Trump is running out of tariff cards to play ahead of CUSMA review

WASHINGTON, D.C. — Even the highest court in the land could not convince Donald Trump to stray from his love of tariffs.

The U.S. president’s year-long imposition of tariffs under the International Emergency Economic Powers Act was brought to a halt by the Supreme Court last Friday, much to his chagrin — and to the thrill of importers around the globe. Within hours, however, Trump responded angrily, declaring he was “ashamed” of the high court and imposing a 10 per cent global tariff under Section 122 of the Trade Act of 1974, which enables the White House to address significant balance-of-payments deficits with tariffs for up to 150 days.

Then, on Saturday, the “tariff man” decided 10 per cent wasn’t enough and vowed to raise it to the statute’s max: 15 per cent.

“I, as President of the United States of America, will be, effective immediately, raising the 10% Worldwide Tariff on Countries, many of which have been ‘ripping’ the U.S. off for decades, without retribution (until I came along!), to the fully allowed, and legally tested, 15% level,” he posted on social.

But legally justifying a five-percentage point bump would have been tricky, which is probably why the official rate, when it came through late Monday from the U.S. Customs and Border Protection, was 10 per cent.

“Weekend Trump!” said Inu Manak, senior fellow for international trade at the Council on Foreign Relations, to explain the flip-flop, noting how cooler heads prevailed.

The new tariff mirrors IEEPA’s exemptions, which means that Canada-U.S.-Mexico Agreement (CUSMA) compliant goods escape the new duties.

So will the Section 122 tariffs stick, and what does this all mean for Canada in the run-up to this summer’s CUSMA review talks?

Courting more trouble?

The Section 122 tariffs, like the IEEPA ones, may be challenged in the courts. The White House is claiming balance-of-payments issues with much of the world, which some trade watchers say has Trump out over his skis.

Phillip W. Magness, an economic historian and senior fellow at the Independent Institute, pointed to a high likelihood of lawsuits being filed because there is no current balance-of-payments deficit. The U.S. lacks the reserve depletion issue from the Bretton Woods era, which this statute was created to deal with, he explained.

While Trump equates the obsolete Nixon-era “balance of payments” with modern trade deficits, Magness said, equating it to trade deficits is just inviting legal jeopardy.

The courts, in turn, could grow increasingly fed up with Trump’s “statute shopping” and demand that refunds be made, punching yet another hole in the deficit.

But Timothy Brightbill, an international trade law and policy attorney at Wiley, a Washington-based law firm, said the temporary nature of Section 122 may influence litigation decisions.

“The reality is that it would probably take 150 days for a challenge to move all the way from the Court of International Trade to the federal circuit, and potentially to the Supreme Court.”

That timing, he added, may be why the administration picked Section 122 as its bridge between IEEPA tariffs and what it has planned to replace them.

Playing cards

Trump’s threat of imposing any level of tariffs under IEEPA has hung over negotiations with global trade partners for the past year and was the basis for the framework trade deals with Japan, the United Kingdom, and Vietnam, and others.

That leverage is now gone, and the White House knows it, which prompted Trump’s post on Monday warning these countries not to misstep.

“Any Country that wants to ‘play games’ with the ridiculous supreme court decision, especially those that have “Ripped Off” the U.S.A. for years, and even decades, will be met with a much higher Tariff, and worse, than that which they just recently agreed to,” he wrote.

The 122 tariffs are meant to provide leverage and maintain the IEEPA-style pressure while the Trump administration prepares robust alternatives to the emergency and fentanyl tariffs.

Knowing that “more tariffs are coming,” said Clark Packard, research fellow in CATO’s Herbert A. Stiefel Center for Trade Policy Studies, means these countries will likely stick to their prior framework to avoid retribution.

But what about Canada?

Having been exempt from most of Trump’s tariffs over the past year, Ottawa knew it needed the IEEPA tariff threat to vanish ahead of the CUSMA review talks. If the trade agreement between the three countries were ever to be abandoned, the risk of facing the IEEPA-level tariffs would have been economically destructive. Now, thanks to the high court justices, Trump can’t pick a number and lob a tariff at Canada with the stroke of a pen.

“Canada’s hand (is) substantially strengthened because IEEPA is off the table…,” said Magness.

The advantage for any country now facing trade talks with the U.S., he explained, is the realization “that Trump is now bound by law instead of just executive orders.”

But Canada still faces the threat of more sectoral tariffs.

Clark Packard, research fellow in CATO’s Herbert A. Stiefel Center for Trade Policy Studies, doesn’t see a big change in Canada’s prospects.

“Yes, a court put the brakes on Trump’s approach to tariffs,” said Packard, “but they didn’t stop other tariffs. He’s looking at ways to recreate the IEEPA tariff structure using another statute.”

Manak tends to agree, referring to it as “status quo, except that this big possible threat of 100 per cent tariffs, for the time being, is gone.”

