A court strikes down Trump's tariffs, for now

On 28 May the US Court of International Trade (CIT) struck down the administration’s across-the-board tariffs, ruling that its use of emergency powers under the International Emergency Economic Powers Act (IEEPA) was an unconstitutional overreach. Trade policy was in chaos. The victory did not last. By the next morning the administration had won an emergency administrative stay.

The challenge came from two directions. A group of small importers, led by a New York wine merchant, V.O.S. Selections, argued that the law had never been meant for tariffs. Twelve states, led by Oregon, brought a parallel suit. The court heard the cases together and ruled for the plaintiffs in both.

What the court decided

The ruling, from a panel of three judges, covers the tariffs imposed under the emergency law: the 10 per cent baseline duty on most countries, the higher reciprocal rates announced in April and since suspended, and the duties on Canada, Mexico and China tied to fentanyl. It leaves untouched the tariffs on steel, aluminium and cars, which rest on a separate national-security statute. A day after the ruling a federal judge in Washington reached a similar conclusion in a case brought by two toy companies, so the administration now faces two adverse judgments rather than one.

The split matters for the economics. The tariffs resting on the emergency law account for most of the new duties imposed this year, including the whole of the extra charge on Chinese goods above the older trade-war levies. If the ruling were upheld, America's average tariff would fall a long way, while the sector duties on metals and cars would stay exactly where they are.

Emergency powers on trial

The ruling shows how shaky it is to run commercial policy through emergency declarations. The court found that chronic bilateral trade deficits are not an 'unusual and extraordinary foreign threat', and so give no grounds for sweeping border taxes imposed without the approval of Congress. The appeals court's stay keeps collections running for now. But the case hangs over billions of dollars in duties already deposited, and nobody can say with confidence whether that money will have to be handed back.

The judges pointed to a specific law Congress wrote for trade imbalances. Section 122 of the Trade Act of 1974 allows the president to impose tariffs of up to 15 per cent for 150 days to deal with balance-of-payments problems, after which Congress must agree to extend them. The existence of that narrow, time-limited power, in the court's view, makes it hard to read the emergency statute as granting an unlimited one.

The reasoning fits a broader trend in American law. The Supreme Court has grown sceptical of executive actions with vast economic consequences that rest on vague statutory language, and in 2023 it struck down the plan to cancel student debt on that basis. Tariffs that touch almost every import into the country are hard to describe as a minor exercise of delegated power, which is one reason the administration's lawyers face an uphill climb.

The Nixon precedent

The administration's defence leans on history. In 1971 Richard Nixon imposed a 10 per cent surcharge on imports under the Trading with the Enemy Act, the forerunner of the emergency law, and an appeals court later upheld it. That surcharge was temporary and limited to rates Congress had already set, however, which is why the trade court found it a poor guide to open-ended tariffs that change by presidential announcement. The appeals court, and very probably the Supreme Court, will now decide which reading of that history prevails.

Importers pay and wait

Corporate importers are stuck in the middle. They must keep paying non-refundable duties under protest and hope that a court eventually orders refunds. Hundreds of millions in working capital sit idle in the meantime.

Getting money back is not automatic. Customs finalises each import entry months after the goods arrive, a step known as liquidation, and importers have a limited window after that to lodge a formal protest. Large companies with customs lawyers will keep their paperwork in order. Smaller firms that miss a deadline may find that even a final victory in court does not return their money, which turns the legal fight into a test of administrative stamina as much as of law.

The price of not knowing

The cost of this uncertainty goes beyond the cash. Economists have long argued that when a decision is hard to reverse, such as building a factory or signing a multi-year supply contract, uncertainty about the rules gives companies a reason to wait. An importer weighing whether to move production out of China now has to guess at the tariff, at whether it is lawful and at what the administration would put in its place.

The uncertainty also reaches the negotiating table. Governments bargaining with Washington under the threat of reciprocal tariffs have less reason to make concessions if the threat may be ruled unlawful. The administration, for its part, needs deals quickly to show that the tariffs work, which could make it more willing to settle for modest terms before the appeals court rules.

Other routes to the same tariffs

Even a final defeat in court would not end the tariffs. The administration could rebuild them under the national-security law already used for steel and cars, under the unfair-trade provisions used against China in 2018, under Section 122, or under an untested clause of the Tariff Act of 1930 that allows duties against countries that discriminate against American commerce. Those routes are slower and require investigations or findings, which would make tariffs more predictable, though not necessarily lower. Markets will watch the appeals court's timetable, any move by the administration to shift its tariffs onto those statutes, and the growing pile of protests filed by importers. Until the appeals courts rule, which could take years, importers will be paying a tax that may yet prove unlawful, and most will probably hold back on new investment rather than bet on how the lottery ends. The likeliest outcome by the end of this year is that the tariffs remain in force pending appeal, while the administration builds a fallback on sturdier statutes that would keep most of the duties in place even if it loses.