Tariff policy: potential paths and endgames

In response to the April 2 “reciprocal” tariff announcement, Managing Director, Washington Policy Analyst Ed Mills and team provide in-depth analysis of potential paths forward.

To read the full analysis, see the Washington Policy report linked below.

The April 2 “reciprocal” tariff announcement has introduced considerable uncertainty about the path ahead and the end game for President Donald Trump. While analysis inspires more questions than answers at this stage, Washington policy analyst Ed Mills of the Raymond James Investment Strategy team outlines the potential paths and outcomes for the Trump administration.

Possible paths forward

Mills sees three potential paths forward for tariffs:

1. Trump starts cutting deals and tariffs are reduced

2. Courts or Congress block the tariffs; and/or

3. Trump stays the course, and this is a historic realignment of global trade.

The market is hoping for a combination of 1 and 2, with growing concerns about the possibility and uncertainty of 3. Trump has sole authority over paths 1 and 3, making this harder to gauge.

For path 2, a court challenge should be closely watched. Trade contacts highlight that Congress passed The Trade Act of 1974 following the use of emergency authority by President Richard Nixon in 1971 to impose a global 10% tariff. Section 122 of the Act authorizes the president to impose up a tariff of up to 15% for 150 days when there is a balance of payments/trade imbalance between the US and another country. Trump has highlighted trade imbalance as a key driver of his use of emergency powers.

We expect a case to be brought arguing that Congress passed the aforementioned law specifically to address trade imbalances and to reign in presidential emergency powers to impose a global tariff. A key hurdle for these court cases is a general reluctance by courts to challenge the emergency declarations of a president, and they could point to the Congressional powers under the National Emergencies Act of 1976, which gives Congress a role in overruling a presidentially declared emergency.

At this time, there is cause for skepticism that Congress would be willing to prevent the tariffs from going into effect, but pressure will build if Trump sticks with the current rates and/or the economic and market impacts deteriorate. Under the National Emergencies Act, Congress has the authority to cancel an emergency declared by the president; however, they will need a veto-proof majority to overcome a likely presidential veto. The Senate voted last week 51-48 to overturn the Canadian tariffs, but the House has prevented a vote, and 51 votes is far short of the two-thirds majority needed to overcome a veto.

On Tuesday, April 8, U.S. Trade Representative Jamieson Greer defended the administration’s trade agenda and its economic and equity market impact at a Senate Finance Committee hearing. Republican questioning of Greer in that forum indicated skepticism of the strategy and the potential for lawmakers to pressure the administration to begin dealmaking.

It's worth noting this is the latest in the fight over the “power of the purse.” Decisions on taxes and tariffs are granted by the Constitution to Congress, but Congress has delegated this authority to the president in various bills – opening the question of whether these laws are constitutional.

Possible endgames

What is the endgame for tariffs? Is it to create a new revenue source to provide a political permission structure for Republicans to pass tax cuts? Is this an effort to protect national security-related industries? Is Trump seeking policy changes in other countries? Are there other factors that we need to consider?

Obtain a new source of revenue. A national sales tax/border adjustment tax has been a longtime goal of many Republicans. Former House Speaker Paul Ryan tried a border adjustment tax in 2017 to pay for the TCJA but was forced to abandon the idea. Republicans need a new revenue source to accomplish their tax goals. Should we view this as fulfilling a longtime policy goal of the Republican party? We continue to view the revenues collected by the global 10% tariff as stickier than appreciated, and they will be used to “pay for” the tax cuts being debated in Congress.
Protect national security-related industries. Trump has highlighted the national security needs of various industries, and the Investment Strategy team has long highlighted this theme as leading to tech restrictions on semiconductors and the tools for manufacturing. Expanding on this, the national security imperatives to have a baseline of industrial production and protection for certain industries are a key element of the sector-specific tariffs. Investment Strategy views the tariffs on automobiles, steel and aluminum, and the soon-to-be announced tariffs on semiconductors and pharmaceuticals, as key national security-related industries. As such, these will be the stickiest of the tariffs.
Force policy changes. It has consistently been said that Trump is seeking to use the economic force of the United States to force policy changes in other countries, pushing countries to remove tariff and non-tariff barriers. A problem for Trump is that he has not set out a clear matrix he is trying to achieve, and world leaders are unsure if he is someone they can negotiate with amid concerns he may constantly move the goal posts on them, leading to political embarrassment. Some of the policies Trump is believed to desire include new trade deals, expanding access for U.S. goods and services globally; new energy deals, especially for natural gas; increased defense spending by NATO allies; access to critical and rare earth minerals; countries siding with the U.S. over China; and the potential for a grand bargain “Mar-a-Lago Accord.”

The “force policy change” dimension is the area with the most volatility, given that Trump is the sole decider of success, retaliatory risk is high – particularly the embargo on rare earth metals from China and its impact on US industrial production – and trust in “Trump as a negotiator” is currently low, especially in Europe and China. One thing worth following is that the only thing excluded from tariffs are USMCA-compliant goods. That is a deal Trump negotiated in his first term and an example of Trump somewhat keeping his word – and Trump trying to signal that deals can be struck and followed.

Read the full
Washington Policy report

All expressions of opinion reflect the judgments of the Raymond James Washington Policy office and are subject to change.

There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected.