What the actual tariff?

0:06Rob Armstrong: Pushkin. Donald Trump is learning the hard way that you can't always get what you want. Last week, the Supreme Court said that actually, Mr. President, no, you cannot have your beloved emergency trade tariffs that you announced last April because you're not using them for an emergency. And anyway, you can't just do that because you feel like it. I'm paraphrasing the legal wording here, but the point is no tariffs. Trump reacted in his usual even-handed, thoughtful manner by saying the judges who voted against him should be absolutely ashamed. He also slapped on some other tariffs. It's all a mess that goes to show you can't spell tariffs without FFS.

0:49Rob Armstrong: This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London, the greatest city on earth. Joining me, I have, as usual, my co-pilot, Captain Robert Armstrong, off of the Unhedged newsletter in New York City. But also, I have someone who actually understands all this stuff and writes about it for the FT, Alan Beatty in the house. Alan, thanks for coming back. Clearly, we failed to put you off last time.

1:17Alan Beattie: Yeah, well, I very much appreciate that I get invited onto Unhedged, basically, where there's some massive carnage. in the global trading system. And I sort of like get the vulture in who will come and pick the carcass clean of any scraps of meaning. I think of you more like a crow rather than a vulture. I'm actually going to take some time to think about that and possibly the next time I'm invited on, I'll have an answer for you.

1:41Rob Armstrong: So Alan, look, normal people have better things to do with their time than track Supreme Court rulings on trade tariffs. So please, for those of us at the back of the class, get us up to speed. What happened last Friday?

1:54Alan Beattie: What happened was the Supreme Court basically backed rulings last spring and summer from something called the Court of International Trade and then a federal appeals court that said, you're trying to use a particular piece of legislation, the International Emergency Economic Powers Act, which is supposed to be, as its name suggests, for use in emergency. And it allows you to regulate or prohibit, quote unquote, imports. It has never been, it's been around for 50 years. It has never been used for tariffs. He's clearly not using it in an emergency. He's clearly just using it for tariffs. For that reason, this particular bit of legislation, you cannot use for this.

2:28Rob Armstrong: So is it that it's not an emergency or that you can't declare it to be an emergency? Or is it like a combination of all these things?

2:35Alan Beattie: I mean, he did declare an emergency. Congress subsequently voted against one particular bit of it and said it isn't. But what a lot of the argument focused on was that this particular thing doesn't let you use tariffs, right? That's it. It's, you know, other things that you use to try and go and use other things, which we'll talk about. But this particular thing, this is not what it's for. And that's what, and you can't do it.

2:55Katie Martin: I don't mean to argue about scripture with a nun here, Alan, but reading through the decision from the Supreme Court, a lot of it was about constitutional principle. Does the president have the unilateral right to impose taxes? And is this him doing that? In other words, Has he taken the powers of Congress from Congress? And the majority said, yes, he has, and it's not allowed. So it wasn't all particular. Some of it was broad and sweeping.

3:25Alan Beattie: That is true. But there are various bits of legislation where the president can impose tariffs without necessarily having to be voted on by Congress. It's just the issue that this is not one of them. And by using this one, he's doing exactly what you just said, which is expanding the powers of the executive beyond what the Constitution said that he actually has.

3:47Rob Armstrong: So it's basically just no, just knock it off. Now, but it's not just no, is it? Because quick as a flash, Trump says, well, I'm going to declare a 10 percent global tariff. Actually, no, call it 15 percent. Make this make sense to me, Alan. How come he can still do this or can he still do it?

4:04Alan Beattie: So if you think of it as being like a workshop and there's a whole bunch of tongs lying around. So to begin with, he picked up the AIEPA, that's the International Emergency Economic Powers Act, and started using that. And Supreme Court said, put that down right now. So the next one he's picked up is called Section 122. and it's a particular tariff authority which is supposed to be used when there's a balance of payment crisis when the US just can't cover its debts, no money is coming in. Now, you know, not many countries, certainly not the US, have major balance of payments crises under floating exchange rate.

4:44Alan Beattie: This is really a concept that goes right back to the Bretton Woods fixed exchange rate system. So he's picked up a tool.

4:50Rob Armstrong: The whole financial system was like based on the price of gold, right? It's like, so we're going back into the olden days, the point where this was really relevant. And like by any sensible measure, the US does not have a balance of payments crisis at the moment, right?

5:04Alan Beattie: However, what's intracted from his point of view is this can be challenged, but the courts are likely to give a bit more deference to him saying there's a balance of payments crisis because it's hard to define than using the Emergency Powers Act. In any case, he can bring this in very quickly. For 150 days...

5:24Katie Martin: Yeah, that's the number that interests me. Like, this is just a Band-Aid. It lasts five months, right?

