Federal Appeals Court Strikes Down Trump’s Tariffs & De Minimis Loophole is Closed

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1:54Money market madness. If money is evil, then that building is hell. The show goes on! The folks in there have watched the show, show! Welcome to Prof G Markets. I'm Ed Elson. Now you know where I stand on this engagement. It is September 2nd. Let's check in on yesterday's market vitals. U.S. markets were closed for Labor Day. Nothing to report there. Notably, the S &P wrapped up its fourth winning month in a row before heading into the holiday weekend. Meanwhile, expectations for an interest rate cut this month pushed gold to a record high. Silver hit its highest price in 14 years. And overseas, shares of Alibaba jumped more than 19 % in Hong Kong after the company reported earnings that crushed cloud revenue expectations.

2:43That lifted its market cap by more than$50 billion, its largest one-day gain in three years. Okay, what else is happening? A federal appeals court has ruled that many of Trump's tariffs are illegal. This affirmed a lower court decision, which also rejected the Trump administration's legal explanation for imposing tariffs. As a reminder, Trump implemented tariffs under the International Emergency Economic Powers Act, which gives the president the ability to react to, quote, unusual and extraordinary threats. The new ruling states that the law does not, however, give the president the ability to, impose tariffs, duties, or the like, or the power to tax.

3:27You may remember we did discuss this on a previous podcast episode when it was the U.S. Court of International Trade that made that ruling. Here's what we said a few months ago. The law literally says, you know, this is only legal if it is in response to, quote, an unusual and extraordinary threat to America. And there was no unusual or extraordinary threat here. I mean, Trump said the threat was the trade deficit that we have with many other countries. But as people have said over and over, and as we've said, a trade deficit is completely normal. That's not a threat. So to call that the unusual and extraordinary threat, it just doesn't hold up.

4:10So this new ruling, which is coming from the appeals court, this confirms the tariffs are illegal. What does this all mean? Well, for now, it doesn't really mean anything because the court has decided to let the tariff stay in place until this deadline of October 14th, which will give Trump time to appeal the decision again, which he's definitely going to do. But this time it will go to the Supreme Court. That is, of course, if the Supreme Court agrees to review the case. But this is such a big deal. This has such large implications for everyone that they almost certainly will. So that's the next step here.

4:45This is now going to go to the Supreme Court. For now, the tariffs remain in place, but still many questions that we have to answer. I mean, what happens, for example, if the Supreme Court decides to uphold the decision? What happens then? Will they even uphold the decision? So lots of questions to answer. Our producer, Claire, spoke to David Gantz, professor at the University of Arizona's Rogers College of Law, to get his take on where things go from here? I think it's a very difficult case because you're dealing with a statute that is extremely broad. The International Emergency Economic Powers Act essentially says presidents can regulate the importation of goods.

5:29It can deal with any unusual or extraordinary threat to the national security, foreign policy, or economy of the U.S. It does not say you can use tariffs, but it doesn't say you can't use tariffs either. So the judges have to struggle with how broad this delegation of power that the president actually is. And the majority says he overstepped. The authority was not broad enough to support these very broad tariffs on Canada, Mexico, and over 100 other countries based on fentanyl and based on trade deficits with the world. My personal opinion is that the Supreme Court will essentially say the president has the authority to do what he did under the IEPA.

6:19Many other lawyers disagree. So it's obviously including seven of the justices on this Court of Appeals. But I think overall, it's a very vague statute. It's hard, I think, 50 or so years later to say, well, this is what the Congress intended in terms of the narrowness or the breadth. It's not the only statute in the last 60 or 70 years where the Congress has delegated what many of us believe unconstitutionally, very broad powers over trade and tariffs when you think about the Commerce Clause and other actions that are reserved to Congress. In my view, it's unfortunate what the Congress has been doing for the last 70 or 80 years, but the fact is there is a precedent, at least for the idea that Congress may delegate very broad authority to the president, not just this president, but obviously all the others in the last 50 years.

