Interview, Podcast
Will legal challenges end the trade war?
- A three-judge panel of the U.S. Court of International Trade blocked most of President Trump's sweeping tariffs, ruling that their unlimited scale conflicts with the non-delegation doctrine.
- The court determined Congress has the authority to impose tariffs but cannot delegate such power to the executive branch without intelligible limits.
- Specific tariffs imposed on Canada, China, and Mexico in February and March were blocked because the cited emergencies (immigration and fentanyl) did not clearly justify the measures under the relevant law section.
- The ruling relied on the International Emergency Economic Powers Act (IEPA), a 1977 statute that the court found was not satisfied by the administration's stated emergencies in these instances.
- Goldman Sachs chief U.S. political economist Alec Phillips noted the court ruled on the merits of the case rather than merely issuing an injunction, a procedural shift that finalized the lower court's decision rapidly.
- Prior to the ruling, Goldman Sachs estimated only a 40% probability of the court ruling against the tariffs, surprising analysts with the decisive outcome.
- The administration is expected to appeal the decision to the Federal Circuit and potentially the Supreme Court, maintaining a timeline for legal resolution.
- The administration may replace the blocked 10% across-the-board tariff with a temporary 15% tariff under Section 122 of the Trade Act of 1974, valid for 150 days.
- During the 150-day window of a Section 122 authority, the administration would likely launch multiple Section 301 investigations to maintain broad tariff coverage on major trading partners.
- Alternative legal authority includes Section 338 of the Smoot-Hawley Tariff Act (1930), which allows up to 50% tariffs without time limits but requires a specific claim that a country discriminates against the U.S. relative to others.
- Analysts reject the view that the ruling serves as an off-ramp for the administration, citing prior refusals to exempt tariffs (e.g., the UK deal) as evidence of intent to maintain a protective tariff regime.
- Future tariff policy may shift from across-the-board rates to more restrictive sectoral or country-specific tariffs as a result of the legal constraints.
- The ruling increases market uncertainty regarding future tariff levels, complicating the path for risk assets as investors debate the potential for 15% tariffs or new Section 301 cases.
- Negotiations with trading partners have slowed, as partners face ambiguity regarding the necessity of concessions when the administration's unilateral tariff authority is legally contested.
- No immediate retaliation from trading partners is expected, though the lack of a clear deadline may prolong diplomatic discussions.
- The loss of approximately $200 billion in annual tariff revenue (based on a 7 percentage point rate reduction) could worsen the U.S. fiscal outlook if revenue cannot be recouped via alternative tariff mechanisms.
- Goldman Sachs projects that without tariff revenue, the net deficit impact of the fiscal package will shift from a potential wash to a slight deficit increase, though the structural deficit remains above 6% of GDP.
- The ruling was recorded on Thursday, May 29, 2025, and reflects the administration's fourth month into a potential four-year term.