What the actual tariff?

Donald Trump is learning the hard way that you can't always get what you want. Last week the Supreme Court said that actually, Mr President, no, you cannot have your beloved emergency trade tariffs that you announced last April because you're not using them for an emergency. And anyway, you can't just do that because you feel like it.

I'm paraphrasing the legal wording here, but the point is, no tariffs. Trump reacted in his usual even-handed, thoughtful manner by saying the judges who voted against him should be absolutely ashamed. He also slapped on some other tariffs? It's all a mess that goes to show you can't spell tariffs without FF.

This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London, the greatest city on earth. Joining me, I have, as usual, my co-pilot, Captain Robert Armstrong of the The Unhedged Newsletter in New York City, but also I have someone who actually understands all this stuff and writes about it for the FT, Alan Beattie in the house.

Alan, thanks for coming back. Clearly we failed to put you off last time. Yeah, well I very much appreciate that. I I get invited on to unhedge basically where there's a massive carnage in the global trading system. And I sort of like get the vulture in who won't come and pick the carcass clean of I think of you more like a crow rather than a vulture.

I'm actually gonna take some time to think about that and possibly the next time invited on I'll have an answer for you, but not quite yet. So Alan, look, normal people have better things to do with their time than track Supreme Court rulings on trade tariffs. So please

For those of us at the back of the class, get us up to speed. What what happened last Friday? What happened with the Supreme Court basically bat rulings last spring and summer from something called the Court of International Trade and then a federal appeals court that said, You're trying to use a particular piece of legislation, the International Emergency Economic Powers Act.

which is supposed to be, as its name suggests, for use in emergency, and it allows you to regulate or prohibit quote unquote imports. It has never been it's been around for fifty years. It has never been used for tariffs. He's clearly not using it in an emergency. He's clearly just using it for tariffs. For that reason, this particular bit of legislation you cannot use for this.

So is it that it's not an emergency or that you can't declare it to be an emergency or is it like a combination of all these things? I mean he did declare it an emergency. Congress subsequently voted against one particular bit of it and said it isn't, but What a lot of the argument focused on was that This particular thing doesn't let you use tariffs. Right. Right. That's it. It's you know other things that you use to have, try and go and use other things which we'll talk about.

But this particular thing, this is not what it's for, and that's what and you can't do it. I don't mean to argue about scripture with a nun here, Alan, but reading through the decision from the Supreme Court, a lot of it was about constitutional principles. Does the president have the unilateral right to impose taxes?

And is this him doing that? In other words, has he taken the powers of Congress from Congress? And the majority said yes he has and it's not allowed. So it wasn't all particular. Some of it was brought up. Mae'n beth yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw. without necessarily having to be voted on by Congress. It's just the issue that this is not one of them and by using this one, he's doing exactly what you just said, which is expanding the powers of the executive beyond

What the constitution said that he actually has. So it's basically just no. Just knock it off. Now, but it's not just no, is it? Because quick as a flash. Trump says Well, I'm going to declare a ten percent global tariff. Actually no, call it fifteen percent. Make this make sense to me, Alan. How come he can still do this? Or can he still do it?

So if you think of it as being like a workshop and there's a whole bunch of tools lying around. So to begin with he picked up the AIPA, that's the International Emergency Economic Powers Act. Um and started using that. And Supreme Court said, put that down right now So the next one he's picked up is called section 122.

And it's a particular tariff authority, which is supposed to be used when there's a balance of payment crisis, when the US just can't cover its debts, no money is coming in. Now, you know Not many countries, certainly not the US, have major balance of payments crises under floating exchange rates. This is really a concept that goes right back to the Bretton Woods fixed exchange rate system.

So he's picked up a tool. Right. It's like Yes. So we're going back into the olden days, the point where this was really relevant and like by any sensible measure The US does not have a balance of payments crisis at the moment, right? However, what's uh in tractive from his point of view is

The court this can be challenged, but the courts are likely to give a bit more deference to him saying there's a balance of payments crisis because it's hard to define than using the Emergency Powers Act. In any case, he can bring this in very quickly. Um for 150 days. Yeah, that's the number that interests me. Like this is just a band-aid. It lasts five months.

