The US tariff saga has gone through many twists and turns. And many more are likely left. The ratcheting up of tariffs last month is broader and higher than expected. In late May, the view was that while the extant US average tariff rate was around 13-14 per cent, it was headed towards 18-20 per cent.
Much of the increase was expected to be focused on ASEAN, where the tariff rate would be raised to that of China’s to eliminate transshipment of Chinese exports to the US via the region. While those on Vietnam and Indonesia were in line with expectations, the additional tariffs on Brazil, Canada, and Mexico were not. Nor was the higher 50 per cent rate on copper.
However, negotiations are ongoing, including with India, the EU, and Korea. If this week’s Japan deal is any guide, tariffs on these economies will likely be half of the threatened levels. But, even at the reduced rate, if these, along with those on EU and the likely extensions of global sectoral tariffs to semiconductors and pharmaceuticals, are realised, then the effective tariff rate could well exceed 20 per cent. All eyes are therefore on August 1, which is the new deadline set by the administration for countries to finalise trade deals.
But there is an upcoming and surprisingly overlooked event that could easily make these trade deals moot and plunge the tariff discussions into more uncertainty. On May 28, the US Court of International Trade (USCIT) ruled that tariffs imposed using the provisions under the International Emergency Economic Powers Act (IEEPA) overstepped the authority granted by the Act. The ruling did not consider the current conditions in the US to be a “state of emergency,” which is needed to invoke IEEPA, to be convincing nor the use of tariffs to address it. Tariffs could be imposed, if the government so desired, but via the other options at its disposal. Not IEEPA. A federal appeals court granted the government a stay on the order and is slated to begin hearing arguments on the appeal on July 31.
All the universal, reciprocal, and fentanyl-related tariffs are based on IEEPA. The tariffs unaffected are the Section 301 tariffs on China imposed under Trump 1.0 and extended by the Biden administration, and the global sectoral tariffs on aluminum, autos and auto parts, copper, and steel that were imposed under Section 232.
It is unclear how the appeals court will rule. But regardless of the decision, either party is likely to move the case to the Supreme Court. If the tariffs under IEEPA are eventually disallowed by the US Supreme Court, the government will shift to other options. Tariffs are central to this administration’s economic agenda and will thus be pursued. Unlike those under IEEPA, the tariffs under the other options are more cumbersome, limited in scope, and significantly more resource intensive. But they can be implemented in a compressed time frame if the administration so desires.
A potential sequence of such actions could be the following. Use Section 122 to impose tariffs of 15 per cent for 150 days on all countries (justified to address balance of payments needs or to prevent a significant depreciation of the dollar). At the same time, ratchet up the tariffs on China that were imposed under Section 301 in Trade War 1.0 by both the Trump and Biden administrations.
Keep tariffs on steel and aluminum at 50 per cent (as on copper) and raise that on autos from 25 per cent to 50 per cent. Hasten the ongoing Section 232 (sector specific on grounds on national economic security) investigations into semiconductors, pharmaceuticals, and lumber to bring these under the tariff net of 25 per cent – 50 per cent.
Use Section 338 to impose tariffs on countries that are deemed to discriminate specifically against US commercial interests (such as digital services taxes by Australia, the EU, Canada, India, and others, although the taxes are imposed on other countries too).
Complete Section 301 investigations on large trading partners (some are ongoing, for example, on the EU and Brazil). These investigations are resource intensive as they need to first identify the specific policy of a trading partner that is the basis of “unfair competition “and then quantify the “harm” that such policies impose on US consumers for each product and for each country. The tariff rate needs to be commensurate with the harm caused and, thus, differ, from product to product for each country. Finally, roll all tariffs under Sections 301 and 232.
As one can imagine, this is an arduous and uncertain process. However, the direction of travel is more certain — the average effective tariff rate is likely to settle close to 20 per cent. Needless to say, the country- and product-specific impact of Sections 301 and 232 tariffs could be vastly different than under IEEPA.
Markets so far have largely shrugged off the announced new tariffs. This is understandable given the quick deescalation after the strong market and corporate reaction to the Liberation Day tariffs; the possibility that the August 1 deadline is postponed; and the eventual negotiated tariff rates could be different from those announced.
However, a court ruling on IEEPA could well turn both the August 1 deadline and the trade deals moot, including potentially that with India. If the basis of these deals, that is, IEEPA, is no longer admissible, then we are headed for renegotiations with tariffs under sections 301 and 232. These could be starkly different than those that are being negotiated now.
The uncertainty around US tariffs will not be over after August 1, even with signed trade deals. US courts might well upset the best laid plans of mice and men. Continued uncertainty is the only certainty.
The writer is Chief Emerging Markets Economist, J P Morgan. Views are personal
US courts might
well upset the best laid plans of mice
and men. Continued uncertainty is the only certainty. 
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