5:29Alan Beattie: So this is a shield. I mean, there's some theory about he could go to 150 days and then start an entirely different Section 122. But their strategy, which I think has been made fairly clear, they've made fairly clear, is you put Section 122 up there for 150 days. While it's there protecting, you build another wall behind it, which is built of different tools, which you've just picked up from the workshop, which take a bit longer to use. All of these things are challengeable in theory, but you can stall it for so long. And I kind of find it quite hard to imagine the Supreme Court getting to the point of saying, right, we are going to take all your tariff power away and say it has to be held by Congress.

6:10Alan Beattie: The thing that will really stop him, I think, is actually not the judiciary. It is if the Democrats gain control and they can assert, which is after all, what is supposed to happen is right there, literally in Article 1 of the Constitution. is that the Congress has the power to regulate foreign trade.

6:26Rob Armstrong: Yeah, yeah.

6:27Katie Martin: Can I ask, again, the thick kid in the back is sticking his hand up here. From the kind of patched together tariffs we might get if the Democrats don't retake control and Trump goes through all the picking up the dusty tools from the back of the workshop, how different are the new tariffs from the old tariffs? There'll be tariffs. I agree with you on that point. But will they be universal? Will they be partial? More on China, less on Europe, anything like that?

6:59Alan Beattie: I mean, if you use them flexibly, you can do a fairly good job of approximating. We're already seeing some sort of little anomalies like gems and so on, which are not covered. But by and large, if you think the U.S. wants, you know, broad protection with manufacturing and particular protection on certain things like steel, that will still be there.

7:18Rob Armstrong: A couple of things. So first of all, when the tariffs were all announced in April, like the famous Rose Garden board with all the tariffs on it, tariffing the penguins, yada, yada, we're all quite familiar with what happened last April on Liberation Day. The U.S. stock market got fried, right? It dumped about 20 percent in a few days. So, Rob, why is the U.S. stock market not adding 10 to 15 percent now that those tariffs have been taken away?

7:46Katie Martin: Because it did it already. In other words, I think it was a deep consensus view that this Supreme Court ruling would go against the president. I think he might be the only person in the world who was surprised by it. That had already priced in. But I think the other answer is what Alan just described. The kind of musical chairs of trade regulation is also a consensus expectation. So it's going to be messy at least for another year or two, right? Yeah. And that's what the market is responding to, I think.

8:25Alan Beattie: I was thinking about this and you think, maybe I've got these numbers wrong, but if you think of this hit, which is about$750 billion, something like that, as being a one-off hit, because he's going to get the tariff revenue once he's got the new tariffs. You think of that as being a one-off hit. It's not an ongoing cost. It's a one-off hit. That's like 2 % or something of the federal debt, right? Right. It's not huge. You think of it as a one-off increment. is not that big. If it's a serious hole in his ability to tax going forward, I suspect there will be more consent.

8:52Rob Armstrong: So there are nine justices on the Supreme Court. Three of them said, it's fine, Mr. President, you can have what you want. Six of them said, no, you can't. Of the three that said, it's fine, you can do this, one of them, I can't remember which one, and Rob, I'm sure either of you will be able to remind me, said, well, you kind of can't really undo this because it would be a real like pain in the arse to figure out how to reimburse people for all the tariffs they've already paid, which is like, it's a view.

9:21Alan Beattie: I think that was Justice Kavanagh. I think that was Brett Kavanagh, who I can only imagine metaphorically, if not literally, was just reading talking points the White House had given him under the table.

9:32Rob Armstrong: Yeah, it's like, well, I've shot him dead and I can't make him alive again. I mean, let's all just move on, shall we?

9:40Katie Martin: I mean, the body, it's a body, but, you know. So it's very hard. It's so hard to un-murder someone.

9:47Rob Armstrong: Really difficult. But that does raise the really interesting question of how to reimburse people. So you're a company. You've paid these tariffs. Now it turns out those tariffs were illegal. So you're due to be reimbursed. Fun times.

10:03Katie Martin: So something like 1 ,800 companies are suing to get back the money they paid under the tariffs. and it's big companies like Costco and little companies and everybody in between. And there was the following delicious quote in our competitor, the Wall Street Journal yesterday. We're talking asbestos levels of lawsuits, said Matthew Sigelman, a federal litigator who's filing lawsuits for importers, all happening at the same time.

10:32Rob Armstrong: Beautiful scenes. Now, this whole thing is just fascinating, right? Because it turns out that the sons of Howard Lutnick, the Commerce Secretary, have been running an operation at Cantor Fitzgerald, the brokerage that Lutnick was CEO of, to help companies to get these reimbursements, right? There's a whole cottage industry in how to get companies this money back. Alan, this looks to me like just an insufferable nightmare from start to finish. How is this going to work?