Right. So this is a shield. I mean there's some th theory about he could go to the hundred and fifty days and then start an entirely different section one hundred twenty two. But their strategy, which I think has been made fairly clear, they've made fairly clear is

You put section one hundred twenty two up there for one hundred and fifty days. While it's there protecting, you build another wall behind it, which is built of different tools which you've just picked up from the workshop, which take a bit longer to use. All of these things are challengeable in theory, but you can stall it for so long. And I kind of find it quite hard to imagine the Supreme Court getting to the point of saying, Right, we are gonna take all your tariff power away

I think is actually not the judiciary. It is if the Democrats gain control and they can assert which is after all, what is supposed to happen is right there, literally in Article one of the Constitution, is the Congress has the power to

Regulate foreign trade. Yeah. Yeah. Can I ask I'm d again, th the thick kid in the back is sticking his hand up here from the kind of patched together tariffs we might get If the Democrats don't retake control and Trump goes through all the picking up the dusty tools from the back of the workshop, how different are the new tariffs from the old tariffs? There'll be tariffs, I agree with you on that point, but will they be universal, where they be partial, more on China, less on Europe?

If you like that. I mean if you use them flexibly you can you can do a fairly good job of approximating. We're already seeing some sort of little anomalies like gems and so on which are which are not covered. But by and large, if you think the US wants, you know, broad protection of its manufacturing and particular protection on certain things like steel, that will still be there. Hm.

A couple of things. So first of all, when the tariffs were all announced in April, like the famous like Rose Garden board with all the tariffs on it, tariffing the penguins, yada yada, we're all quite familiar with what happened last April on on Liberation Day. The US stock market got fried, right? It dumped about twenty percent in in a few days. So, like, Rob, why is the US stock market not adding ten to fifteen percent now that those tariffs have been taken away?

'Cause it did it already. In other words, I think it was a deep consensus view that this Supreme Court ruling would go against the president. I think he might be the only person in the world who was surprised by it. That had already priced in, but I think the other answer is What Alan just described, the kind of um musical chairs of trade regulation is also a consensus expectation. So it's gonna be messy at least for another year or two.

Right. Yeah. And that that's what the the market is responding to. I was thinking about this and you think maybe I got these numbers wrong but if you think of this hit which is about 750 billion something like that as being a one off hit because he's gonna get the you know, the tariff revenue once he's got the new tariffs. You think of that as being a one off hit, it's not an ongoing cost, it's a one off hit. That's like two percent or something of

The federal debt, right? Right. It's not huge. You think of it as a one off increment, it's not that big. If it's a serious hole in his ability to tax going forward, I suspect there will be more concern. So w the so there are nine justices on the Supreme Court. Three of them said, It's fine, Mr President, you can have what you want. Six of them said no you can.

Of the three that said it's fine, you can do this, one of them, I can't remember which one, and r and Rob, I'm sure either of you will be able to remind me, said Well, you kind of can't really undo this because it would be a real like pain in the arse to figure out how to reimburse people for all the tariffs they've already paid. Which is like It's a view. I think I think that was I think that was Justice Kavanagh. I think that was Bret um Kavanaugh, who I can only imagine

Metaphorically if not literally was just reading talking points the White House had given him under the table. Yeah. It's like well I've I've shot him dead and I can't like make him alive again. So like I mean let's all just move on, shall we? I mean the body. You know.

So really difficult. But that does raise the really interesting question of how to reimburse people who th so you've paid you're a company, you've paid these tariffs. Now it turns out those tariffs were illegal, so you're due to be reimbursed. Fun times. So something like eighteen hundred companies are

suing to get back the money they paid under the tariffs and it's big companies like Costco and little companies and everybody in in between. And there was the following um delicious quote in our competitor the Wall Street Journal yesterday. We're talking asbestos levels of lawsuits, said Matthew Sigleman, a federal litigator who's filing lawsuits for importers, all happening at the same time. Beautiful scenes.

This whole thing is just fascinating, right? Because you know it turns out that the sons of Howard Lutnick, the Commerce Secretary, have been running an operation at Canter Fitzgerald, the brokerage that Lutnick um was CEO of. to help companies to get this these reimbursements, right? There's a whole like cottage industry in how to get companies this money back.

