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Brad Setser is the Whitney Shepardson senior fellow at the Council on Foreign Relations and a former senior advisor to the United States Trade Representative.
LONDON — The U.S. Court of International Trade (CIT) ruling this week on President Donald Trump’s tariff policies signaled a potentially pivotal shift in the way the administration has been pursuing tough trade negotiations with both friends and traditional security rivals. But challenging trade talks can be expected to continue both with longtime U.S. allies across Asia and Europe, and with China.
How do you gauge the international reaction to the latest U.S. court rulings on tariffs?
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The CIT ruling produced a certain amount of relief globally. America’s trade partners are very conscious of the fact that the United States does have legal tools other than the International Emergency Economic Powers Act (IEEPA) that can be used to impose tariffs, so the court ruling didn’t take away all tariffs or future tariff threats. But IEEPA did let Trump raise or lower tariffs over a weekend; limiting that power at least means that there is a longer period for other countries to prepare for any new tariffs, and potentially more time for negotiations. And, obviously, countries would welcome removing the 10 percent “base” tariff that Trump had already introduced. The U.S. ask in most negotiations (see the deal with the United Kingdom) has been for other countries to accept that tariff without retaliation and then make additional concessions to avoid even higher tariffs.
A federal appellate court decision blocked the immediate removal of that tariff—which isn’t welcome by trading partners—but I think most foreign governments still have a bit more hope today than at the start of the week that the U.S. courts ultimately will limit the use of the president’s emergency economic powers for permanent changes to the structure of U.S. tariffs.
How does the decision followed by the pause affect import decision-making for American businesses?
Given President Trump’s clear intent to raise the average U.S. tariff, any pause will lead firms to front load imports and bring as many goods as possible into the United States as soon as possible to avoid the tariffs. This pattern pushed the trade deficit in the first quarter up to record levels in dollar terms and close to a new all-time high as a share of GDP. Even the reduction in many tariffs on China from the 145 percent level in April to a high of 30 percent will likely result in a surge of imports. It is somewhat of an irony that Trump doesn’t like trade deficits, but the threat of higher tariffs over time is likely to result in a significant widening of the trade deficit this calendar year.
What impact might the latest rulings have on U.S.-EU trade negotiations?
The ruling makes it less likely that the Europeans will accept a 10 percent “base” tariff on trade—one of the U.S. asks of the European Union (EU). It could well make it more likely that the United States will give the negotiations more time, as the ability of the United States to raise all tariffs to 50 percent if there isn’t a deal by July 9 is in question. Why would Europe agree to accept a tariff that the United States may not have the legal authority to impose?
But in some ways, it doesn’t change the basic structure of the negotiations all that much. The United States has already imposed tariffs on European exports of steel and autos using the more standard “232” process (an authority that gives the Commerce Department the ability to impose tariffs on trade in a particular sector if it is judged to be a threat to U.S. national security; that authority is independent of the IEEPA used for other tariffs).
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The investigation into pharmaceutical trade practices, which is likely to be concluded soon, will cover even more U.S.-EU trade than the tariffs on autos (2024 pharmaceutical imports from the EU reached $155 billion while auto and auto part imports were around $60 billion). Those tariffs alone generate a strong incentive for the Europeans to look for a deal; the United States has to worry that if there isn’t a deal, the Europeans will retaliate against those tariffs with those of their own. Any deal would likely require that the United States accepts some European exports at either a zero tariff or a reduced rate (say 10 percent), while Europe agrees not to retaliate and European firms promise new investments in the United States. That is a difficult deal for Europe to accept given that Europeans don’t think the U.S. complaint against the national security threat from European trade has much merit.
How is China likely to respond, especially in areas like control of illicit fentanyl flows, one of the tariff triggers?
China has other incentives to reach a deal with the United States over fentanyl, as it matters for the broader relationship between the two countries. Of course, IEEPA does currently provide the legal basis for both the 20 percent counter-fentanyl tariff on all Chinese goods exports and the 10 percent base tariff on Chinese goods exports that aren’t covered by a current or future 232 (sectoral) investigation, and China won’t be upset at all if those tariffs go away. But, China also recognizes more than most that the United States has many legal tools that can be used to bring tariffs on China back up.
For example, the legal basis for the Trump trade war against China in his first term was a section 301 (unfair and discriminatory trade practices that burden U.S. commerce) case, and that case is still active. In fact, the “remedy” under the so-called “phase one” deal that led to a pause in the initial trade war was more tariffs, and there is no doubt that China did not deliver on the “phase one” purchase agreements. So the U.S. Trade Representative’s office has a locked down, legally solid case for expanding tariffs on China using that authority. And there are multiple other section 301 cases that could be brought against China, as the initial case technically focused on weak Chinese protection of the intellectual property of U.S. firms that invest in China. The 2018 legal case didn’t cover any of the Chinese policies that have led Chinese firms to flood global markets in clean technologies and now autos. China thus understands that any reduction in the IEEPA tariffs from U.S. courts isn’t likely to last all that long.
Finally, it is worth noting that the trade tensions between the United States and China aren’t just about tariffs and fentanyl. China strongly objects to U.S. semiconductor export controls, and the United States strongly objects to China’s new controls on rare earth exports. The tariff truce reached in Geneva is thus fragile for reasons that aren’t related to the U.S. courts.
This work represents the views and opinions solely of the author. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy.