While another Supreme Court opinion day* has come and gone without a decision on President Trump’s use of tariffs under the International Emergency Economic Powers Act (IEEPA), there has been a bevy of activity in the trade space since the start of the year. Below is an update on the ever-shifting trade and geopolitical landscape.
*Note that the Court has a scheduled argument day tomorrow and a conference day this Friday. They are then out until February 20, though opinion days can still be added as needed.
IEEPA DECISION
Overlooked in the Supreme Court’s oral arguments on IEEPA this past November is the precedent of judicial deference. The Court has historically ceded the argument of national security to the Executive. If the Court defers to the President on defining the U.S. trade deficit as a “national emergency,” the Administration could very well prevail, though the definition of “tariff” remains. To the latter point, Justice Gorsuch opined during oral arguments that tariffs could be considered a form of “regulation” rather than a tax. So while much of the market seems convinced that the President’s IEEPA tariffs will be struck down, there is a viable alternative view.
To date, roughly $150 billion in refunds would be available should the Court strike down the Administration’s IEEPA-related reciprocal and fentanyl tariffs. SCOTUS could provide refund instructions to the Executive or remand the logistics to the lower courts, likely the Court of International Trade (CIT). Importers have 314 days to make corrections before their duties are “liquidated” and refunds are no longer allowed. That deadline has now passed for goods imported from China during February of 2025.
Both trading partners and domestic importers continue to hedge their bets ahead of the Court’s decision, chief among them South Korea and India. Interestingly, some companies are offloading their refunds to hedge funds, creating a secondary market for refund rights. Refund rights on reciprocal tariffs are selling higher than those on fentanyl tariffs, though both are pennies on the dollar, according to a Reuters report.
Should the Court rule against the President, we would expect swift action by the Administration to supplant the tariffs. NEC Director Kevin Hassett told reporters last week that a 10 percent levy would be imposed quickly to act as a bridge to more long-term and historically durable statute authorities like Section 301 and Section 232. As a reminder, the Administration has the following tariff authorities at its disposal to supplant IEEPA:
- Section 301 (Trade Act of 1974). Under the statute, USTR may impose country-specific tariffs in response to foreign trade measures that are deemed discriminatory to U.S. businesses or in violation of U.S. rights under international trade agreements. Like other non-IEEPA authorities, the levy isn’t immediate and instead requires an investigation by USTR, consultation with foreign countries, and potential public hearings. The duties terminate after four years but may be extended if USTR receives a request for continuation. Pending investigations exist already against Brazil, the Czech Republic, the EU, and Indonesia.
- Section 232 (Trade Expansion Act of 1962). The provision gives the President the ability to use tariffs to regulate the imports of sector-specific industries on national security grounds. Similar to Section 301, the tariffs cannot be imposed immediately. Instead, Commerce must first initiate an investigation and release its findings. That said, there are numerous 232 investigations already in place that could be implemented rather quickly. Moreover, Commerce can add to the existing list of derivatives so long as a product includes steel, aluminum, copper, wood, semiconductors, critical minerals, or polysilicon; is an auto, truck, or plane part; and/or is robotics or industrial machinery.
- Section 338 (Tariff Act of 1930). While it has never been used for this purpose, “Smoot/Hawley” allows the President to impose tariffs on countries that are determined to have discriminated against U.S. commerce. Treasury Secretary Scott Bessent has specifically mentioned this authority as a possibility. Importantly, Smoot/Hawley has the benefit of unilateral imposition, though it is capped at a 50 percent tariff rate.
- Section 122 (Trade Act of 1974). The provision allows the President to impose an up to 15 percent tariff to address “fundamental international payments problems” including an “imminent and significant” depreciation of the dollar. Similar to Smoot/Hawley, the President may invoke the statute immediately, though he is limited to 150 days after which an extension is required by Congress. This is a statute the Court of International Trade (CIT) suggested as a better avenue for the Administration than IEEPA.
- Section 201 (Trade Act of 1974). This statute allows the President to impose tariffs if an increase in imports is causing or threatening serious injury to American manufacturers. More cumbersome for the Administration, the Act first requires the International Trade Commission (USITC) to conduct an investigation with public hearings and comments. These tariffs are also capped at 50 percent with an annual phasedown over four years followed by a possible four-year extension.
- IEEPA. Under the statute, the President has the ability to regulate imports “by means of instructions, licenses, or otherwise” (see Gorsuch reference above). President Trump has already raised the prospect of rebranding the tariffs, telling the New York Times earlier this month that “I have the right to license.”