11:04Alan Beattie: It is gigantically, massively complicated to the point where if you talk to a different bunch of people who really all ought to know what they're talking about, they tell you totally different things. I hear things from, oh, yes, this will be a few weeks, it will be administrative to this will be two to five years. I think it will actually depend quite a lot on when you pay the tariffs, how big a company you are, that sort of thing. But there is a huge amount of uncertainty around at the moment. And people do not want to take responsibility. So the White House said, not our problem. Go and ask the Supreme Court.

11:32Alan Beattie: The Supreme Court was silent on the matter. That bounces it back down to the first federal court, the Court of International Trade, who I have a gigantic amount of respect for because, you know, they're proper good nerds. They have to come up with a way of adjudicating people's claims and then giving the money back.

11:49Rob Armstrong: So, Rob, this is an issue, right? Because one of the things that's been helping the US deficit, right, it spends more money than it has. one of the ways it's been helping to plug that gap is the revenue that's been coming into treasury coffers from tariffs. So first of all, it looks like that money that's coming in is at least going to slow quite dramatically. Some of it might need to come out again. Again, it's a mild surprise to me that that's not slightly bugging the bond market because this has been touted as one of the reasons why the US government bond market has been quite well behaved.

12:22Katie Martin: It's true. And it is, there is a revenue issue here, given that taxes were cut. And part of the way to fill the hole in the bucket was tariffs. But you have to keep the scale in mind. Alan will know better. We're talking about$200 to$300 billion a year of tariff revenue that all this stuff generated. And total tax revenue in the United States is in the trillions, not the hundreds of billions. So it's a problem on the margin, but we have so many deficit problems on the margin that it's just one of many.

12:59Rob Armstrong: Yeah, yeah.

13:00Katie Martin: I have a question, which is now, you know, this is a kind of natural point for us to pause at this moment in history and look back at this whole sorry episode that started coming up on a year ago now and ask how much economic damage was done. Is it too general to say, in effect, what happened is Trump put a smallish tax on U.S. importers and consumers, and it was a little sand in the gears, but enough for the system to absorb. Functionally, is that what happened?

13:37Alan Beattie: Yeah, that is actually what happened. And, you know, the main cost of this is the U.S., not anywhere else. And I know we're all used to, and I'm as bad as anyone, we're all used to thinking in sort of export-oriented, mercantilist terms and saying, this is terrible for the countries exporting to the US and so forth. But, you know, it's much more terrible for the US because if you put tariffs on, it mainly hurts you. And no one else has done it. The US is actually quite a closed economy anyway, by which I mean self-sufficient, right? And so it's not that big in the global economy or global trading system as you would think.

14:09Rob Armstrong: Sometimes it's about the friends you lose along the way, right?

14:13Alan Beattie: But, you know, in a sense, it's just slightly detaching itself. And, I mean, this is happening across a bunch of different sectors as well, like, you know, in green tech, for example. The US is not stopping what's happening globally. It's just...

14:25Rob Armstrong: It's just not playing.

14:26Alan Beattie: It's just absenting itself.

14:27Rob Armstrong: Yeah.

14:28Alan Beattie: So that's what's doing here.

14:29Rob Armstrong: Just to go back really quickly to the whole refunds thing, you were writing in your newsletter today, Alan, that actually a lot of these repayments are potentially going to go to shuffles paper, checks notes, Chinese companies. What are you talking about, Alan?

14:45Alan Beattie: So this is genuinely comic. But the way tariffs work is they are paid by importers, everyone knows that, and it's paid by someone called the importer of record. And usually it's quite easy for foreign companies to be importers of record as well. So you can have a Chinese exporter, which exports into the U.S., also pays the money over to Customs Border Protection, despite not actually being a company in the U.S., and then sells it on. Now, what this means, because all the refunds go to the people who paid it, who actually handed the cash over. It doesn't matter whether they pass those costs on to other companies, to consumers, whatever.

15:26Alan Beattie: They just pay it back to the people who paid it. The impact is that when some of this money goes back, it goes back to Chinese companies. Now, when you think... Trump's going to love that. He's going to love it. So when you think that they basically have passed this on to American companies and consumers, Trump has put in a tax on American consumers in order to subsidize Chinese companies.

15:46Rob Armstrong: That leads me neatly to my next question. When does Robert Armstrong receive compensation for the additional price of the martinis he's been drinking in New York?

15:56Alan Beattie: It's true.

15:57Rob Armstrong: When do consumers get the checks?

