US-China Watch

Does a US President have the authority to address a national economic emergency?  The simple answer, of course, is yes.  There is no higher calling for a president than to protect the nation. But the question is actually trickier than it seems. There is good reason to believe that the simple answer may not be the best answer.  This very question was raised about Donald Trump’s tariff strategy in a May 28 ruling by the US Court of International Trade (USCIT), now under appeal. It is hardly a trivial issue. The fate of the US and world economy could well hinge on how the courts eventually answer this question.

The problem is that Trump tends to see emergencies everywhere—the southern border invasion, the fentanyl crisis, a national energy emergency, and now, a trade-deficit crisis.  We can argue over whether he has exaggerated, or not. But to the extent the body politic legitimizes a President’s emergency declaration, then there is, indeed, ample leeway for protective—or corrective—action.

The question I am raising—and one explicitly considered in the recent USCIT ruling—is basically one of economics: Whether a seemingly chronic trade deficit can be defined as a qualifying characteristic of a full-blown US economic emergency.  If  so, then it checks an important box, allowing the President to act on the basis of constitutional authority to take decisive remedial action— in this case, in the form of the widespread global tariffs that were a centerpiece of his Liberation Day initiatives—to address the emergency.

As I noted last week, a key finding of the US Court of International Trade was its judgement that a trade deficit is not an economic emergency.  Instead, it falls under “a narrower non-emergency statute”—namely, Section 122 of the Trade Act of 1974. As such, the President would not have the authority to invoke broad emergency powers under the International Economic Emergency Powers Act of 1977 (IEEPA) as he asserted in his “reciprocal tariff” actions but, instead, would be limited to temporary Section 122 remedies such as quotas and tariffs capped at 15% for a maximum duration of 150 days (USCIT 25-00066 & 25-00077: pp. 33-35). The USCIT goes further in stressing four conditions under which emergency powers may be exercised under the provisions of IEEPA: identifying a threat; making the case that this threat is unusual and extraordinary; declaring a national emergency aligned with this threat; and proposing remedies to “deal with” this threat.  As per the May 28 USCIT ruling, the trade deficit fails this four-part test.

Significantly, the USCIT’s interpretation of the law is consistent with conventional macroeconomic analysis—that trade deficits are a painfully natural (non-emergency) characteristic of a saving-short US economy.  As I underscored last week, enactment of the One Big Beautiful Bill Act of 2025 as a pillar of fiscal policy under Trump 2.0 will only perpetuate the trade deficit for as far as the eye can see. That suggests trade deficits are more of a symptom of America’s real economic emergency—a profound shortfall of domestic saving driven by increasingly reckless fiscal policy.  Nor are there any visible signs of economic emergency currently evident in the US economic data —a conclusion validated by low level of the so-called Misery Index, reflecting the simple sum of the unemployment and inflation rates. Of course, that doesn’t rule out the possibility that misery could increase in the future as an outgrowth of misdirected tariff and fiscal policies. Moreover, as the chart below suggests, history is hardly comforting in pointing to a tariff solution to trade deficits—consistent with the IEEPA warning of a remedy that does not “deal with” a threat.

As an economist, I am hardly qualified to render judgement on thorny legal issues—even though I am a Senior Fellow of the Paul Tsai China Center, which is under the academic umbrella of Yale Law School. But that doesn’t stop me from noting that in this instance the economics of the above argument are in tight alignment with the USCIT’s judicial findings on the non-emergency status of a trade deficit.  This complementary thrust of legal and economic considerations provides an especially powerful repudiation of one of Trump’s key tariff initiatives, leading me to conclude that this important aspect of the ruling is unlikely to be reversed on appeal.

There is a second issue raised in the May 28 USCIT decision—a separation-of-powers adjudication upholding Congressional authority for tariff setting actions. This is clearly a more contentious issue, especially in light of recent Supreme Court rulings on expanded executive authority. While it is quite possible that the appeals process could make a distinction between these two issues, that would not prevent the non-emergency verdict on the trade deficit from holding up under judicial appeal.

What happens next?  The US Court of Appeals (Federal Circuit) put a temporary 12-day stay on USCIT’s rollback of Trump’s 10% baseline global tariffs. Briefs from plaintiffs  opposing the stay order are due today (June 5), with the government’s response due next Monday, June 9. A ruling from the appellate court—affirming, extending, or rejecting the stay—could follow in a relatively short period of time. Irrespective of which side prevails, a further appeal to the US Supreme Court is quite likely.

Meanwhile, the Trump Administration is already sending out signals that it may move to Plan B, an alternative to its current approach on tariffs.  This would most likely entail pivoting away from IEEPA emergency justification of tariffs toward more conventional remedies offered under existing trade legislation.  That would include Section 301 of the Trade Act of 1974, which allows the imposition of tariffs as a response to unfair trading practices; this was the approach followed during Trump 1.0 that was used to justify the imposition of stringent tariffs on China during 2018-19.  There is also a Section 232 option available under the Trade Expansion Act of 1962 that would allow tariff remedies in response to national security threats, a concern increasingly favored by both the US and China in recent years. Finally, there is the Section 122 option of the Trade Act of 1974  noted above—a temporary (150 day) tariff authority that can be quickly deployed (without investigation) to address balance-of-payments deficits.

It should be pointed out that the first two options—Sections 301 and 232—require detailed investigations, outside comments, and lengthy final reports prior to the implementation of tariffs. During the first Trump Administration, the March 2018 Section 301 report (182 pages plus five appendices) took about seven months to prepare. For a Trump Administration in a hurry, convinced it is dealing with a dire emergency, one has to wonder if it has the patience to take this more laborious approach. That raises the possibility of a “bridge action”— quickly imposing Section 122 tariffs as a stop-gap action, pending the preparation of more elaborate complaints required under Sections 301 and 232.

All in all, the USCIT’s May 28 ruling was a serious blow to Trump’s global tariff campaign. It threw cold water on the notion that the President was saving the US from a dire economic emergency. Still, my best guess is that the broad thrust of Trump’s tariff policies will survive this legal challenge, as the US judicial system will not prevent the President from embracing an activist tariff strategy as a major feature of his policy agenda.  All it will take is for Trump to accept a  second-best, non-emergency, rationale for tariffs. Ironically, the USCIT ruling has provided the President with just such an alternative  approach.

The Trump tariff package that emerges from this legal dispute will likely feature something close to a 10% global tariff, a considerably larger penalty on China, and steeper product-specific tariffs aimed at  protecting legacy strategic industries (i.e. motor vehicles and parts, steel, and aluminum).  The courts may have an important say on the process by which the Trump Administration arrives at this formula.  But, in the end, the President will not be denied drawing on what he has long called the most beautiful word in the dictionary—tariffs.  Unfortunately, the combination of beautiful tariffs and beautiful budgets is likely to leave the US economy in exceedingly rough shape.