SECTION 232 TARIFFS
Two outstanding investigations and resulting presidential actions were unveiled last week on semiconductors and critical minerals. Details are as follows:
- Semiconductors. Under the President’s proclamation (fact sheet here), Commerce and USTR are directed to pursue negotiating agreements to address the threatened impairment of the national security with respect to imports of semiconductors and derivative products. The President also imposed a 25 percent tariff on certain advanced computing chips, such as the NVIDIA H200 and AMD MI325X. The tariff does not apply to chips imported to support the buildout of the U.S. supply chain and manufacturing of semiconductors. The President also announced that he may soon impose broader tariffs on the industry. Elsewhere in chips news, the Commerce Department’s Bureau of Industry and Security published the NVIDIA H200 deal with China in a Federal Register notice. Meanwhile, House Foreign Affairs Committee Chairman Brian Mast has drawn the ire of the tech industry and White House AI Czar David Sacks by moving forward with a markup of H.R. 6875, the Artificial Intelligence Oversight of Verified Exports and Restrictions on Weaponizable Advanced Technology to Covered High-Risk Actors (AI OVERWATCH) Act.
- Critical Minerals. The President’s proclamation (fact sheet here) orders Commerce and USTR to pursue negotiations to address the threatened impairment of the national security with respect to imports of processed critical minerals and derivatives. Chief amongst the President’s goals is the adoption of price floors by allied countries. USTR Jamieson Greer and Secretary Bessent have already begun conversations with their counterparts. Bessent and Greer recently convened a meeting with Australia, Canada, the EU, France, Germany, India, Italy, Japan, Mexico, South Korea, and the UK, as well as the Ex-Im Bank and JP Morgan. Secretary of State Marco Rubio has held similar talks with India.
Meanwhile, we await pending 232 investigations on: pharmaceuticals; commercial aircraft and jet engines; polysilicon; unmanned aircraft; wind turbines; PPE and medical equipment; and robots and industrial machinery.
CHINA
All eyes are on President Trump’s upcoming state visit to Beijing in April. For now, the one-year truce reached between Trump and President Xi in October is holding, though there are signs of strain, most notably the U.S. strike on Venezuela and resulting oil blockade. The Chinese remain reliant on below-market oil imports from Iran, Russia, and Venezuela. What follows is a summary of where relations stand between the two superpowers and their dueling geopolitical strategies:
- Alliances Threatened. In addition to its Venezuela supply being cut off, the Chinese are now facing another disruption vis-à-vis the recent Iranian protests caused by a series of escalating events against the regime. By all accounts, the Israeli and American strikes against Iran’s nuclear program were a success. At the same time, Iranian proxies in Hamas (hardline leadership killed in Doha) and Hezbollah have been degraded and the Iranian economy is suffering from widescale inflation brought on by renewed U.S. sanctions. Just last week, President Trump applied yet more pressure via a Truth Social post, announcing a 25 percent additional tariff on “any Country doing business with the Islamic Republic of Iran.” Should Ayatollah Ali Khamenei fall, Iran could quickly become U.S.-friendly. Regardless, the U.S. continues to make inroads in the Middle East, further dislodging Iranian influence. In addition to leading the Gaza peace process, the U.S. welcomed Kazakhstan into the Abraham Accords in November. Syria and Saudi Arabia could be next to join, bringing pressure upon Lebanon and further weakening Hezbollah. That leaves the China-Russia alliance as the last bulwark for Beijing against Trump’s muscular geopolitical strategy. Historically, the Russians have believed themselves the greater power and are struggling to face the reality that they are now economically subservient to and reliant upon the Chinese. The result is a tenuous alliance that could falter if peace is achieved with Ukraine.
- Leverage Points. The tension between the U.S. and China is best understood through the lens of the AI race. China’s current investment strategy focuses on batteries, photovoltaics, and electric vehicles. Meanwhile, the U.S. strategy is centered around software, reindustrialization, and on- or near-shoring batteries, magnets, and compute capacity. Estimates are that the U.S. will be able to onshore around 20-30 percent of advanced chipmaking over the next decade. Compared to the Chinese, the U.S. holds significant advantages in its capital markets and venture capital. As a result, the U.S. has a sizeable lead over China in robotics software. Motor power density, battery technology, compute density, and hardware affordability will be deciding factors. The prospect of deflation from AI (e.g., health care) will further cloud the playing field for both countries.
