Tariffs run into legal troubles but will remain at core of Trump's agenda

The US Supreme Court's tariff ruling dents Donald Trump's leverage, reshaping global trade talks and placing India in a relatively stronger negotiating position

The United States (US) Supreme Court’s ruling on tariffs is arguably the biggest setback for President Donald Trump thus far in his second term. It also showed that not all decisions of the administration will be upheld by the court, and that it can assert its independence when required. The court last week ruled that the President did not have the powers to impose tariffs under the International Emergency Economic Powers Act (IEEPA). It noted that when the US Congress granted the powers to impose tariffs, it did so clearly, which was not the case with the IEEPA. No President had ever used it to impose tariffs. Predictably, Mr Trump did not like the judgment and called it “a disgrace”. He almost immediately imposed a 10 per cent tariff under Section 122 of the Trade Act of 1974. It was later increased to 15 per cent. The provision allows the President to impose tariffs up to 15 per cent for up to 150 days to address a large deficit in the balance of payments. 

Tariffs are central to Mr Trump’s agenda, and, in his view, they can be used to address a range of economic and strategic problems. At a very basic level, he believes that trading partners over the years have not treated the US fairly, and its large trade deficit is a consequence of this unfairness. The so-called reciprocal tariffs were imposed to address the US trade deficit and bring back manufacturing jobs. The use of tariffs was not limited to addressing the trade deficit — though that, too, was misguided. Tariffs were used also to penalise countries presumably exporting illegal drugs to the US and to discourage India from purchasing Russian oil, assuming it would help end the Ukraine war. Mr Trump also threatened to impose higher tariffs on Europe if it resisted the takeover of Greenland. He had used tariffs more selectively in his first term and imposed them on specific items and countries, which could be defended in court. However, this time he went way too far. It is not clear whether US businesses will be able to reclaim the tariffs paid. In any case, the possible decline in tariff collection has raised fiscal concerns. 

Mr Trump will keep looking for ways to impose tariffs. However, it is fair to argue that the leverage that the US administration had in negotiating agreements has been dented, at least for now, and some of those agreements will be open to renegotiation. India recently concluded a trade agreement with the US and agreed to 18 per cent US tariffs, with an understanding of opening up its markets for US goods to a much larger extent. It remains to be seen how the judgment and subsequent actions by the administration affect the final implementation of the trade agreement because the fine print is still to be finalised. Although the government is watching the developments, like most trading partners, India will now be in a relatively good position. 

To be fair, tariffs and trade disruption initiated by the US have forced many countries to seek alternative markets and stitch alliances. India also moved constructively over the past one year and has initiated and concluded several trade agreements, including the much-awaited one with the European Union. It also took several measures to push internal reforms with the aim of improving productivity and business conditions. It will be important that such efforts continue unabated. This will be vital for India to be able to integrate with global supply chains and tap emerging opportunities.