Supreme blow?
5 November was a strange day on equity markets – the stocks that had been hardest hit by US trade tariffs suddenly outperformed the rest of the market. The reason for this is quite clear: the US Supreme Court met in Washington to consider the legality of some of the import taxes imposed by Donald Trump. Although the ruling is not expected for a couple of weeks or even months, this session looks to have gone badly for the position of the White House.
This should not have been the case, given that six of the nine Supreme Court judges are reputed to be “conservatives” and three of them were nominated directly by Trump during his first mandate. This should have been a comfortable and, in principle, acquiescent majority.
However, invoking the law used by Trump to impose some of these tariffs – the International Emergency Economic Powers Act (IEEPA) – seemed so difficult to defend in legal terms, that even some of the conservative judges appeared sceptical, implying an unfavourable ruling for the White House.
To be honest, this is hardly surprising. US courts have already twice ruled that it was illegal to use this law to impose trade tariffs, initially and then in an appeal at federal level.The argument was formidably robust: in general, the imposition of new taxes remains an exclusive power of Congress and not of the President. Against this argument, based on the separation of powers, a fundamental principle of modern democracies, the Trump administration invoked the IEEPA, which provides for exceptional measures during a national emergency. The White House had hoped to justify use of this law by claiming that the colossal US trade deficit and the import of fentanyl represent national emergencies. Yet the judges seem to have been unimpressed by this defence. How can the trade deficit be presented as a national emergency when it has been in existence for decades without creating any particular problems for the US economy?As for fentanyl imports, these will not be directly curbed by trade tariffs on China, but rather by customs controls and an efficient healthcare policy.
If, as now seems likely, the Supreme Court overrules the use of the IEEPA, what should we expect from markets? Will they collapse on a defeat for Trump, likely followed by waves of presidential anger? Or will they rejoice at the end of these tariffs, which will ease the costs on imported goods?
One guess would be that interest rates will tighten due to the loss of tax revenues, which will aggravate the budget deficit. In this scenario, equities – with the exception of the stocks hardest hit by these tariffs to date – would suffer from this rise in rates, particularly as the outlook for the tariffs policy will become more uncertain. Conversely, the US Federal Reserve could gain some room to manoeuvre on rates cuts, thanks to the removal of one source of inflation, and this would support risk assets. It is hard to anticipate which side will be the eventual winner.
But if the truth is told, this binary approach to the question is not optimal. Even if the Supreme Court were to rule that use of the IEEPA to impose trade tariffs is, at least in part, unlawful, it is unlikely to prevent the use of other specific laws to arrive at the same end, without Congress even having to be consulted. There are a wide variety of laws which the White House has already used to introduce targeted trade tariffs and which have not yet been challenged, in particular, articles in the Trade Expansion Act and the Trade Act. However, these provisions are harder to implement. Some require investigations to be carried out before they can be invoked, others restrict the duration and scope of the applicable tariffs. Trump’s “Plan B” would therefore be cumbersome and limited, preventing him from striking out in a discretionary manner. The highest Court could therefore deal a supreme blow to Trump’s way of governing – a knockout blow in defence of its own scope?