- Domestic Headwinds. To be clear, both sides also face internal headwinds. The Chinese are seeking to reverse their longstanding global overcapacity strategy in light of weak global demand while boosting domestic consumption. Past poor domestic investments (e.g., real estate) have increased national debt and led to deflation, lower GDP growth, and rising youth unemployment. Xi’s crackdown on corruption has also brought tension within his government, particularly with the Central Military Commission. Finally, China will continue to suffer from global dominance of the dollar and its lack of access to advanced semiconductors. On the U.S. side, the biggest headwinds continue to be trade uncertainty, particularly the Supreme Court case on IEEPA and sector-specific 232 tariff investigations. Coupled with the long lag period in developing its own critical mineral and magnet supply chain, President Trump’s trade realignment has not been fully realized. The U.S. suffers from a 50-year lag with China on mining, refinement, and energy capacity. To catch up, the U.S. will need to work closely with the G7 (see Section 232 critical minerals proclamation), as well as emerging mineral industrial hubs like Cambodia and Thailand. This could very well take the next 10-15 years, spanning multiple Administrations and domestic political turnover that does not provide the same long-term certainty as Chinese autocracy.
Against this backdrop, we expect the Chinese to reassert President Xi’s hands-off redlines in April-human rights, domestic politics, technology, and Taiwan-with a particular focus on the latter. Many believe that President Xi overplayed his hand by using the rare earth card this early. The U.S. was able to counter the move by escalating tariffs and making material progress in constructing a new “free world trading bloc.” Ultimately, energy will be the key deciding factor in who emerges as the dominant force in AI.
EUROPE
Over the weekend, President Trump announced a new 10 percent tariff on all imports from “Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland” in response to rising tensions across Europe with U.S. interests in acquiring Greenland. On June 1, the Greenland-related tariffs will increase to 25 percent on those countries. Tariffs will stay in place until “a Deal is reached for the Complete and Total purchase of Greenland.”
Whether the President has reached a tipping point on Greenland remains to be seen coming out of this week’s meetings in Davos. That said, the European Parliament already postponed a decision on whether or not to delay a January 26 vote on the U.S. trade deal in response to the Greenland debate. President Trump shot back with a missive against EU digital services taxes (DSTs).
Trump is using the future of NATO, various tariff threats and/or concessions (e.g., steel and aluminum), and a rising populist right as leverage for negotiations. On the latter, both France and Germany are staring down the prospect of a rightward political shift in the near future, which Trump continues to point to. Given their preoccupation with foreign policy, the Macron and Merz governments could very well be overwhelmed by their countries’ economic malaise, anti-woke, and anti-migration social climates.
Look for Republicans to draw parallels between the EU’s economic and security situation and the perceived consequences of New York City’s recent mayoral election in the lead-up to the U.S. midterm elections. The Administration and congressional Republicans will continue to brand Mayor Zohran Mamdani and Democratic Socialism as a precursor towards fiscal erosion and reduced economic growth a la the EU.
TAIWAN
After much delay, the U.S. and Taiwan finally reached terms on a trade deal, outlined in a Commerce Department fact sheet here. In short, the U.S. will “true-up” Taiwan’s IEEPA and 232 rates to 15 percent, exempting generic pharmaceuticals, aircraft components, unavailable natural resources, and semiconductors for Taiwanese companies building new chip capacity at certain investment rates in the U.S. Further, Taiwan committed to investing $250 billion in additional chip, energy, and AI capacity in the U.S., as well as $250 billion in credit guarantees.
Commerce Secretary Howard Lutnick told CNBC that the U.S. plans to bring “40% of Taiwan’s entire supply chain and production” of advanced semiconductors to the U.S., though that number will surely create domestic political friction in Taiwan.
USMCA
President Trump continued to pour rhetorical cold water on the agreement, calling it “irrelevant.” Top of mind for the President is moving all domestic automaking back to the U.S.
Either seeking to gain leverage or hedging against possible U.S. withdrawal, Canadian Prime Minister Mark Carney visited Beijing last week and struck an agreement with President Xi to begin allowing imports of Chinese electric vehicles. For its part, China agreed to cut its tariffs on Canadian goods from 85 percent to 15 percent. The two sides also released an “Economic and Trade Cooperation Roadmap” (release here) to strengthen their trading partnership, particularly with respect to Canadian oil and gas.
Meanwhile, Mexican President Claudia Sheinbaum announced that she had spoken with President Trump by phone last week on the heels of her public opposition to the U.S. strike in Venezuela. A readout from the U.S. side was not provided, but President Trump’s focus on drug trafficking seemed to occupy the call.
The above continues to point to an eventual bifurcation of large parts of the agreement, though we remain bearish on unilateral U.S. withdrawal.
DONROE DOCTRINE
Combined with the Venezuela strike, news from Argentina augers well for the growing “Donroe Doctrine.” Argentinian President Javier Milei cut the country’s government by five percent of GDP within his first month in office and economic activity grew by six percent the following year. Argentina is now the only country in the G20 running a fiscal surplus. Combined with his partnership with the U.S. and moves away from reliance on commodities and Chinese investment, Argentina could help serve as a U.S. bulwark against regional instability and migration.
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