Economic Forecast If Trump Tariffs Ruled Unconstitutional

Most of the Trump administration’s new tariffs have been declared unconstitutional, though an appeal continues the uncertainty. Economic forecasts will have to be revised if the Supreme Court supports the lower courts, which ruled that President Trump’s “reciprocal” tariffs were beyond his authority. Note that the ruling does not apply to all of the tariff orders the president has made.

How the Supreme Court will rule is beyond my expertise, but a few points emphasize the potential for a big change. The Court of International Trade’s panel of three judges ruled against the president with no dissent. The appeals court agreed by a 7-4 vote. At least some, and possibly all, of the Supreme Court justices will try to evaluate the constitution and the law at question rather than voting politically to help or hurt the president. Yet both sides of the appeals court made arguments that could attract conservative justices on the court. My personal guess is that the tariffs will be found unconstitutional, but I’m not an expert on the subject. Unless one thinks it’s a slam dunk victory for the president, some sense of what the end of the affected tariffs means for the economy is needed by business leaders.

The range of tariff uncertainty would be substantially narrowed—but not at all eliminated. The greatest risk of recession comes, I wrote earlier this summer, from tariff uncertainty. News stories report some businesses dragging their feet on capital spending and hiring because of uncertainty about tariffs. The data confirm a slowdown in hiring across the economy—probably for a wide range of reasons—but not in capital spending.

New tariffs can be applied, however. The Wall Street Journal reported, “Alongside the so-called reciprocal tariffs, Trump has also imposed a number of levies on industries including automobiles, steel, aluminum and copper under a separate national security authority. Those tariffs are unaffected by the ruling, and the administration plans to expand them over the next few months—in part to provide a backstop if the Ieepa tariffs are overturned.” (Ieepa is the International Emergency Economic Powers Act.) Tariffs might be added under national security law on semiconductors, pharmaceuticals, and other goods.

The tariffs at issue, if allowed to stand, would bump prices up by about one percent, compelling consumers to cut back their price-adjusted spending. (The Budget Lab at Yale estimates a larger impact from current tariffs: prices would increase by 1.7%. If the Ieepa tariffs are invalidated, the price increase would be 0.5%.) That would lead to reduced employment, all other things being equal, but not of a great enough magnitude to trigger a recession. The alternative tariffs under national security law would have even less impact, so economic growth would be likely to continue.

The global economy will be changed in structure. Even if declared unconstitutional, President Trump’s reciprocal tariffs have shaken up business and political leaders around the world. Fewer will be comfortable making long-run plans that assume free trade around the world. Businesses have been adjusting in two ways already, and those adjustments will continue.

First, countries are trying to shorten their supply chains. At the extreme, they are sourcing materials in their home countries, either through direct production or purchase from a local facility. And if that’s not feasible, they are more skeptical about a supply chain that involves many different countries. There are too many ways for that structure to fail.

The second, and complementary, approach is to diversify sources of supply. If a raw material is needed, acquiring it from several different countries seems safer. It will probably be more expensive, and that’s a tradeoff that many companies will accept. Similarly, a particular intermediate processing step—such as dying thread—could be done in two or three countries rather than one.

These two strategies will raise costs a bit but may be found prudent by many business managers. The result of this trend will be a small increase in production costs. They won’t sink the global economy, but consumers will get slightly worse offers when they go shopping.

These changes cannot be accomplished quickly. Finding new suppliers takes time, and the new suppliers themselves will have to buy increased supplies from their vendors. Gradually, though, the structure of global production will become more local, less globalized.

The likely Supreme Court decision on President Trump’s reciprocal tariffs will affect the economy a little overall, and by a great deal for specific companies. The most affected company leaders must follow the proceedings closely, but the rest of the business owners and executives can focus on their operational issues.