Pacheco: Trump’s tariff mess just got a lot messier

Average Americans are being bombarded more than ever with what I refer to as a “tariff soup,” which is related to President Donald Trump’s trade policy founded on tariff imposition. On Feb. 20, the U.S. Supreme Court ruled that Trump’s International Emergency Economic Powers Act, or IEEPA, tariffs, which he imposed on most of the U.S. trade partners last year, were illegal.

IEEPA tariffs were created to allow the president to respond to threats such as drug trafficking or severe trade deficits. However, after reviewing the tariffs, Congress ruled the way that the IEEPA tariffs were being used constituted a tax, which only Congress has the authority to impose, not the president.

Upon learning of the ruling and hurling insults at Supreme Court Justices, Trump announced that he would use Section 122 tariffs to impose a global 10% tariff on trading partners. A day later, he said he would raise it to 15%, the maximum allowed. These tariffs were created primarily to address severe trade imbalances. They have never been used as blanket tariffs, which are part of broader trade policy.

It is uncertain whether the Section 122 tariffs can legally be used the way Trump is using them. Furthermore, there is more uncertainty that they can be extended past 150 days, because it has never been done. These tariffs might find themselves in front of the Supreme Court as the IEEPA tariffs did.

Meanwhile, the Supreme Court’s ruling did not affect the Section 232 tariffs that are in place. These tariffs were created to address national security issues, as determined by the U.S. Department of Commerce. Trump is using these tariffs on major U.S. imports such as steel and aluminum. Nor does the ruling affect Section 301 tariffs, which allow the U.S. Trade Representative to impose tariffs on countries that it deems not to be engaging in fair trade practices with the U.S. Goods traded between the U.S., Mexico and Canada that meet North American content percentages under the U.S.-Mexico-Canada-Agreement, or USMCA, are not affected by the Supreme Court ruling.

All of the above-listed tariffs were intended to be used in specific circumstances, not as part of a blanket trade policy against the world. Taking tariffs away from Trump takes away the pillar of his trade policy. Therefore, he will push the boundaries of what the original intent of the different tariff categories was as he pushes his agenda. This is why there are very few joyous comments in the press that the tariffs were struck down, and life before the tariffs will resume.

There are a couple of issues that are still very uncertain. The first involves the trade agreements with countries and trade blocs such as the European Union that the Trump administration was negotiating before the Supreme Court ruling. Do these countries or trade blocs walk away from negotiations that were based on the illegal IEEPA tariffs? Why would they keep negotiating on tariffs that no longer exist? Trump has already threatened trading partners that they better not walk away or they will face retaliation. How he would do this is unclear. Furthermore, do countries reciprocate the 15% tariff that Trump said he would impose on most of the U.S.’s trading partners?

The other issue that is even more complicated involves tariff reimbursements. During the time that the IEEPA tariffs were in place, U.S. importers paid billions of dollars in tariffs to import products into the U.S. If the IEEPA tariffs were illegal, how would the amount paid by U.S. importers be refunded? Complicating matters even more is the fact that many of these U.S. companies passed the tariff charges on to their clients. Do U.S. consumers have a claim to be reimbursed for the extra costs that they paid? Trump had touted using the tariffs to offset tax cuts and to eventually replace income taxes with tariffs. In the grand scheme of things, tariffs are but a smidgen of what Americans pay in income taxes, so this strategy seemed unlikely to succeed from the start.

All of this tariff drama precedes U.S., Mexico, and Canada doing their five-year review of the USMCA this year, in which all three North American trading partners will either fine-tune the agreement, add in new provisions or decide to rip it up completely. Tariffs will be a major part of the discussion, and likely a U.S. tactic to get Mexico and Canada to bend to its objectives.

So, what now? In the short term, U.S. importers will continue to pay tariffs at least for the short term. Many of my importing colleagues have often expressed that they are willing to pay a tariff, but they want a stable tariff number. They don’t want to go to bed tonight knowing that the tariff they are paying is 10% only to wake up tomorrow and Trump has decreed a rise in tariffs to 25%. It is extremely difficult to strategically plan for your business in an environment such as this. A 15% tariff is a stable number that cannot be raised further. Business executives will have to work around this, not that they want to, but it is a step toward stability.

In the longer term, we can expect tariffs to sow uncertainty in the business world and the U.S. economy. American businesses and American consumers will continue to deal with this uncertainty as they have for the past year.

Jerry Pacheco is the executive director of the nonprofit International Business Accelerator. He can be reached at (575) 589-2200 or jerry@nmiba.com.