Talking Points

US courts weigh in on tariffs but unlikely to stop Trump

It has been an unusually busy week for tariff news, which is saying something. The highlight, if I can call it that, was two court decisions nullifying Trump’s ‘reciprocal’ tariffs — and then an appeals court decision to suspend that until this Thursday. Amid all the talk of ‘TACO’ (Trump Always Chickens Out), I think it’s important to bear in mind Navarro’s statement this week about Trump’s tariff policy: "You can assume that even if we lose, we will do it another way." Trump is determined to have tariffs, as high as possible, and there are many ways he can put them into effect. Last week’s court decisions may have looked like a setback, but it may not mean tariffs come down at all. And the doubling of tariffs on steel and aluminium reflect his determination to raise tariffs as high as possible.

The week started well. After threatening a 50% tariff on imports from the EU because of lack of progress on bilateral negotiations, Trump suspended that tariff until July 9 after a call with European Commission President von der Leyen. The European market responded positively on Monday; US stocks bounced more than 2% when they reopened on Tuesday. But remember, the April 2 ‘reciprocal’ tariff rate for the EU was only 20%. So the net effect of this back and forth is the possibility that the tariff on European goods will be more than twice the Liberation Day tariff. I’m still hopeful that a deal can be reached in time to avert this — the US-UK Economic Prosperity Deal is little more than an agreement to continue talking — but this past week’s legal developments may put a pause on talks.

On Wednesday, May 28, the US Court of International Trade ruled Trump’s use of the IEEPA invalid on the grounds that (1) Congress did not delegate authority to impose unlimited tariffs, which the ‘reciprocal’ tariffs are; and (2) a large and persistent balance of payments (or trade) deficit does not meet the standard of an “emergency” under the law. Thus, the ‘fentanyl’ tariffs of 25% on Canada and Mexico and 20% on China; and the worldwide ‘reciprocal’ tariffs of 10% or higher were ruled to be invalid and set aside. The following day, the Court of Appeals for the Federal Circuit issued an order granting “an immediate administrative stay” until June 5.

It’s likely that Trump’s appeal will fail. The use of the IEEPA on Liberation Day was contentious at the time, with many economists and trade lawyers arguing essentially as the USCIT has. But there are other ways Trump can impose across-the-board tariffs. Indeed, the Court pointed to Section 122 of the 1974 Trade Act as a mechanism for imposing tariffs for precisely the reason Trump wants to — to correct a persistent trade deficit. This would allow him to impose tariffs of up to 15% for 150 days.

Alternatively, Section 301 allows the President to apply tariffs on countries in response to unfair trade practices. This was how most of the 2018-19 tariffs were applied — and these were not removed by the Geneva agreement. Section 301 would be difficult to use on as broad a scope as the Liberation Day tariffs, but could be used to impose high tariffs on China, the EU, Canada and Mexico. This would require a new Commerce Department review to justify the tariffs, but this could be expedited, of course.

He could also use Section 232 to impose sectoral tariffs on more industries, although this would also require a Commerce Department reviews as a precondition. The doubling of tariffs on steel and aluminium imports announced on Friday and due to take effect this coming Wednesday show that this can be a flexible tool once the harm to US industry from imports is demonstrated.

Either way, I’d be surprised if there is much progress on trade talks this week as other countries may be hoping that the administration is forced to back down on tariffs by the courts.

US-China Geneva agreement fracturing already

Meanwhile, the US-China truce that was negotiated in Geneva on May 9-10 seems to have broken down. Trump posted on Friday that China had violated the agreement. Trade representative Greer said later that the issue is that China has not removed non-tariff barriers, specifically the export controls on rare earths exports to the US. However, these weren’t even mentioned in the White House summary of the Geneva agreement.

And this outburst followed the imposition on Wednesday of export controls on electronic design automation software to China and sales of aircraft engines and parts to COMAC. The increase in tariffs on steel and aluminium imports, unless it provides an exemption for China, would add to a sense on the Chinese side that it is in fact the US that is breaking the Geneva agreement.

On a less directly trade-related issue, the State Department’s promise to “aggressively revoke” visas of Chinese and Hong Kong students, especially those studying in critical areas or with connections to the Communist Party is a reminder that tariffs are only part of a broader decoupling effort.

Friday’s tirade against China could well be setting the stage for a formal end to the Geneva agreement and an increase in US tariffs on imports from China beyond just steel and aluminium. Alternatively, Trump might hope that such a threat would quickly lead to a call with Xi and some movement on the Chinese side on non-tariff barriers or export controls. It worked with the EU. I’m not sure it’ll work with China, but honestly there’s little downside to Xi having a call with Trump if it keeps the momentum towards a proper agreement going.

Market developments

As I noted above, US stocks responded very positively to the about-face on the tariff threat directed at the EU, rising 2.1% on Tuesday after being closed on Memorial Day. But the momentum wasn’t sustained as Senate opposition to the One Big Beautiful Bill and uncertainty over the tariff policy in the wake of Wednesday’s USCIT decision weighed on sentiment. US stocks ended the weak up 1.8%. For the month of May, the US market was up 6.3%, but investors will probably better appreciate the 19% rise from the post-Liberation Day trough. Year-to-date, US stocks are up 0.6% but it has been a wild ride.

Stocks in South Korea had a much better week than the US, rising 4%, while markets in Vietnam and Japan posted gains of more than 2% last week. Stocks in New Zealand, China and Thailand tumbled last week — Thai stocks, by far the region’s worst performing since Trump’s election, are down 18%ytd in baht terms. Chinese stocks are still up 12% in CNY terms — total returns in USD have reached 13%ytd.

Year-to-date, South Korea has yielded the most to foreign equity investors, posting a gain of 21% in USD terms, marginally shy of the European market’s return to dollar-based investors. South Korean stocks have outperformed European stocks in EUR terms, though, thanks to the won’s appreciation versus the euro. Singapore, China, Hong Kong and Japan have all seen total returns in dollars above 10%ytd while only Thailand (-12% in USD terms), Malaysia and New Zealand have posted negative returns.

Despite the mounting chorus of negative commentary and ‘Truss moment’ references around the US budget talks, US bond yields fell last week. The 10yr Treasury yield was down 10bps and even the 30yr yield was down 12bps. Don’t get me wrong: the US fiscal deficit is far too high (7.3% of GDP last year) for an economy growing as quickly as it has been since the pandemic and the OBBB doesn’t change that. I’ve pointed out a few times, most recently last week, that the US fixed income market has been trading more like an emerging market recently. And that continued last week, with lower relative yields in the US accompanied by a slightly stronger dollar.

In the Asia Pacific region, only Hong Kong and Australia saw yields fall more than in the US. But only in India, Vietnam, Taiwan and Indonesia did yields rise, and even there the moves were small.

Bond yields in China and Japan fell last week, but whereas Chinese yields are near record lows yields in Japan are still near seventeen-year highs. The Tokyo inflation data reported on Friday won’t have helped, with core inflation coming in a little above expectations.

Despite the relatively higher yields in most APAC economies, currencies in the region weakened modestly against the dollar. Moves in the JPY, THB, AUD and KRW were significant. Only the TWD appreciated.

Below, I’ll briefly compare fiscal balances — deficits and debt — in APAC versus the US and then turn to recent data. The Chinese private sector may be reassured but data suggest no room for optimism. The RBNZ and BoK cut rates, as expected, but one signaled much more easing to come. Inflation in Tokyo and Australia diverged, probably troubling one central bank and reassuring the other.