Customs and courts

AT PENPOINT

The New York Federal Court of Appeals has certainly taken the world down the rabbit hole by its decision upholding the original decision by the Court of International Trade, striking down President Donald Trump’s decision to impose tariffs on all countries. At issue were his powers under the International Emergency Economic Powers Act.

That is the Act under which Presidents normally impose sanctions on individuals and even entire countries. Normally, custom duties are determined by act of Congress, but Trump first declared an emergency, saying that the country was running a trade deficit, and had used his powers to impose tariffs according to what he felt necessary to overcome that deficit.

Trump came up against two bits of economic theory. The first was his assumption that the persistent US trade deficit was caused by unfair trade practices on the part of everyone else. The second was his assumption that US consumers would not have to pay the bill.

The first assumption is most fundamental, because unfair practices only provide an advantage in specific areas. When a country is persistently importing more than it exports, in the old days of specie trade, the country would face a shortage of gold, and importers would have no way of paying for their imports. They would not import. That might drive up the price of the item they intended to import, but does not affect other imports. In other words, a tariff against a country is unhelpful unless one imports one item from there.

Second, unfair practices are low down on the list of reasons why countries import, and cheapness is at the top/ If a consumer can get an item of comparable or better quality cheaper, he will prefer it over a dearer item of comparable quality. Brand loyalty is only there because a brand name is a guarantee of quality, and does command a premium. However, national origin in itself is not a guarantee of anything, unless an entire industry maintains that quality. Japanese electronics were associated with quality and cheapness because all manufacturers maintain a certain standard, and it is only after a time that consumers will work out that Japanese electronics are of good quality and cheap.

It is up to the importing nation to work out why other countries are outselling local manufactures. In the USA’s case, the answer is simple: cheaper labour. The US labour laws not only make it necessary that workers be paid much more than workers in Asia, but the other provisions also ensure that workers must be provided certain facilities, and are harder to fire. There would also be input price issues, but across the board, in the areas where the USA imports the most, it is the labour factor that counts the most.

Another important factor is simply that the USA can. From one point of view, it is a sweet deal. The US dollar is the world’s reserve currency, which means that when two countries trade, the importer will make his payments in dollars. The exporting country is willing to accept, because it can pay for its imports with those dollars. One result has been that while most countries scramble to export goods to pay for their imports, the USA simply prints more dollars.

The separation of powers has many things to commend itself, but efficiency in government is not necessarily one of them. Trump would probably have been happier as a tinpot dictator, whose word was final, and who did not have to navigate any legal challenges.

This was not the case in the days of gold-backed currencies. Then no one had an incentive to import, because gold was neutral. No one could manufacture it. It could be mined, but not made. The money supply was not controlled by the central banks; it depended on what could be dug up. The gold standard was abandoned in favour of the US dollar, which is assumed to be backed by the wealth of the USA.

The flipside is that this is an incentive to import. It must be remembered that imports are actually resources brought in from abroad, while exports are actually resources sent out. A plastic toy imported from China represents the labour that has gone into it and the plastic raw material. That is something China had, but which the USA now does. The USA has long been importing real goods, made out of materials mined or made abroad, made by labour being paid abroad, with piles of paper. Gilt-edged US securities, no doubt, but still paper.

Trump has assumed that the USA’s importers can be persuaded to put up the capital to set up the factories to make substitutes for the goods they imported, that US workers can be persuaded to take jobs making those goods, and that US consumers can be persuaded to buy those goods, even if they are shoddy and costly. None of these assumptions are justified.

The trade balance of the USA has chronically been in the red for decades now, so it can hardly be considered an emergency. The present court intervention has been made at the behest of importers, even though US trade is pervasive enough, and its tariffs strong enough, for the whole world to be affected. However, the USA’s complaining that it runs a deficit does not reflect the economic reality that it was no longer in as commanding a position as it wished.

To take only one example, the entire South Asian and South-East Asian regions are enmeshed in these tariffs, because there has been some discrimination among them. Pakistan is largely focused on grabbing the business that India will lose, especially in the textile sector, as well as pick up some of the electronic assembly that China loses, but which could have gone to Vietnam or Cambodia. However, if the Supreme Court upholds the Court of Appeals, as is distinctly possible, for it to uphold the tariffs would mean reversing the decision of two courts, not unheard of, but not very common.

If upheld, it would mean either that there was no economic emergency, or that even if there was, Trump could not impose tariffs on an entire country. It was intricate enough a process to deal with entire countries, and it would be even more intricate to sanction individual exporters who were being unfair. There is presently no law designating anyone exporting into the USA guilty of being unfair. And for every exporter, there would be a corresponding US importer. How could that importer be sanctioned? It would probably need a new statute, and Trump might as well get the proposed tariffs passed by Congress, which would leave the Supreme Court no reason to stop them from going into effect. He avoided Congress because of uncertainty about the majorities in each House, especially as all of those affected countries would lobby Congressmen hard to get a favourable tariff. Pakistan should consider the Indian lobbying effort that would be put on if such a bill was to come before Congress. If this plan is shot down by the Supreme Court, it might provide him a campaign issue for the 2026 midterms, but importers and exporters will have a year, perhaps longer, without the tariffs in place.

For an economics graduate from a leading business school, Trump’s economic theory is surprisingly weak. But it is also of concern that he is not very well served by his legal team. It is also not a very business-like way to run a country.

The separation of powers has many things to commend itself, but efficiency in government is not necessarily one of them. Trump would probably have been happier as a tinpot dictator, whose word was final, and who did not have to navigate any legal challenges.

Another court case shows that. Trump is facing pushback, including a legal challenge, for sacking one of the Federal Reserve Governors, Liza Cook, the first black woman on the Board. Trump wants the Fed to lower interest rates to counter the inflation his tariffs will cause. There isn’t much deference to his wishes. What’s the point of being President if you can’t lower interest rates?