GLOBAL ECONOMY
When the US Supreme Court ruled that Donald Trump’s tariffs were illegal, he reacted with characteristic fury saying the decision is a “disgrace” and that the judges have been swayed by “foreign interests”. Trump then asserted that he has a back-up plan ready to go.
Over the next few days, he may well use all the power of his office to find a way of reimposing additional levies on everything America imports (on top of the 10pc he has already announced).
And yet, despite all of the drama of the decision, it may not make a great deal of difference. Tariffs have already fundamentally reshaped the global economy – and there will be no return to the old order now.
The decision of the Court was split by six votes to three, but was still clear enough. By relying on a 1977 law meant for national emergencies to impose sweeping tariffs on everything from cars to toys to microchips, Trump exceeded the power of his office.
In peacetime, it is the role of Congress to decide on import levies. Trump can try to find another legal route if he wants to; but for now, his original tariffs are dead in the water.
So, does that mean we can all go back to the global trading system that has reigned for the last half-century? One in which the rules-based order is back, where free and open trade is restored, and where globalised supply chains can operate without any barriers? Well, not exactly.
As much as the European Union, the World Trade Organisation, and the gatherings of Davos might want it to, there is no going back to the old system. The world has changed too much since “liberation day” last April for that to happen.
To start, Trump has already said he will impose an additional 10pc global tariff, on top of the levies he has already forced through. Is that legal? At this stage, no one really knows.
The president is planning to use a section of the 1974 Trade Act which allows him to set import restrictions for 150 days, and it will probably be another year or more before the Court delivers a verdict on that decision.
By then, he may well be using another obscure piece of legislation, and then another. Trump is determined to impose tariffs, and will use all the power of the White House to make them stick. He doesn’t care how often the Court rules against him.
More significantly, just look at some of the ways that the global trading system has changed over the 10 months since the tariffs were first imposed.
Europe has already decoupled from the US as much as it can, and, where that hasn’t been possible, made concessions to hold the fort.
Japan has opened up its market to American rice, and will feel nervous of putting up barriers again simply because the Supreme Court ruling might mean it can do so.
China has started to build its own computing and chip industry, replacing the American hardware that it used to depend on.
Global conglomerates, such as Britain’s AstraZeneca for example, have already committed billions of dollars to building factories in the US to make sure their products are on the right side of the tariff wall, and, with those contracts already signed, there will be no movement to scrap those plans now. The list goes on.
The supply chains that span the world have already been reconfigured, and it is too late now for a complete reversal, even if some wanted to do it.
Many of the senior figures around Trump probably suspected all along that the tariffs were illegal, but decided to go ahead anyway. They knew they would never get Congress to agree to them, and figured that a year would be enough time for the levies to change the global trading system.
In that judgement, then, they were correct. Surreptitiously, or maybe with some good fortune, they may even end up with the best of all possible worlds. The global trading system will have been reordered, and largely in America’s favour, with the tariffs as the battering ram.
But the levies themselves, with all the price rises for ordinary consumers that they triggered, will have to be ditched. The result will be falling inflation, and the Federal Reserve will be able to cut interest rates. That will help going into difficult mid-term elections later this year.
It will be messy over the next few weeks. The Trump presidency is a chaotic wild ride, and no policy has proved more disorderly than tariffs. We still don’t know if the White House’s new legal tricks will work? Or whether the president will try to persuade Congress to impose tariffs for him?
We don’t even know yet whether the billions of dollars in revenue collected from the tariffs will have to be repaid by the American government, and if so whether it is the manufacturers, the retailer, or even the consumer who will get the refund? Even by Trump’s standards everything is up in the air.
One point, however, is surely cast in stone. We are not about to return to the old trading system any time soon.
Trump has already reshaped the way goods move around the world. The huge trade imbalances between the US and the rest of the world will keep on being reduced. Manufacturing will move closer to the consumer. Trade flow will reduce, and barriers will remain in place.
Whether that will be better or worse than the old system is open for debate. Prices may well be higher, but against that there may well be better paid blue-collar jobs, and countries will rely more on their own resources.
Either way, that is the new reality, and one that Trump has created – and whether we like it or not, it will take more than six Supreme Court justices to stop that process now.