The US Supreme Court’s February 20 ruling has significantly limited President Donald Trump’s ability to use tariffs as a negotiation tool. However, friends and foes have not yet breathed a sigh of relief; restricting the President may increase his use of potentially much more damaging instruments.
Despite his ideological malleability, Mr Trump has been consistently mercantilist in his view of the global economy since at least the 1980s, believing that other countries are exploitatively trading with the US, and preferring tariffs to correct this imbalance. Moreover, even in non-trade disputes, Trump likes tariffs because of his political base’s aversion to deploying the US military, as illustrated by the threat of tariffs for countries that trade with Iran as a tool for pressuring the Middle Eastern state during the latest round of negotiations.
However, the US Constitution does not afford the president unchecked authority to impose tariffs. A key general impediment stems from tariffs’ explicit role as a revenue-generating tax – an issue that by default places them under the purview of Congress. Having to seek legislative approval for each tariff greatly undermines their effectiveness because the process is both long and highly uncertain. This has forced the Trump administration to invoke specific legal channels that allow for quasi-unilateral decisions on tariffs.
The first was Section 232 of the 1962 Trade Expansion Act, whereby imposing tariffs for a selection of commodities is deemed critical for national security. This was used to justify his steel and aluminium tariffs – critical inputs to military manufacturing – during Mr Trump’s first term. Notably, this designation does not occur by fiat, with the US Department of Commerce having to conduct a formal investigation, but it is still preferable to rolling the dice with Congress.
The second was the International Emergency Economic Powers Act (IEEPA) of 1977, which allows the President to regulate commerce unilaterally during a national emergency. Mr Trump classified various situations as “emergencies”, including the trafficking of fentanyl in the cases of Canada and Mexico, or the economic exploitation of the US in the case of the “liberation day” tariffs imposed on all countries and territories in the world. This path is particularly attractive to Mr Trump because it allows him to change tariffs instantly without consultation or oversight, making it well-suited to his style of escalatory negotiation.
The Supreme Court has ruled that Mr Trump is no longer allowed to pursue this second channel due to the income-generating property of tariffs, which places them under congressional control. This does not mean he can no longer impede trade for its own sake or as a negotiating instrument, but his flexibility and ability to act unilaterally are significantly reduced. This is especially important in high stakes geopolitical negotiations where Mr Trump is looking to quickly secure a favourable deal and move on. An important angle is the refund risk: the government has to worry about how to refund companies for tariffs that are retrospectively ruled illegal – a risk amplified by the real possibility of some businesses going bankrupt.
Critically, the Supreme Court did not contest the President’s legal capacity to designate an emergency and invoke the IEEPA – it merely restricted what he could do in light of it. The fear for the countries that negotiate with the US – friends or foes – is that with tariffs off the table, Mr Trump may opt for sanctions as a replacement.
In particular, the sharpest tool in Trump’s toolbox is now the Specially Designated Nationals (SDN) list. Individuals or businesses being added to the SDN list suffer an immediate freeze of US-based assets and are no longer allowed to do business with any American citizens or US-based companies. An SDN designation also makes trading in dollars de facto nearly impossible. Collectively, these effects lead to it being colloquially described as a “financial death penalty”, and it can be applied at the country level, as in the cases of Iran, North Korea, Cuba and others. An attractive feature compared to tariffs is that there is no refund risk.
Before the Supreme Court ruling, Mr Trump preferred tariffs because he appreciated their revenue-generating appeal, and because they are more scalable than SDN designations. However, now that his hand is being forced, Mr Trump is unlikely to change his negotiating philosophy – he may look for the easiest substitute, which happens to be sanctions such as SDN. Those imagining that sanctioning allies would constitute too extreme a norm violation for a country like the US would do well to note that the same was said about the punitive tariffs Mr Trump has been imposing since 2016, as well as many other actions he has taken globally. Trade partners hoping for predictability may instead face a more volatile negotiating landscape.
