As the global hegemon, the United States once championed free markets and democracy. Trump 2.0 has torn up its principal trade agreements and is arguably doing the same to its political and educational institutions.
These actions have created uncertainty. Trump’s tariffs have increased the US’s effective average tariff rate from 3 per cent to closer to 15 per cent. Sectoral tariffs on lumber, semiconductors and pharmaceuticals could increase the effective applied tariffs when announced.
A trade agreement is a formal (legal) arrangement between countries that establishes the framework to guide and inform mutual trade flows. The purpose of a formal framework is to make the trading arrangements between countries more predictable and, ostensibly, easier, and cheaper.
Key features included in these agreements are tariffs, non-tariff measures, market access commitments, standards and regulations and dispute resolution mechanisms. Typically, these arrangements are extremely detailed and require several months, if not years, to successfully conclude negotiations.
The substance and legal form of the trade deals announced by the Trump administration raise questions about whether they qualify as traditional trade agreements. The deals with the EU, Japan, South Korea, and others amount to memoranda of understanding (MOUs), non-binding political commitments rather than ratified treaties.
For example, the EU and Japan trade deals include pledges for investments in the US ($600 and $500 billion, respectively). However, the investment modalities are unclear. Does reinvestment of retained earnings count? Is the investment in the form of new cash injections as distinct from borrowing (domestic or foreign)? The EU clarified that it cannot force private companies to fulfil these investment promises.
In effect, through these arrangements, countries concede the US’ right to impose unilateral tariffs on their exports under the threat of imposing higher tariffs. This destroys the principle of reciprocity, the requirement that a WTO member country must treat all members equally in international trade (Most Favoured Nation principle). This has effectively killed the principle of free trade.
The US Constitution empowers Congress to set import tariffs and to regulate commerce with foreign nations. MOUs or executive orders have been used to implement these reciprocal tariffs to facilitate the use of presidential executive power in an emergency under a provision in the International Emergency Economic Powers Act (IEEPA). This is a legal shortcut designed to bypass congressional approval. However, there are two legal challenges to the use of presidential executive powers using this mechanism. The challenges could potentially reshape the US constitutional landscape around the exercise of presidential authority.
The first legal challenge is VOS Selections Inc v Trump. This is a consolidated case combining that of a small importer with lawsuits filed by various states. This case is being tried in the US Court of International Trade (CIT), a specialised court with jurisdiction over customs and trade matters.
The second, Learning Resources Inc v Trump, is before the US District Court for the District of Columbia. These cases are business disputes, but also hinge on the wider principle of the limits to executive power. This explains why various states and trade associations have joined the legal actions.
Both courts ruled that the tariffs issued by President Trump under the IEEPA were unlawful. The CIT ruled that the “triggering” emergency bore no rational connection to the trade measures imposed, while the DC District Court went further. It held that the IEEPA does not mention tariffs and was never intended as a tool for reshaping global trade and therefore cannot be invoked to authorise the use of tariffs.
The Trump administration has appealed both rulings. The tariffs will remain in force while the appeal is heard. Pending a final decision, the legal basis for the tariffs is shaky.
These developments are of critical interest as the US is Trinidad and Tobago’s largest trading partner, accounting for approximately 40 per cent of total exports and 40 per cent of imports. The imposition of a 15 per cent tariff could deleteriously impact T&T’s export competitiveness.
Petrochemical exports (Ammonia, Urea, Methanol) and all non-energy exports to the US are now subject to the new 15 per cent tariff. Second, ammonia is one of T&T’s major exports, with approximately 25 per cent going to the US market. Export volumes to the US market have been falling as new US ammonia plants are more competitive and natural gas inputs cheaper. Lower gas throughput volumes in T&T plants and the tariff put T&T exports at a disadvantage.
Lower margins or lower export volumes will hurt T&T’s shallow economic recovery, and exacerbate the current critical forex position. Also, the impact of tariffs on the US economy can indirectly affect the T&T economy because the US is our largest trading partner. Any negative impact in the US could have a knock-on effect here. For example, if these new tariffs increase US inflation as is widely expected, this could lead to imported inflation. Similarly, if the Federal Reserve raises interest rates, it will affect domestic monetary policy.
These are challenging and uncertain times, and the policy decisions to address the challenges are complicated. Relying on an overvalued exchange rate sucks in imports, drains the reserves and hurts domestic industry. Will the Minister of Finance make the tough decisions required to address fiscal policy, the size of the deficit, and incentivise a new path to economic growth?
Mariano Browne is the Chief Executive Officer of the UWI Arthur Lok Jack Global School of Business.
