Opinion A protracted battle between Trump and the US courts will only worsen trade uncertainty

The underlying issue which was taken up by the trade court warrants further deliberation, as it is a deeper question of the functioning of the US constitutional democracy. The court ruled against Trump’s tariffs stating that it unlawfully invoked the 1977 International Emergency Economic Powers Act (IEEPA) to declare a national emergency and impose tariffs on nearly all US trading partners. The three-judge panel concluded that this Act is meant for urgent national security issues and that long-standing trade issues do not qualify as one. To do it lawfully, these tariffs would have had to be passed after approval by the US Congress, which would be prone to long discussions and scrutiny, which Trump seeks to avoid.

This skirmish and the ensuing long-drawn battle of political manoeuvrings is a scathing indictment of the political and judicial system in the US. That the judiciary is subject to political takeover and can be openly criticised and even threatened in public by the President surely does not bode well for the process of checks and balances and having independent, but equal, branches of government. The executive has steamrolled both the legislature and judiciary in this episode.

The strategy of this administration seems to be to flood the system with brazen extra-constitutional and unconstitutional executive orders, which will take time to be legally challenged and withdrawn. Across the country, in separate cases on a broad range of issues, there have been at least 180 judicial rulings that the White House has exceeded its constitutional authority or violated Congressional statutes, which has drawn public criticism by the administration. Many more have passed through.

Back to trade, Trump is determined to win this battle one way or another. The White House has stated that if these rulings don’t go in its favour, they are prepared to take the matter to the Supreme Court. Even if the Supreme Court rules against the administration, they have many other options at their disposal to disrupt trade through tariffs. Peter Navarro, Trump’s chief trade advisor has said, “So you can assume that even if we lose, we will do it another way;” and has already lined up several legal alternatives.

For starters, the current trade court ruling does not affect the tariffs on cars, auto parts, steel and aluminium, which were imposed using Section 232 of the Trade Expansion Act (1962), which allows for trade barriers based on national security concerns. That can be revoked again, as everything can be argued to be a national security concern. Further, they could invoke Section 301 of the US Trade Act of 1974 that allows for tariffs to protect against unfair trade practices by other countries, which was used to impose tariffs on China in the first term.

A separate trade law from the 1930s allows the President to impose tariffs up to 50 per cent on imports from countries that “discriminate” against the US. Thus, there’s no shortage of options for Trump. The full range of tariffs on countries are now paused and due to resume sometime in July.

While all of this domestic drama plays out, most countries, including India, might adopt a wait-and-watch approach before going out of the way to make concessions in a trade deal with the US. In cabinet meetings across countries, discussions will be raging on whether the US has less leverage now and if it would make sense to slow down on trade negotiations a bit. While the legal seesaw might not derail negotiations, it might shift positions on the negotiating table by a bit, given that the legitimacy of the tariffs is questioned by US courts.

A protracted battle will only worsen uncertainty surrounding trade. Trade policy uncertainty, as captured by an index built by “policy uncertainty” is at the highest level since the 1980s. To give you an idea of the extent, the uncertainty score under normal circumstances in 2017 was around 80, which rose to a peak of 1400 during Covid times. Under Trump’s second term, it has reached 3300.

All of this uncertainty severely dampens business sentiment. According to one study, trade policy uncertainty reduced investment in the US by about 1.5 per cent in 2018 (first trade war). Another study says that the uncertainty, by itself, is equivalent to a tariff rate of between 1.7 per cent and 8.7 per cent.

The effect of uncertainty on other countries can be significant as well. India’s trade and investment will take a beating due to this. Businesses relying on trade will be caught in a limbo, severely hampering decision making. Fresh investments will be stalled due to the uncertainty. Though Apple has decided to brave the storm and committed to an expansion of production in India, other companies might be waiting for greater clarity before investing, which might take years.

The best way out of this for India remains for it to have a trade deal with its major trading partners. In this regard, the Australia FTA and the recently concluded FTA with the UK is excellent news. Though much more difficult now with a flaky regime, a trade deal with the US can overcome much of this uncertainty.

Anupam Manur is a Professor of Economics at the Takshashila Institution, an independent think tank and school of public policy