I was asked by Newsweek to provide some comments on the Section 122 tariffs following the Supreme Court decision to strike down the reciprocal tariffs launched on “liberation day”. Here are the full length reflections. The Newsweek coverage is here.
How this impacts average tariff rates – and costs for US consumers and businesses
So far, US consumers have been shielded at least to some extent from the full brunt of the tariffs as some companies have absorbed shocks or been slower to pass through the tariff shocks on to consumers. And a close look actually highlights that the new tariff regime following the supreme court decision actually implies lower tariffs on some countries, especially for produce coming from China, India, Brasil and Japan. Each of these countries faced higher reciprocal tariffs before the Section 122 uniform rate. This will benefit some intermediate goods producers and consumers, lowering their tariff burdens. So this may actually offer some temporary relief, but I frankly do not think we will see much of this in price data, precisely for the reason that US companies had not passed on the full burden of the original reciprocal tariffs and with the weakening dollar much of this is offset with lower real effective exchange.
The biggest indirect burden for US consumers and firms is likely the foregone tariff revenue which now create a fiscal shadow as the illegally collected tariff revenues may be reclaimed, worsening the US fiscal position going forward and indirectly driving up taxes and interest rates for US consumers. And of course, there is the fact that this activity further undermines the US credibility, which may lead to further weakening of the US dollar which is also inflationary. Further, AI and calls for digital sovereignty across the world may invite further decoupling from the US and could lead to more capital outflows from the US, which will generate even more headwinds for the US economy.
Whether the use of section 122 is likely to invite additional legal pushback
I think we will see further legal challenges. Section 122 is designed to address balance-of-payments pressures, and the scope and duration of measures is more narrow. Since it is invoked in the context of the struck down measures, courts may be much more likely to see this as a reaction by executive power to circumvent the rule of law. This could trigger a further and deeper constitutional crisis between executive and judicial branches in the US. If anything, it may actually strengthen the grounds on which legal challenges to the Presidents authority to use tariffs the way he has.
How the issue of a tariff refund will play out – will the administration pay this, when and are consumers likely to see a penny back?
Consumers will not benefit. In fact, they will still face the ultimate bill of these tariffs. There will be litigation that will be legally very costly and long process. Many companies will sell the claims to reimburse tariffs they have paid to law firms at a discount. This litigation will eventually result in the US government to have to reimburse large chunks of the customs revenues that were collected and will have to do that likely at a premium to account for interest costs and litigation costs. This means the shock will hit consumers and all companies eventually through higher tax bills or higher interest rates as the US government will have to finance the lost revenues tapping into capital markets. This will make the already bad debt situation even worse. Borrowers, mortgage holders and tax payers will feel the pain all the same. Except that, this time is different: the US refinancing cost may now be structurally elevated given the lost credibility and heightened uncertainty, which already has contributed to a pivot away from US markets. This may now accelerate further.