Like Alan, th this this looks to me like just an insufferable nightmare from start to finish. How is this gonna work? This is gigantically massively complicated to the point where if you talk to a different bunch of people who really all ought to know what they're talking about, they tell you totally different things. I hear things from oh yes, this will be a few weeks, it will be administrative to this will be two to five years. I think it will actually depend quite a lot on

When you pay the tithes, how big a company you are, that sort of thing. But there is a huge amount of uncertainty around at the moment. And people do not want to take responsibility. So the White House said, not our problem, go and ask the Supreme Court. The Supreme Court was silent on the matter. That bounces it back down to the first federal court, the Court of International Trade, who I have a gigantic amount of respect for because, you know, they're proper good nerds.

They have to come up with a way of adjudicating people's claims and then giving the money back. So, Rob, how this is an issue, right? Because one of the things that's been helping the US deficit, right? It spends more money than it has.

One of the ways it's been helping to to to plug that gap is the revenue that's been coming into Treasury coffers from tariffs. So first of all it looks like that money that's coming in is at least gonna slow quite dramatically. Some of it might need to come out again.

Again, it's a mild surprise to me that that's not slightly bugging the bond market because this has been touted as one of the reasons why the US government bond market has been quite well behaved. It's true, and it is there is a revenue issue here, given that taxes were cut. And part of the way to fill the hole in the bucket was tariffs. But you have to keep the scale in mind.

Alan will know better. We're talking about two to three hundred billion dollars a year of tariff revenue that all this stuff generated, and total tax revenue in the United States is in the trillions, not the hundreds of billions. So it's a problem on the margin, but we have so many deficit problems on the margin that it's just a problem.

One of many. Yeah. Yeah. I have a question, which is now, you know, this is a kind of natural point for us to pause at this moment in history and look back at this whole sorry episode. And ask how much economic damage was done. Is it too general to say in effect what happened? Is Trump put a smallish tax On U.S. importers and consumers, and it was a little sand in the gears, but enough for the system to absorb. Functionally, is that what happened?

Yeah, that that is actually what happened. And you know, the main the main cost of this is the US, not anywhere else. You know. And I know we're all used to and I'm as bad as anyone, we're all used to thinking in sort of export oriented mercantilist terms and saying

This is terrible for the countries exporting to the US and so forth. But you know, it's much more terrible for the US because if you put tariffs on, it mainly hurts you. And no one else has done it. The US is is actually quite a closed economy anyway, by which I mean self sufficient, right? Um and so it's not that big a in the in the global economy or global trading system as you would think. But sometimes it's about the friends you lose along the way, right.

But in you know, in a sense it's just pr it's just it's just slightly detaching itself. And I mean this is happening across a bunch of different, you know, sectors as well, like, you know, in green tech, for example. The US is not stopping what's happening globally.

It's just It's just not playing. It's just absenting itself. Yeah. So that's what it's doing here. Just to go back really quickly to the whole refunds thing. You were writing in your n newsletter today, Alan, that actually a lot of these repayments are potentially going to go to Shuffles paper, checks note. Chinese companies? Yeah, so what are you talking about, Alan? So this is this is genuinely comic, but the way tariffs work is they are paid by importers, everyone knows that.

and it's paid by someone called the importer of record. Unusually it's quite easy for foreign companies to be importers of record as well. So you can have a Chinese exporter which exports into um the US also pays the money over to Customs Border Protection, despite not actually being a company in the US, and then sells it on.

Now, what this means, because all the the refunds go to the people who paid it, right? Who actually handed the cash over. It doesn't matter whether they hand it over they they pass those costs on to other companies, to consumers, whatever. They just pay it back to the people who paid it. The impact is that when some of this money goes back it goes back to Chinese companies. Now when you think Trump's gonna love that. Trump has put in a tax on American consumers

In order to subsidize Chinese people, you're not sure. That leads me neatly to my next question. When does Robert Armstrong receive compensation for the additional price of the martinis he's been drinking in New York? It's true.

It's only but when do when do consumers get the checks? Consumers will have to go and try and badger the shops that sold them stuff. Now this is going to be quite an interesting thing because I talked to some people this week from something called the Main Street Alliance who represent a lot of small businesses.

