Could a ruling on legality of tariffs affect your business?
Australian business operators along with those worldwide have a massive stake in the outcome of a US Supreme Court hearing next month that will decide whether President Trump’s tariffs are legal.
If it’s decided they’re illegal, importers will have to be repaid hundreds of billions of dollars, and the president will be humiliated as he sees trade deals he’s signed being rendered null and void. He’ll also lose his negotiating edge internationally.
It’s expected the court will deliver its ruling on or about 27 November (Thanksgiving Day in the US), and that if the tariffs are declared illegal, Americans will also see a big hole blown in the nation’s Budget and pressure on the president to make more spending cuts while raising revenue from other sources.
Nixon encourages Trump
A US president has already had tariffs he imposed upheld as legal. This undoubtedly encourages President Trump to believe his tariff regime can survive.
In 1971 President Nixon ordered a 10% tariff surcharge to counter a US balance-of-payments deficit, to reduce imports and improve the competitiveness of America’s exports.
Initially, the US Customs Court, disallowed Nixon’s tariffs made under the Trading With The Enemy Act 1917 (TWEA), but the Court of Customs and Patent Appeals reversed this decision.
The case was known as US v. Yoshida, and the finding was that President Nixon was justified in imposing the surcharge because he had ability under TWEA to “regulate” imports.
This Yoshida case is now being heavily relied on to support Mr Trump’s reciprocal tariffs because the International Emergency Economic Powers Act (IEEPA), which has replaced the TWEA, replicates language that gives the president authority to “regulate” imports.
Two sides of the current argument
However, the US Supreme Court has agreed to review recent decisions of the lower US Court of Appeals. This court found Mr Trump does not have authority to issue many of his global tariffs under the IEEPA.
Furthermore, the Supreme Court’s willingness to undertake the review, is because it has been asked more than 20 times to intervene in challenges to decisions made by lower courts on individual tariffs.
It was when the Justice Department in September appealed a lower court judgment on a particular tariff that it became apparent on-going confusion about the legality of tariffs was untenable, and a definitive ruling applicable to them all needed to be made by the Supreme Court.
Current tariffs were issued by Mr Trump’s executive decisions on the basis they are justified by IEEPA, so the Supreme Court will now decide whether that Act allows him to do what he’s done, or whether it doesn’t – or in other words whether the tariffs he’s levied are legal or not.
His administration says that if the Supreme Court upholds the ruling of the Appeals Court that the president isn’t authorised to have levied tariffs, Americans will be put at a disadvantage because their nation could be exposed to retaliatory trade policies imposed on them by other countries.
The Court of Appeals, in deciding, seven judges to four, that President Trump is unauthorised under the IEEP to do what he’s done with tariffs, said in its judgement “it seems unlikely Congress intended, in enacting the IEEP, to depart from its past practice and grant the president unlimited authority to impose tariffs”.
Be that as it may, it should be noted that ultimately the Appeals Court did not rule on whether President Trump could rightly claim IEEPA provided him with the authority to levy any tariffs,it simply ruled that the sweeping duties he imposed earlier this year by way of executive orders were allowable under existing law.
It’s because a federal district judge in Washington DC has ruled to the contrary – the IEEP “does not authorise the president to impose the tariffs set forth” in his executive orders – and because the Depart of Justice has now appealed that ruling, that the matter has been hand balled to the Supreme Court for review and a definitive finding.
Who the tariffs hurt most
In America, as in Australia, the so-called middle class -- participants in small businesses on which the economy largely depends -- is facing a harsh reality.
Wages are not keeping pace with inflation and the job market, traditionally a cushion for financial shocks, is softening. And tariffs, on top of rising prices for basics like food, clothing and shelter, are now imposing new costs on households, making many products too expensive for them or too difficult to source.
Tariffs are a tax on both businesses and consumers. Importers pass on their increasing costs to consumers, as do local suppliers of goods and services, and because businesses are having to pay higher prices without compensatory increases in wages, households are postponing replacements, shrinking expenditure on vacations, while dining out less.
Options for discretionary spending have disappeared as more money is required for essentials.
A recent American survey shows three quarters of lower-to-middle income households (defined roughly as those with a yearly income of between US$50,000 and US$100,00) are living pay cheque to pay cheque, a 10% increase since May. That’s the highest level since 2020 when the survey began tracking more than 185,000 households in this category.
A survey of middle-market US businesses that are the other side of the coin in the Trump tariff regime, shows in the same time frame that 90% of them have reported higher supplier costs, while 75% say demand has weakened significantly.
The bottom line
If you’re operating a business in Australia, it’s likely you’ll already be aware of the interaction between consumer strain and pressures you face in running the business. Which begs the question: to protect your margins should you raise prices or cut offerings – or do a measure of both? Whatever you do, you’ll of course be trying to ensure it doesn’t result in your customers cutting their spending.
Without a consultation Macks Advisory cannot suggest what you should do (individual businesses would need to make individual decisions about this). However, we can suggest you look carefully in what way and to what extent tariffs might affect your business, and factor that into your risk management system.
