Court rules Trump's new tariff illegal too

The US Court of International Trade (CIT) struck down the administration's temporary 10 per cent tariffs on 7 May, knocking out the White House's fallback trade plan. The tariffs had been imposed under Section 122 of the Trade Act of 1974. The court found that the administration had not shown the "large and serious balance-of-payments deficit" that the statute requires.

A law written for Bretton Woods

Congress wrote Section 122 in 1974 to deal with balance-of-payments crises under the Bretton Woods system of fixed exchange rates, when gold or foreign reserves could drain quickly from a central bank. Exchange rates now float, and America pays for its current-account deficit with capital inflows without much effort. The CIT held that a merchandise trade deficit is therefore no balance-of-payments emergency. The tariffs lasted barely seventy-five days of their 150-day statutory limit.

The provision has a specific origin. In August 1971 Richard Nixon closed the gold window and imposed a 10 per cent surcharge on imports under emergency powers drawn from a 1917 wartime statute, and importers spent years contesting it in the customs courts. Congress answered with a narrow, explicit authority: a surcharge of up to 15 per cent, for no more than 150 days unless Congress extends it, and only to meet a balance-of-payments problem. By the time the Trade Act was signed in January 1975, the major currencies had been floating for almost two years, so the clause was dated almost from birth. It had never been used until this year.

The Nixon litigation also carries a warning for importers celebrating this week. In the Yoshida case, the Customs Court ruled in 1974 that the surcharge had exceeded the president's powers, and the appeals court reversed that decision the following year. A first-instance win against the executive on trade has been undone before, and the government will argue that it should be again.

What the court weighed

The government's case rested on the size of the trade gap, while the court's answer turned on definitions. A balance-of-payments deficit in the Bretton Woods sense meant a country running short of the reserves needed to defend its exchange rate. America borrows in its own currency and issues the world's main reserve asset, so it faces no such shortage, and its current-account deficit is matched by foreigners' willingness to buy American assets. Reading the statute to cover any trade deficit would have handed the president a standing tariff power that Congress had deliberately fenced in.

The ruling lands on top of the earlier defeat of the emergency-powers tariffs, whose repayment is already under way. Two broad tariff programmes have now failed in court on the same basic ground, that the statute invoked did not stretch as far as the White House claimed. That pattern is what turns a single judgment into a strategy for importers.

Suing pays

Corporate treasurers will draw an obvious lesson. Going to court against the federal government has become the cheapest and most profitable way to avoid tariffs.

The economics are lopsided. For a large importer, a 10 per cent duty amounts to a tenth of its annual import bill, while a lawsuit costs legal fees and some management time. Customs law pays interest on refunds of duty that should not have been collected, so a company that sues and wins recovers its cash with a return, and one that stays silent may find its claim harder to press later. The calculation favours filing early and filing often.

The deadlines explain the rush. Once Customs finalises the duty on an entry, a step known as liquidation, an importer has 180 days to lodge a protest, and an entry that liquidates unchallenged is hard to reopen. Companies that want to be sure of any eventual refund have every reason to protect their claims now, whatever they think of the odds on appeal.

Winners and losers

The winners are large importers with legal departments, and the customs brokers and trade lawyers who process the paperwork for everyone else. Foreign exporters gain too, since their American customers can place orders without adding a tenth to the landed cost. The Treasury loses revenue it had counted on, which adds a little to the deficit at a time when it is already selling more bills to fund refunds. Domestic producers competing with imports lose the price shelter the surcharge gave them.

Pricing is where the ruling gets awkward for importers. Many added a surcharge to customer invoices when the 10 per cent duty arrived, and they must now decide whether to drop it while an appeal is pending. Keeping it risks the same downstream lawsuits that the earlier refunds have provoked, with customers claiming a share of any money returned. Dropping it early risks absorbing the full duty if a higher court revives the tariff.

Where the White House turns next

The administration still has sturdier tools. Section 232 of the Trade Expansion Act of 1962 allows tariffs on national-security grounds, and Section 301 of the 1974 act allows them against unfair foreign practices; tariffs under both have survived court challenges since 2018. Each requires a formal investigation first, which makes them slower and narrower than a blanket surcharge. The government will also appeal, and a stay from the Federal Circuit could keep duties in place while the case proceeds. Congress could settle the matter by legislating tariffs directly, though that would give lawmakers a say over trade policy that this White House has preferred to keep for itself.

The strongest objection to the lesson is that one trial-court ruling settles nothing, and importers who sue may see the decision reversed and their legal bills wasted. That risk is small next to the potential refund. It does mean the gains will be uneven, since large importers with legal departments will file promptly while smaller firms may miss deadlines or settle for less. After this ruling, any tariff built on a borrowed statute will probably draw a lawsuit within days, and companies will keep filing until the White House finds a legal basis that holds up in court.