And there's more businesses were saying, We're getting cust customers saying, Hold on, can we have this money please? And in some cases those businesses are like, We haven't raised our prices. We didn't think we could. We've taken hits on margins, we've let people go, all this sort of stuff.

And you know, but it's gonna become a marketing tool, for example. If you know the company uh Cards Against Humanity who do this sort of party game things, they've actually set up a website saying, If you bought our cards Not direct from us because we didn't put up prices, but via one of the big retailers who they say did put up prices, we will give you money back. Right nice. So it's just a marketing thing, it's not legal.

But, you know, there's no way of of actually doing it. There's no way of actually of compensating consumers because once they're in the economy, you know, that's it. They're in a free market economy. You can sell them to ever whatever price. Rob, if I was you, I would be mad as hell. Are people mad as hell about this? No. I think people are inured so much. I li I'm a I'm mad as hell about it, but I'm n I'm not a very good test case. I think it in a way it's kind of like

Doge. You remember Doge that was going to cut the government in size by a third or whatever? I mean, that didn't work at all. Everything went the other direction, and people have just forgotten about it. Right? It's like there was this big tariff noise, there was a lot of stuff singing and dancing, nothing happened. Shrug your shoulders, move on.

But I but I would say if you just look at the polls, tariffs are not popular. They're really not popular. And Trump doesn't seem to understand this. His administration does,'cause they keep sort of opportunistically cutting tariffs when they can.

The Democrats have finally woken up and realised this is actually a thing they can get behind. And one really amazing thing I think Trump is doing now is he's going to reconstruct these tariff walls using the the authorities I was talking about before, the two three twos and the three or one. That's gonna take a bit of time because you have to go through the sort of investigation procedures and so forth.

At the same time, I think there's just going to be ongoing rows about people not getting their tariffs back and Trump is not going to be very helpful about tariffs back. So you're now going to have a period of months When Trump has basically put himself out there exposing his flanks on a on a policy which is not popular, letting the Democrats hit at him Consumers. Companies and everything um hit it him. You know, I'm c I'm kinda for it. I live for the chaos.

We are gonna be back in just one second, listeners with long short. Okie dokie listeners, it's time for long short, that part of the show where we go long a thing we love or short a thing we hate. Alan, since you've been generous enough to join us, you can go first. I'm not sure I'm allowed this, but it's a very metaphysical one. I'm going long irony.

Then this week the British Trade um Minister Peter Kyle went over to Brussels, remembering this it's ten years after Brexit, and lectured them for raising trade barriers. Beautiful. I love that for him. I um long acronyms Market nerds love an acronym. Yes, the Taco Trade. T A C O, Trump Always Chickens Out, invented by some guy called Rob Armstrong.

I'm making the case for Wacko, wash always chickens out,'cause I don't think he's gonna upset the markets in the way that he could do. I reckon a chicken out. Yes. So on the wacko on the wacko trade We are long treasury. I guess I guess Wacko is long is long treasuries. But this week, yes, customers, we have a new one, the Halo Trade. Investors are looking for heavy asset, low obsolescence companies. It doesn't trip off the tongue, I'll be honest.

Obsolescence. I don't know. It's a bit of a long word, but I kind of like the idea. People want boring safe companies, so Halo trader is. So I I'm long acronyms. I wrote about Halo in my newsletter yesterday. Halo is the product of a guy called Josh Brown. And I just wanted to call out downtown Josh Brown. Oh, is it him? Yeah, it's him. I think he came up with Halo because you know you for reasons you'll understand. I'm very sensitive to acronyms being misattributed.

So I I'll take I'll take short on on the Halo trade. It's a good acronym, but if you think I'm paying twenty-five times earnings for like Some trucking company. You're crazy. Well, it's it's an acronym Inventor SmackDown right here on the show. Rob Armstrong versus downtown Josh Brown. I'm here for it.

Listeners, if this is the sort of content that pleases your ears, then you'll be delighted to know that it will be back in your stream on Tuesday. So listen up then, and in the meantime, thank you for your attention to this. Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topha Ford. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler.

FT Premium subscribers can get the Unhedged newsletter for free, and a 30-day free trial is available to everyone else. Just go to FT.com slash unhedged offer. I'm Katie Martin. Thanks for listening.