, not too far off the latest reading of 4.0%. Both the services trade surplus and secondary income deficit have also remained relatively stable as a share of GDP. However, the current account deficit has deteriorated relative to the trade shortfall in recent years, due to the deterioration in the primary income balance. During 2025, the four-quarter tally turned negative for the first time ever. This, in turn, reflects the mounting interest payments on Treasury securities to foreign investors. The rough mirror image of the current account is seen in the financial account. The latter tallies the outbound and inbound flows of direct, portfolio and other investments. The financial account has a positive balance when there are net outflows… when the U.S. is net acquiring assets or is net lender in the global economy. The financial account has a negative balance when there are net inflows… when the U.S. is net incurring liabilities or is a net creditor in the global economy. A current account deficit means there is a net outflow of payments due to trade and income flows. This, in turn, is ‘balanced’ by a financial account ‘deficit’ which means there is a net inflow of foreign investment. From this perspective, America’s strong ability to attract foreign investment, something the Administration often touts and encourages, is indicative of the economy’s ability to sustain a large current account deficit. So, no problem here. In an election year with affordability a critical issue, we doubt Congress will extend the Section 122 tariffs past July 26. In the meantime, the tariffs are already being challenged in the U.S. Court of International Trade, on two issues. First, there are too many country and product exemptions. The law allows some, but there must be “broad and uniform application” of the duties. Second, fundamental international payments problems do not exist in the current situation. America has absolutely no problem attracting sufficient net foreign investment to cover its current account deficits. Section 201This section gives the President the authority to impose tariffs as a ‘safeguard’ measure, to temporarily protect a domestic industry from foreign competition. This is designed to give an industry time to restructure so that it can eventually compete effectively against imports. The tariffs tend to remain in place for up to four years, but they can last as long as eight years. These were the first tariffs introduced during the first Trump Administration, on imported solar panels and washing machines in February 2018, No new Section 201s have been announced. Instead, there was the news that the duties on solar panels, in place for eight years after being extended during the Biden Administration in 2022, had expired on February 6, 2026. (The washing machine tariffs expired in February 2023, after their original three-year life was extended by two years.) Section 232This section gives the President the authority to impose tariffs on imports that “threaten to impair the national security,” with national security defined broadly to include “the general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements, which are critical to the minimum operations of the economy and government.” The determination is made via an investigation by the Bureau of Industry and Security (BIS), part of the Commerce Department. Once an investigation has been initiated, the BIS has up to 270 days to prepare a report with recommendations for the President, and the President has up to 90 days to take any action. So, it can take as long as a year from initializing investigations to instituting tariffs. |
The two reports covering steel and aluminum from 2018 (which were acted on at the time) and the one covering automobiles and parts from 2019 (which was not acted on at the time) were dusted off last year. This set a precedent because no old or lapsed reports had been acted on before. There were new actions on both fronts (Table 1). And as last year unfolded, 12 new Section 232 investigations were initiated. The reports are slowly being acknowledged and acted on (or not), although there is a veil of secrecy surrounding the investigations, reports and actions because of their national security considerations. There have been no new investigations launched since September 2, 2025. The latest actions on completed reports were announced on January 14, 2026. The investigation on semiconductors and semiconductor manufacturing equipment (initiated April 1, 2025) resulted in 25% duties on select chips and more industry oversight (and involvement). The investigation on processed critical minerals and derivative products (initiated April 22, 2025) resulted in no tariffs but more industry oversight. Section 301This section gives the Office of the United States Trade Representative (USTR) the authority to impose tariffs if it determines that “an act, policy, or practice of a foreign government… is unjustifiable and burdens or restricts United States commerce.” It is a remedy for unfair trade practices. The USTR typically takes about one year to make its determination after an investigation starts. |
|
In the wake of the Supreme Court ruling, two new Section 301 investigation were initiated. On March 11, one was launched into the practices of 16 countries/regions “relating to structural excess capacity and production in certain manufacturing sectors [2].” It was asserted that “key trading partners have developed production capacity untethered from the incentives of domestic and global demand.” Then, on March 12, another was launched into the practices of 60 countries/regions “related to the failure to impose and effectively enforce a prohibition on the importation of goods produced with forced labor [3].” These add to the two ongoing investigations initiated last year. The first was launched on July 15 to investigate an array of Brazil’s trade practices. The second was launched October 24 to investigate China’s implementation of its commitments under the ‘Phase One’ Agreement (from 2019). |
Tariffs’ takeApart from triggering new tariffs and investigations, the Supreme Court’s ruling also triggered a clamouring for refunds of paid IEEPA tariffs. U.S. Customs and Border Protection (USCPB) is currently completing an online claim portal to manage the volume: more than $166 billion (plus interest totaling $23 million per day according to some estimates) to over 330,000 importers of record. |
From February 1, 2025, when new tariffs first started, until the end of February 2026, a total of $311 billion was collected (Chart 2). Deducting the IEEPA amount (~$166 billion) and the amount from pre-2025 duties (roughly $94 billion over the past 13 months), results in just over $50 billion worth of other new tariffs. The latter amount appears destined to rise, particularly through the end of July, but the tariff run rate looks likely to come in well below where it was before. In its latest fiscal projection (February 11), the Congressional Budget Office assumed tariff revenue would average $400 billion per annum over the coming decade. It is now looking like it could be roughly half that amount, which will tack on another $2 trillion to the 10-year deficit and public debt. |
|
America’s tariff narrative is in a state a flux, which has been the case for the past 14 months. This is not going to change any time soon. However, at least the intensity of the situation is less than what it was last spring. |
[1] Under the previous fixed exchange rate regime (the Bretton Woods System) in which the U.S. dollar maintained a fixed conversion rate with gold ($35/oz) and other countries maintained a fixed exchange rate with the U.S. dollar, a profound international payments problem emerged through the early 1970s. There was pressure for the U.S. dollar to depreciate due to deteriorating budget and trade deficits (owing, for example, to Vietnam War spending and expanding social programs), but it could not do so. This led to countries requesting that their growing holdings of U.S. dollars be converted into gold (a loss of confidence in the greenback), which led to a drain of America’s gold reserves. In August 1971, President Nixon announced the temporary suspension of the dollar’s convertibility into gold, which began the end of the fixed exchange rate regime. [^][2] The list includes China, European Union, Singapore, Switzerland, Norway, Indonesia, Malaysia, Cambodia, Thailand, Korea, Vietnam, Taiwan, Bangladesh, Mexico, Japan, and India. [^][3] The list includes Algeria, Angola, Argentina, Australia, The Bahamas, Bahrain, Bangladesh, Brazil, Cambodia, Canada, Chile, China, Colombia, Costa Rica, Dominican Republic, Ecuador, Egypt, El Salvador, European Union, Guatemala, Guyana, Honduras, Hong Kong, India, Indonesia, Iraq, Israel, Japan, Jordan, Kazakhstan, Kuwait, Libya, Malaysia, Mexico, Morocco, New Zealand, Nicaragua, Nigeria, Norway, Oman, Pakistan, Peru, Philippines, Qatar, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Sri Lanka, Switzerland, Taiwan, Thailand, Trinidad and Tobago, Turkey, United Arab Emirates, United Kingdom, Uruguay, Venezuela, and Vietnam. [^] |