The new global tariff regime that Donald Trump is trying to erect is a transparently cynical attempt to do what US courts have told him he can’t.
On Wednesday, the Trump administration announced new tariffs of either 10 per cent or 12.5 per cent on 60 of its trading partners, covering 99.4 per cent of all imports into the US, predicated on those countries’ failures to adequately prevent that imports were made with forced labour.
There are six countries that the US deems have made “some initial steps” to prevent the importation of forced labour goods. They will have a 10 per cent tariff rate imposed. The other 54, including Australia, face the 12.5 per cent rate.
Separately, the US is pressing ahead with an investigation of 16 of its biggest trading partners – including China, the European Union, Japan, India and South Korea – for what it has described as “excess manufacturing capacity and production” that could add another layer to their tariff burdens.
The new tariffs have little to do with the Trump administration’s concern about forced labour. They’re driven by the US president’s protectionist obsession with tariffs and a desire to replace the trade barriers that America’s courts have demolished, and restore the revenues lost.
In effect, they would replicate the global baseline tariff component of the “reciprocal” tariffs Trump had announced, rather theatrically, on “Liberation Day” in April last year.
It is quite apparent that the tariffs are being driven by economic motivations, not moral ones.
Those tariffs were ruled illegal by the Supreme Court, with the administration now in the process of refunding some of the $US166 billion of revenue collected. (Having disgorged about $US20 billion so far, with plans to return $US85 billion, it is appealing a lower court ruling that it has to refund the entire amount).
When the Supreme Court struck down Trump’s first attempt at constructing a global tariff regime, he put in place temporary measures, using a different section of the US Trade Act, Section 122, which in a balance-of-payments crisis allows the president to impose a tariff rate of up to 15 per cent for a maximum of 150 days before they have to seek Congressional approval for an extension.
The 10 per cent duty imposed under that regime was also ruled illegal by a US court – America is not experiencing a balance-of-payments crisis, as with a floating currency, it actually can’t – and the tens of billions of dollars of revenue the government has been collecting in that tariff round may also have to be returned. The administration is appealing the judgement.
That second attempt at building the universal tariff wall faced an expiry date, without a Congressional extension, of July 24, but bought the Trump administration time to come up with a longer-term replacement for its reciprocal tariffs. The forced labour and excess capacity headings are the results of that search for substitutes.
The Trump administration is using yet another section of the Trade Act, Section 301, as the legislative cover for its actions.
It didn’t use the section in the first, or second, instance because it involves detailed investigations of specific practices considered unfair or discriminatory to US companies, and calls for public hearings and opportunities for the affected parties to make submissions and be consulted.
While more time-consuming, the 50-year-old section has been stress-tested in the courts in the past, albeit sparingly (there’s been an average of only three Section 301 actions a year), and it has held up.
It has never, however, been used to impose across-the-board global tariffs, like the Trump administration is now proposing.
Like the previous two attempts, the administration’s option of last resort on universal tariffs will also probably be tested in the courts by US importers.
The US Constitution gives Congress the full power to impose tariffs, not the executive. While Congress has delegated some authority to the president in particular circumstances in the past, the scope of the delegated authority has been quite limited.
It is not clear that Congress itself has the power to give the White House the authority to impose tariffs as comprehensive as those announced this week. It’s also unclear whether the statute itself, which refers to the actions of “a foreign country”, can be leveraged for use in one fell swoop against almost all foreign countries.
It would be obvious to the courts that Trump is trying to recreate what they have already deemed illegal.
The fact that his administration hasn’t included many of the countries accused of using forced labour in its new tariff regime, but has targeted countries it deems haven’t adequately stopped imports from those countries, is telling.
In essence, the administration looked for an excuse, any excuse, that it could use to impose blanket tariffs on its trading partners, and “forced labour” was the most convenient one because most countries either don’t have such laws or (like the US, which does) find it near impossible to trace the use of forced labour in complex global supply chains and police it.
It is instructive that in the annual reviews of trade and economic policies of its trading partners, the issue of forced labour (with China and the Uyghurs the exception) has rarely been mentioned and that (China excepted) most of the countries accused of actually using slave labour aren’t included in the tariff regime.
Moreover, it is quite apparent that the tariffs are being driven by economic motivations, not moral ones, with a range of exclusions to the proposed regime for products like beef, tomatoes, bananas, coffee and other grocery items, as well as critical minerals and other commodities that the US doesn’t produce enough of to satisfy its domestic demand and which, if taxed, could add to inflation.
When they are in place, provided the courts allow them to remain in place, the new tariffs will essentially restore the “baseline” tariffs that were the core of the more comprehensive raft of duties Trump unveiled on Liberation Day.
There are other tariffs, either sectoral on commodities such as steel and aluminium that were imposed on national security grounds, or that have come out of bilateral negotiations (that some would describe as extortion) with countries that negotiated under threat of even more punitive rates.
The tariffs, new and existing, will further fuel US inflation, which because of the past tariffs – and now, increasingly, the impact of Trump’s war on Iran – has been rising steadily.
They will also, if left unchecked, raise a lot of revenue for an administration presiding over budget deficits of about 6 per cent of GDP and gross government debt nearing $US40 trillion, or about 125 per cent of GDP.
Before Trump started his trade wars, the average effective US tariff rate was about 2.5 per cent. The Yale Budget Lab has calculated the current average effective rate at 11.8 per cent, which it says would fall to 9.7 per cent if the Section 122 tariffs were allowed to expire next month, but rise to 12.2 per cent if they were permanently extended.
With the new tariffs and those that might be added as a result of the investigations of industrial overcapacity, the effective tariff rate – while well below the mid-20 percentage point mark that could have been reached at the height of Trump’s threats last year – would be even higher, as would be their inflationary impact as and when US importers pass on their costs to companies and end-customers.
The best hope for America’s trading partners and its own companies and consumers is that, as with the previous two attempts to create a global tariff regime, this third and probably final attempt is challenged by US importers and, like its predecessors, knocked out by the courts.
The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.
Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.