A Tariff Waiting Game – Phillip W. Magness

Ever since President Trump launched his protectionist tariff agenda at the outset of his administration, economists have offered a common plea to other countries: do not retaliate. This wisdom must often contest with the impulsive political pressures of trade wars, and yet it is the soundest economic path. Politicians often believe that retaliatory tariffs place a burden on the foreign country that picked the fight. Retaliatory tariffs tax your own population by burdening them with higher prices and fewer consumer choices. The actual result, however, is akin to imposing a blockade on your own ports to spite an adversary who chose to do the same to their ports. This strategy seldom ends the trade war though, because the bulk of the resulting economic pain is self-inflicted.

Trump’s early targets largely ignored the counsel of economists to forego retaliation. Canada, then in the midst of an election campaign, imposed countervailing duties on American goods as its Liberal government sought to project an image of strength in the face of international bullying. Trump responded by doubling down. The situation with China rapidly devolved into a retaliatory standoff with threatened US rates on Chinese imports reaching 145 percent, and China’s countermeasures increasing to 125 percent. Both sides de-escalated from this brink in May, but only partially. The US now imposes a 30 percent tariff on most Chinese imports, whereas China now taxes American goods at 10 percent—substantial hikes over the single-digit rates that prevailed in the 2010s.

Until last week, it appeared that the 27-member European Union was about to join the retaliatory trade war. With Trump threatening a 30 percent tariff on European goods, EU leaders floated the idea of invoking their “Anti-Coercion Instrument” (ACI)—an aggressive suite of retaliatory tariffs, export and import controls on the US, intellectual property restrictions, and limitations on American investors in Europe. Suddenly, on July 28, Trump appeared to pull a rabbit out of his hat by announcing a sweeping trade deal. According to the White House announcement, the EU would accept a 15 percent US tariff on European goods, or half the threatened rate, but also significantly higher than the average 1.47 percent duty that existed before Trump started his trade war. Pre-Trump EU rates on American goods were even lower, sitting at about 1.35 percent before Trump’s term, but the White House now claims that Europe will further reduce these mostly vestigial levies on a small number of products.

The US-EU announcement sent shockwaves around the political press. Trump declared “victory” over the Europeans. French officials raged at the outcome, calling on Brussels to reverse course and deploy the retaliatory ACI. Other European leaders seemed resigned to the fate of accepting higher American taxes on their exports, calling it the least-bad outcome. On the American side of the debate, some tariff-skeptics reacted with surprise, even suggesting that Trump’s tactics had upended conventional wisdom about trade wars. Oren Cass, the protectionist lawyer who runs the “New Right” think tank American Compass, appeared to be confused by the development even as he celebrated. Cass declared on a podcast that the EU’s unexpected turn away from retaliation somehow disproved all of the economists who had been pleading with the EU to resist retaliation.

Surprisingly few commentators have paused to examine the underlying strategy that led to the US-EU tariff de-escalation. Almost all sides of the debate have accordingly missed a subtler lesson, one related to legal and institutional dynamics at play.

Before digging deeper, it warrants mention that the EU “trade deal,” like the others that Trump has announced to date, is not a conventional trade agreement between nations. Neither Congress nor its European counterpart has voted on the specific terms, which may not even exist beyond the verbal pledges that Trump and European Commission President Ursula von der Leyen made in a meeting on the day of the announcement. There are no publicly available documents containing the text of this “deal” or any other that Trump claims to have secured. Trump and his counterparts have not even formally signed anything that would legally bind them to their terms. The EU deal is at best a framework of loose commitments that may or may not be formalized at some future date.

And therein lies the key to understanding why some nations have opted against a retaliatory strategy. The tariff agenda sits on an extremely shaky legal and political foundation. Tariffs remain unpopular in the United States, with recent polling showing that American voters oppose them at a margin of almost 2-to-1. The EU and other countries might accordingly believe that their best strategy is to wait Trump out until a future election outcome reverses his trade war.

More importantly, Trump has eschewed even conventional US tariff statutes when implementing his current measures. Up until this spring, most US tariffs followed the procedures laid out in obscure federal statutes: the Trade Expansion Act of 1962, the Trade Act of 1974, and a handful of other measures. These laws contain clauses that allow the president to impose temporary tariffs on specific goods or countries if certain stipulations are met, such as a national security need, or evidence that another country has been “dumping” goods into the United States or trying to injure its industries. 

The rationales behind these clauses are often politicized, but they nonetheless contain specific statutory requirements to invoke. Usually, that means the White House must formally investigate whether the conditions have been met and submit its findings to a regulatory review process. Congress also has formal oversight powers to review any tariffs enacted under these clauses, and may vote to reverse the president’s decision. Most presidents have made periodic use of these clauses to impose limited tariff measures, including Trump’s tariffs on China from his first term. But all of these measures have taken place under relatively strict statutory processes and review requirements.