7:14I'd love to just get a bit more color on how you're thinking about the Supreme Court's decision, which is likely coming next. Do you feel that just because this is a Republican majority court, things are likely to go in Trump's favor? Or is it really that this whole thing is so vague that it'll be difficult for them to uphold this ruling? In my personal view, it's some of both. I mean, I think I don't remember how many cases have gone forward in the last six months challenging Mr. Trump's authority to do one thing or another, mostly domestically. And I think in 19 out of 20, the court has said, yes, you can do this.

8:01So just on that basis alone, and the fact that he and the Republicans on the court have a huge 6-3 majority, I think it's very likely, again, many disagree with me. I think it's likely that they will find a basis, perhaps in the dissent, to say to Mr. Trump, yes, you can go ahead with the tariffs on this basis. I think from a legal point of view, it is complicated by the very vagueness of the statute. You know, you're talking about, again, regulating importation. Well, one of the ways you regulate importation is using tariffs, even if it's not mentioned, to deal with an unusual or extraordinary threat to the national security, foreign policy, or economy of the U.S.

8:48I think you would really argue that there's nothing unusual about the balance of payments problem. That's been around for decades. I think there's an argument that the fentanyl crisis, if it really exists, if that's with Mexico, does it with China or Canada, I don't know. You could argue that the fentanyl crisis fits within that very broad group of considerations. So I don't think it's difficult for the Supreme Court to say, we agree, it's covered. Say the Supreme Court does uphold the ruling, what would that mean for these tariffs? Would these tariffs actually be rescinded? Would the U.S. have to repay those tariffs?

9:32What kind of recourse would we actually see? Well, there are obviously a lot of questions in there that we can't really answer. There has been, I think, quite a discussion among legal experts, some of them more than I, as to whether all these tariffs would have to be repaid. I don't think this case should be read as much more than what the Craig representative Jason Greer said a few days ago, and that is it's a temporary flip in the use of the tariffs. Undoubtedly, there will be litigation over whether or not the tariffs have to be refunded. I have no idea which way the courts would go on that.

10:08but I think in the longer term, I mean, there are over three years left of the Trump administration. During all or almost all of that period, there will still be substantial tariffs being imposed on foreign imports from many, many, or if not most countries on various legal grounds. And if the IEPA is thrown out, they will find other grounds to do what I think they want to do. That was David Gantz, law professor at the University of Arizona. So it sounds like, according to Professor Gantz, these tariffs are here to stay. I mean, it sounds like basically Trump will do whatever he can to muscle these things through.

10:51But I think it's worth taking a moment to look at some of the quotes that we saw in the official ruling from the appeals court. There were a few moments that I think are telling of the legality of this situation. We'll see what the Supreme Court says about this. But just a few quotes that I want to emphasize here. This is on the precedent of this Emergency Economic Powers Act. Let me just read this quote to you. Quote, not once before has a president asserted his authority under IEEPA, that's the act, to impose tariffs on imports or adjust the rates thereof. Rather, presidents have typically invoked the Emergency Powers Act to restrict financial transactions with specific countries or entities that the president has determined pose an acute threat to the country's interests.

11:38For example, in the aftermath of the September 11th, 2001 terror attacks, President Bush invoked IEEPA to establish a process for designating terrorist organizations. In almost all other instances where the Emergency Powers Act has been invoked, presidents did so to freeze assets, block financial transfers, place embargoes, or impose targeted sanctions. The invocation to impose tariffs on nearly every country in the world is undoubtedly a significant departure from these previous invocations. So this goes back to the idea of what actually constitutes an emergency. I mean, in every other instance, there has been a specific threat for which this Emergency Powers Act has been invoked in order to pursue a specific solution, i.e., we've just been attacked by terrorists.

12:27So let's sanction the regions that are specifically suspected of harboring those terrorists. But the idea of saying the world is screwing us, no one in particular, just the world in general, so we're going to tariff the world. At a certain point, if that's your definition of an emergency, well, then the word starts to lose its meaning, and so too, therefore, does this act itself. Another great quote that I would draw your attention to. So first, the court is referencing Trump's argument, which is that the tariffs are a, quote, less extreme tool for achieving America's objectives. Put another way, the Trump argument is, look, these tariffs aren't that big of a deal.