Over the next five months, Section 122 will be a temporary bridge as the Trump administration works on Section 232 and 301 investigations in addition to its existing ones on lumber and aluminum, among others.

For 232s, the U.S. government must prove that imports threaten national security; for 301s, it must prove foreign “unfair practices,” which requires months of investigations and testimonies.

Trump is already in uncharted territory with the unprecedented use of Section 122. While it’s unclear which legal challenges he will face, one thing is clear: He will not be able to secure congressional support to extend it.

“Congress is definitely not gonna vote on this…,” said Manak, noting the recent House vote against tariffs and how unpopular they are with the U.S. public. “They’re looking at the midterm elections in November.”

Still, some trade professionals fear that Trump could go a step further by revoking the 122 order before the 150 days are up and reimposing it, which could let the tariffs potentially carry on indefinitely.

“I don’t think there’s anything in the statute that directly prohibits that,” said Packard.

“Creatively interpreting statutes is not beyond them when it serves protectionist ends.”

But, for Ottawa’s purposes, unless Trump drops the CUSMA exemption in Section 122 — which would essentially abrogate the free trade agreement — Trump no longer has unfettered tariff leverage over Canada, apart from the existing sectoral tariffs and the threat of new ones.

Advantage Canada

U.S. Trade Representative Jamieson Greer recently announced plans for a “series” of such investigations against “most major trading partners.” He said they would target digital services taxes, pharma prices, tech discrimination, and industrial overcapacity issues. Nothing has formally been filed against Canada, or any other country, but Ottawa’s paused DST, which remains in legal limbo, could be a target.

Such a move, said Packard, would “really poison the well” on the CUSMA review.

“It would make it almost impossible,” he added.

Still, at least Canada is exempt from the 122 tariffs for now; nearly 200 other U.S. trading partners are not.

“Canadians and the Mexicans are in a better position relative to virtually any other country…,” said Packard, and both he and Manak expect South Korea, the EU, and Japan to be targeted first for any 232 investigations, and the possible 301 probes.

Americans are largely opposed to tariffs, which could also work to Canada and Mexico’s advantage, given that Trump is facing a tough final midterm election in November. For the House race, Democrats are leading in national polls, while the Republicans appear to still have the edge for Senate seats.

“Tariffs are unbelievably unpopular…,” said Packard. “I just don’t think voting on a tax increase right before midterm elections is going to be a political winner.”

Magness agreed, noting that Trump is “underwater” on this issue. Fifty-seven per cent of the country approved of the Supreme Court decision on IEEPA, according to a new YouGov poll .

“If this drags out for another six months, we’re in election season, and he might not have as friendly a Congress after the election if the tariff issue ends up being a major thing” come election day.

In the meantime, Magness and Packard strongly suggest that Ottawa bide its time and that Prime Minister Mark Carney not overreact to any sectoral tariffs or threats.

“Retaliation is very tempting in the middle of trade wars, but it ends up making it harder to de-escalate that trade war in the future,” warned Magness.

Carney is doing well to try to bring EU members into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Packard said.

“The more trade agreements that (Ottawa) can engage, the less leverage the United States has over them.”

“Ultimately, though, the United States has a lot of leverage over Mexico and Canada,” he added, noting that both countries will have to accept some tariffs and uncertainty for the foreseeable future .

Nuclear option or bluff?

Trump may be eyeing another card for leverage.

During his press briefing last Friday, he also mentioned having Section 338 at his disposal , which would allow him to impose tariffs of up to 50 per cent on imports the U.S. deems discriminatory compared to other countries.

While the U.S. would struggle to prove that Canada — or any other major trading partner — was discriminating in such a matter, the law is ambiguous and worrying, given that it allows for a high tariff.

This would be one of the “wildest” moves yet, said Magness, as Section 338 is a clause from the 1930 Smoot-Hawley Tariff Act.

“We all know the notoriety of Smoot-Hawley — it’s the tariff that plunged us into an international trade war at the outset of the Great Depression. It’s considered one of the greatest economic blunders in world history.”

It allows for tariffs of up to 50 per cent as retaliation against countries that attack the U.S. with their own tariffs. It has never been invoked — that clause wasn’t used in the Depression era — and it has been supplanted by subsequent statutes.

“The letter is still in the books, but it’s an obsolete letter because Congress has come in and they’ve clarified and added defining terms to what discrimination means under later trade statutes.”

If Trump is looking for leverage in CUSMA talks against Canada, 338 is off the charts, which means it’s more likely a bluff.

“It’s like a nuclear option,” Magness said. “If you went Section 338, this is a trade war with the rest of the world.”

“It would be a very severe worsening of already poor tensions between the two countries, and I think that it would also be more likely to draw a backlash against Trump (domestically).”

National Post

Our website is the place for the latest breaking news, exclusive scoops, longreads and provocative commentary. Please bookmark nationalpost.com and sign up for our daily newsletter, Posted, here.