Not so with Trump’s current round of tariffs, which are far more expansive than anything he attempted in his first term. Instead of using the aforementioned trade statutes, Trump has claimed the power to impose tariffs by unilateral executive order under the International Emergency Economic Powers Act (IEEPA) of 1977. By using IEEPA, Trump believes he can enact new tariffs for almost any reason he wants. He has accordingly set new tariff rates by posting letters to foreign leaders on Truth Social, or by announcing the terms of an “deal” that he made in an informal conversation with a foreign head of state.

The biggest risk to Trump right now is that the appellate and Supreme Courts both strike down his IEEPA tariff orders, and with them every “deal” he has secured to date.

There’s a huge constitutional problem with Trump’s use of IEEPA, though. This statute does not authorize the president to impose tariffs. It does not even contain the word “tariff” or any of its common synonyms. Trump has merely inferred that he has this power through a tendentious interpretation of IEEPA’s “emergency” provisions.

Trump’s use of IEEPA now faces a serious challenge in the federal court system. Earlier this year, the US Court of International Trade ruled that Trump misused IEEPA. The ruling is under a procedural pause as the case makes its way through the federal appellate system, but the clock is ticking. A federal appellate court will likely rule on the case in August, which in turn will probably fast-track it to the Supreme Court in its next term. If the courts continue to rule against Trump, his entire tariff agenda—including every single “deal” made under his IEEPA orders—could be voided in an instant.

Although Trump is fighting to have the trade court’s ruling overturned, the underlying legal issues present a tough sell for the White House’s lawyers. In addition to Trump’s strained interpretation of the IEEPA statute, he faces a constitutional obstacle. Article I, Section 8 of the US Constitution gives Congress the exclusive authority to decide tariffs and tariff rates under its tax and commerce powers. 

Previous court rulings have upheld laws wherein Congress authorized the president to modify tariff rates under certain conditions, such as the aforementioned Trade Acts of 1962 and 1974. But they’ve never authorized the president to simply set the rates himself for any reason he wants. The long-established “nondelegation doctrine” requires Congress to set an “intelligible principle” for the executive branch to exercise a delegated power, and the parallel “major questions doctrine” bars executive branch agencies from deciding policy questions of great economic and political significance on their own without express congressional authorization. The Court of International Trade cited both doctrines in its determination that Trump abused IEEPA to impose tariffs. A majority of justices on the current US Supreme Court have also ruled against the executive branch in cases involving similar questions, such as West Virginia v. EPA in 2022 and in their rulings against President Joe Biden’s attempt to forgive federal student loans without congressional authorization (a detailed explanation of these legal arguments may be found in the amicus briefs filed in relation to the case).

Returning to the international arena, Trump may be playing with fewer cards than he realizes when he attempts to negotiate tariff deals. The EU and other governments know that time is on their side with both the tariff lawsuits and the US political climate. And that recognition changes the dynamics of their strategies by shifting them away from retaliation. Consider the possible scenarios.

The biggest risk to Trump right now is that the appellate and Supreme Courts both strike down his IEEPA tariff orders, and with them every “deal” he has secured to date. Courtroom outcomes are never guaranteed, and they tend to operate on the judges’ own schedules, but this outcome could conceivably occur in a matter of months. If that’s the case, then the EU has every incentive to take the 15 percent tariff “deal” and just wait it out until the courts make their determination.

Suppose that the Supreme Court punts on the case for procedural reasons, or finds a rationale for upholding the tariff policies. Even in this scenario, waiting may still be the more prudent strategy for the EU and other trading partners abroad. They may be banking on Trump losing one or both houses of Congress in the 2026 midterms, as often happens to the incumbent president’s party. If the Democrats regain the majority, they will almost certainly remove a procedural rule that Republican Speaker Mike Johnson imposed back in April to prevent floor challenges to Trump’s IEEPA tariffs (Johnson adopted this rule because he currently lacks the votes to defeat a direct challenge if a handful of free-trade Republicans break ranks and vote with the Democrats). An opposition Congress would make it more difficult for Trump to enact tariffs by executive decree, thereby limiting his ability to use them as leverage for his “deals.”

A third scenario could play out in the 2028 election, where both political parties will be nominating new candidates due to Trump’s term limits. On the unlikely chance that the current IEEPA tariffs are still in place in 2028, their survival into the next administration would come down to a simple pen stroke. Since Trump enacted his tariffs by unilateral executive order, they could also be rescinded by any future president at will. Here, the absence of any codification of Trump’s tariff orders and “deals” into law becomes their main future vulnerability. If tariffs remain politically unpopular, Trump’s successor will face growing pressure to rescind them, no matter the party that wins.

From the EU’s perspective, these scenarios amount to a surprisingly short timeframe. Trump’s tariffs could be stricken down in court in a matter of months, or they could collide with mounting political opposition in 1.5 to 3.5 years.

Under these conditions, the advantage goes to the side with greater patience. Risky strategies such as the EU’s retaliatory ACI, or retaliatory tariffs in general, become less appealing if you know there’s a good chance that Trump will be stripped of his claimed tariff powers in the near future. It may mean enduring a little short-term pain from accepting the higher tariffs of a Trump “deal,” but in the long run, all of Trump’s negotiating cards have an expiration date.