13:10We're not launching bombs on people. We're just putting up these little tariffs. And so, you know, that's covered in the Emergency Powers Act, not a huge deal. And in response, the court actually quotes James Madison, one of the founding fathers. This is from Federalist number 58. Quote,

13:36So put another way, according to James Madison, you can't downplay the severity and the extremity of these tariffs as an excuse for doing them. In fact, as he said himself, it is the most powerful weapon we have. And so to strip that power away from Congress, away from the people who are supposed to represent us and then put it in the hands of one guy, that is a step too far. They end that segment with another great quote from James Madison. This is from Federalist number 48. He said, quote, Congress alone has access to the pockets of the people. And that, I think, is the crucial point here. When it comes to matters that concern, as he says, the pockets of the people, when it comes to an effective tariff rate of more than 15 % on all of us, on all American consumers, it is a tax on the American people.

14:31It directly affects our pockets. When it comes to matters that concern that, you have to get the approval of your constituents. You can't just leave it to one person. And, you know, maybe people would say, well, the people voted for this. Well, actually, we can look at the approval ratings on the tariffs right now. The approval rating, the number of people in America who say this is a good idea is 38%. The disapproval rating on tariffs right now is 61%. So that's more than six in 10 Americans who think that the tariffs at large are a bad idea. More than 200 million Americans. So we know where the American people stand right now.

15:16We know that the American people don't want this. And yet, here we have the commander-in-chief basically deciding, no, no, no, we're just going to blast this through. I'm going to use this loophole, this I-E-E-P-A, to just make it happen. And the American people won't have a say. This concerns, as James Madison said, the pockets of the people. And therefore, this decision should be up to the people. After the break, the de minimis loophole is closed. If you're enjoying the show, give us a follow on ProfG Markets.

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17:31We're back with Profit Markets. President Trump's executive order closing the de minimis loophole took effect on Friday. For years, this rule let overseas sellers ship items under$800 duty-free to the US with minimal inspection. But back in May, Trump ended the exemption for all goods from China and Hong Kong. And then in late July, he expanded the rollback to include all countries. And now that is going into effect. Just a quick reminder on this de minimis loophole, the history behind it. So the term de minimis actually comes from Latin. It basically means too small to matter. And that was the idea behind this exemption.

18:13It was created in the 1930s. It was originally designed so that Americans could buy souvenirs. And the idea was that if the product is really cheap, well, then it doesn't really matter. You don't need to pay import taxes on that. But then, of course, as usually happens, companies started to exploit this loophole. And it went from being too small to matter to too big to ignore. And last year, America processed one and a half billion de minimis shipments. That is four million packages per day, with most of those shipments coming out of China. Actually, the estimated share of packages that come from China of the de minimis packages, it is 60%.

18:53By the way, roughly half of that is estimated to come from two companies alone, and they are Xi 'an, the fast fashion retailer, and Timu, essentially China's Amazon. Now, you probably know where I stand on this. As we've discussed before on the podcast, I'm pretty anti-Xi 'an and pretty anti-Timu. These companies have been suspected, and in some cases, it's been proven that they rely on forced labor, that they rely on labor camps in Xinjiang. And that, by the way, would perfectly explain why their products are so cheap. And it would also follow that this de minimis loophole is essentially incentivizing that business model.

19:34I mean, by some estimates, Sheehan and Timu are saving$3 billion per year because of the de minimis loophole. So if the upside to using forced labor to produce crazy cheap products that you can ship at under$800, if the upside to that is$3 billion in savings, well, then it becomes just a little bit harder to not go through Xinjiang. So my view on this has always been, you know, we should get rid of the loophole specifically for China, which Trump did. But now he is extending it to all countries. And that will have very different implications for our economy. So to tell us more about this, our producer Claire spoke with Amit Kanderwal, the Han Professor of Global Affairs and Economics at Yale.

20:23And he recently wrote a report that investigated specifically how shutting down this loophole could impact our economy. Eliminating the de minimis exemption based on the analysis that we've done would find that lower income households in particular will be hit harder than richer households. And there's really two features of the data that pin that down. So the first is that it appears that lower income households disproportionately spend more as a share of their income on goods that enter through the de minimis channel. And then the second thing is like once you open up and try to figure out, well, where are these de minimis shipments coming from, whether they're purchased by richer households or poorer households, we find that poorer households or lower income households seem to be purchasing relatively more goods from China.

