America’s trade chaos is just beginning

The moment was historic. On February 20th America’s Supreme Court struck down Donald Trump’s signature policy. The president claimed the International Emergency Economic Powers Act (IEEPA) of 1977 let him slap any tariffs he wanted on anyone for any length of time. The justices ruled 6-3 that Congress did not hide in IEEPA “a delegation of its birth-right power to tax within the quotidian power to ‘regulate’”, as Chief Justice John Roberts wrote in the majority opinion.

Looking solely at America’s changing tariff rates, tomorrow’s trade historians may miss the ruling altogether. Within hours of the decision Mr Trump invoked Section 122 of the Trade Act of 1974, to levy 10% tariffs on all imports for 150 days from February 24th. The next day he said he would raise the level to 15%, the highest the law permits. Before the justices weighed in, America’s effective tariff rate was 13.7%, estimates the Yale Budget Lab. Swap IEEPA for Section 122 tariffs of 15% and this edges down to 12.2% (see chart 1). By comparison, the figure was 2-3% before Mr Trump took office for the second time in January 2025.

If they dig beneath this superficial stability, however, future chroniclers of global commerce will mark February 20th as the start of a period of turmoil possibly even more chaotic than what Mr Trump unleashed on “Liberation Day” last April. That is because, first, the Supreme Court stayed silent on what to do about refunding duties that the government collected illegally, setting up another legal fight. And, second, the latest authorities Mr Trump is asserting—or is about to assert—will also be challenged in court. While the lawsuits play out, uncertainty will persist, and so will the economic drag of all the trade-warmongering.

The government has collected perhaps $180bn in IEEPA tariffs. Over the past year 1,800 companies—including Goodyear, a tyre-maker, and Costco, a retailer—have filed lawsuits to protect their right to a refund should the Supreme Court overturn them. They are now owed this money, equivalent to roughly 5% of the profits companies generated in America last year, or 0.6% of GDP—plus interest, compounded daily at an annual rate of 6-7%.

Despite this rising bill, the administration will not make life easy for refund-seekers. It may be hoping that some will be shamed into forgoing claims because they had passed the tariffs on to consumers. Goldman Sachs, a bank, estimates that by the end of last year around 60% of the tariffs’ cost was being borne by shoppers through higher prices. Others may prefer not to anger a president who has used the power of his office to go after his perceived enemies in business, law and elsewhere.

Trading partners which have struck deals with America, offering concessions to secure lower tariff rates and Mr Trump’s grace, face a similar dilemma. Because Section 122 must be applied indiscriminately, trade partners clobbered by IEEPA, like China and Brazil, come out ahead (see chart 2). Those which negotiated better terms, like Britain and the European Union, are up in arms. Some are likely to stay quiet. Others won’t. “A deal is a deal,” declared the European Commission in a statement after Mr Trump said he would raise the levies from 10% to 15%.

Everyone will await more legal wrangling. Rick Woldenberg, the toymaker whose company, Learning Resources, was the lead plaintiff in the IEEPA case, is scathing about the White House’s response. “I wonder what process the US government went through between dinner on Friday and breakfast on Saturday to determine that 10% would not solve the national emergency they discovered. It’s a sham,” he fumes. “That’s $100bn of tax that is highly questionable.”

Like IEEPA, Section 122 is an untested instrument from the disco era. It applies in the event of “fundamental international payments problems”, such as “large and serious” balance-of-payments deficits or “an imminent and significant” depreciation of the dollar. The dollar has indeed weakened in the past year—but partly as a result of Mr Trump’s tariffs, so using its slide to justify their reimposition seems like a stretch. And the decline is anyway within historical norms. The administration has more wriggle room with the hazier concept of balance-of-payments deficits. This was a bigger concern when the world was moving away from fixed exchange rates in the 1970s. Still, the courts may defer to the executive branch on what constitutes a crisis.

There is another reason for trade partners and companies to hold their breath. Section 122 tariffs expire after 150 days unless Congress agrees to extend them. This looks like a nonstarter with the midterm elections around the corner in November. So when this authority lapses, Mr Trump will try to recreate it using other tools, notably Section 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962. These allow for country- and sector-specific tariffs, like those levied against China during his first term or on steel and aluminium imports more recently, and stand on firmer legal ground. Both also require formal investigations to be launched before tariffs are levied, making them cumbersome to use. If the administration’s probes look frivolous, that will invite more lawsuits.

Mr Trump is hoping that his relentless pursuit of tariffs will persuade companies to build factories in America. But that is complicated, expensive and makes little sense in uncertain times like these. Much easier to hire trade lawyers to constantly optimise customs arrangements and redefine the origin of goods. The “first sale” rule, for instance, lets importers pay duties on the price charged by the original manufacturer rather than the middleman. “Duty drawback” rules allow companies to offset tariffs against equivalent goods that they then export. Goods can be shuffled around cross-border supply chains to alter the legal country of origin. Mark Truchan of PwC, an accounting and tax-advisory firm, says that such strategies could save firms between 10% and 50% of their tariff bill.

All this constitutes a less-than-ideal mix for the American economy. The tariff refunds, which would flow straight to businesses’ bottom lines, and marginally lower tariffs, which amount to a tax cut, may add up to a stimulus worth 0.7% of GDP. They come alongside separate tax refunds courtesy of Mr Trump’s One Big Beautiful Bill Act, passed last year. Some of this stimulus will, though, be offset by the uncertainty that keeps importers guessing and deters firms from hiring and investing. Trade lawyers will stay busy. Everyone else will just be exhausted. ■