16:00Alan Beattie: Consumers will have to go and try and badger the shops that sold them stuff. Now, this is going to be quite an interesting thing. I talked to some people this week from something called the Main Street Alliance, who represent a lot of small businesses. And their small businesses were saying, we're getting customers saying, hold on, can we have this money, please? And in some cases, those businesses are like, we haven't raised our prices. We didn't think we could. We've taken hits on margins. We let people go, all this sort of stuff. And, you know, it's going to become a marketing tool. For example, if you know the company Cards Against Humanity, who do this sort of party game things, they've actually set up a website saying, if you bought our cards not direct from us because we didn't put up prices, but via one of the big retailers who they say did put up prices, we will give you money back.

16:39Rob Armstrong: Oh, cute. Right? Nice.

16:40Alan Beattie: It's just a marketing thing. It's not legal. But, you know, there's no way of actually doing it. There's no way of actually compensating consumers because once they're in the economy, you know, that's it. They're in a free market economy. You can sell them to whatever price.

16:54Rob Armstrong: Rob, if I was you, I would be mad as hell. Are people mad as hell about this?

16:58Katie Martin: No. I think people are inured to so much. I'm mad as hell about it, but I'm not a very good test case. I think in a way, it's kind of like Doge. You remember Doge that was going to cut the government in size by a third or whatever? I mean, that didn't work at all. Everything went the other direction. And people have just forgotten about it, right? It's like there was this big tariff noise. There was a lot of singing and dancing. Nothing happened. Shrug your shoulders.

17:30Alan Beattie: Move on. But I would say if you just look at the polls, tariffs are not popular. They're really not popular. And Trump doesn't seem to understand this. His administration does because they keep sort of opportunistically cutting tariffs when they can. The Democrats have finally woken up and realized this is actually a thing they can get behind. And one really amazing thing I think Trump is doing now is he's going to reconstruct these tariff walls using the authorities I was talking about before, the 232s and the 301s. That's going to take a bit of time because you have to go through this sort of investigation procedures and so forth.

18:00Alan Beattie: At the same time, I think there's just going to be ongoing rows about people not getting their tariffs back and Trump is not going to be very helpful about tariffs back. So you're now going to have a period of months where Trump has basically put himself out there exposing his flanks on a policy which is not popular, letting the Democrats hit at him,

18:19Rob Armstrong: consumers hit at him

18:21Alan Beattie: companies and everything hit at him

18:23Rob Armstrong: you know I'm kind of for it I live for the chaos we are going to be back in just one second listeners with Long Short

18:43Rob Armstrong: Okie doke listeners it's time for Long Short that part of the show where we go long a thing we love or, short, a thing we hate, Alan, since you've been generous enough to join us, you can go first.

18:54Alan Beattie: So I'm not sure I'm allowed this, but it's a very metaphysical one. I'm going long irony. Okay. Because, first of all, you have Trump taxing consumers to pay Chinese companies. Then this week, the British Trade Minister, Peter Kyle, went over to Brussels, remembering this is 10 years after Brexit, and lectured them for raising trade barriers.

19:14Rob Armstrong: Beautiful. I love that for him. I am long acronyms. Market nerds love an acronym. Yes, the taco trade, T-A-C-O, Trump always chickens out, invented by some guy called Rob Armstrong. I'm making the case for WACO, WASH always chickens out, because I don't think he's going to upset the markets in the way that he could do. I reckon he'd chicken out that. I like that trade. Yes. So on the WACO trade, we are long treasuries.

19:44Katie Martin: Would that be right? I guess.

19:46Rob Armstrong: I guess WACO is long treasuries. But this week, yes, customers, we have a new one, the Halo trade. Investors are looking for heavy asset, low obsolescence companies. It doesn't trip off the tongue, I'll be honest. Obsolescence, I don't know. It's a bit of a long word, but I kind of like the idea. People want boring, safe companies. So Halo trade is, So I'm long acronyms.

20:13Katie Martin: I wrote about Halo in my newsletter yesterday. Halo is the product of a guy called Josh Brown. And I just wanted to call out downtown Josh Brown.

20:24Rob Armstrong: Oh, is it him?

20:25Katie Martin: Yeah, it's him. I think he came up with Halo because, you know, for reasons you'll understand, I'm very sensitive to acronyms being misattributed. I'll take short on the Halo trade. It's a good acronym. But if you think I'm paying 25 times earnings for like some trucking company, you're crazy.

20:45Rob Armstrong: Well, it's an acronym inventor smackdown right here on the show. Rob Armstrong versus downtown Josh Brown. I'm here for it. Listeners, if this is the sort of content that pleases your ears, then you'll be delighted to know that we'll be back in your stream on Tuesday. So listen up then. And in the meantime, thank you for your attention to this matter. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Foreheads. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler.

21:25Rob Armstrong: FT Premium subscribers can get the Unhedged newsletter for free. And a 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening. We'll be right back.