21:10And since China is the high tariff origin at the moment. It just means that if you eliminate the de minimis exemption and now everyone faces tariffs or all shipments face tariffs, it's going to look like a regressive tax in the sense that lower income households, they're going to see more of their shipments now taxed and then even higher tax because they tend to buy them from China. So a regressive tax on poor people does not sound like a great direction to be moving in. But the two arguments that I hear in favor of closing the loophole are that many of the products entering the U.S. through this loophole have been found to come from forced labor.

21:54And then there's also President Trump's argument, which is that drugs might be entering the country through this loophole. What's your response to those arguments? I think those are important points to be taken seriously. And I think the question that, you know, you want to think about from a policy design is, is the exemption the best way to address both of those two concerns? And so it may be that relatively more goods come in, illicit goods or goods made through forced labor are coming into the de minimis channel. And then the question is, if you eliminate the de minimis shipment, does that kind of directly target the problem at hand?

22:39Or are we simply going to, you know, illicit actors are going to move those goods through other formal channels and hide them in other ways? It's possible that they won't. But, you know, I think the way that we've tried to deal with that in the past is through stepped up enforcement and auditing of the channel. And so it's kind of like if you have 99 percent of goods that are coming in that are made kind of standard household goods made under proper working conditions, etc. And then 1 % are really bad. I'm just making up those numbers. I don't actually know what the fraction is. Do we want to eliminate the de minimis exemption completely or do we want to think about more direct targetings of those goods?

23:18And I think that's where, you know, it's a little bit unclear to me that this would solve the problem, which is a real problem to be solved, I would say. I think you need to be thinking about this policy as kind of two separate things. There's the de minimis exemption, which is trying to ease the burden of importing for both consumers as well as CDP to target their limited resources into the larger shipments. And then there's this separate issue of illegal products coming in. And I think, you know, typically if you have two problems, you want to use two kinds of policy instruments to deal with those problems.

23:56That was Professor Amit Kanderwal of Yale University. His point is an important one. There is a big loser in all of this. There are many losers, but one of the biggest is, of course, low-income Americans, who actually rely on these cheap imported goods more than anyone else. I mean, to go through the exact numbers here, the numbers from his research report, in rich zip codes, the percentage of shipments that are de minimis shipments is 52%. Compare that to poor zip codes in America, where it's 73%. So that's three quarters of all shipments going into poor neighborhoods. They're de minimis. The share of de minimis shipments from China also declines with income.

24:40It's 22 % for the richest, 48 % for the poorest. So by closing off this loophole, you are essentially adding on tariffs, adding on tax to most of the shipments that go to poor neighborhoods in America, which, of course, is only going to add fuel to the fire of inflation. And as we have discussed many times, these tariffs, I mean, they're going to hit one group harder than any other, and it's poor people. I mean, they are the ones who are going to suffer. Meanwhile, we could take a look at the winners here. There are winners, but it's basically two companies. It is Amazon and Walmart, because those are the next best options for cheap products behind Shein and behind Timu.

25:27And in fact, we are already starting to see perhaps some of the benefits of closing this loophole. Amazon sales increased 13 % last quarter. That was an acceleration from 10 % growth in Q1. So, you know, the story here, at least when it comes to the consumer, is kind of the same as ever. Big corporations win, poor people probably lose. Now, having said that, that is the dynamic we are likely going to see. But there's this other issue where the consumer economy here appears to be so dependent on the forced labor of people in China. And I'm not exactly sure what to make of that. That's just not a great situation to be in.

26:12And to Professor Kanderwall's point, perhaps it just means we need a more targeted solution to that problem. Perhaps closing the loophole to the entire world is not the answer. Perhaps maybe we should have just stuck with China. I'm not sure. But the bottom line here for the consumer, the days of buying$4 sunglasses from Shenzhen with free shipping, the days of buying a$10 dress from Shein or a$10 hoodie off of Timu, those days are over.

26:47Okay, that's it for today. This episode was produced by Claire Miller, edited by Joel Patterson and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our research team is Dan Jelan, Isabella Kinsel, and Mia Silverio. and our technical director is Drew Burrows. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow. I'm Ed Elson. I'll see you tomorrow.