Faisal Islam: Tariff ruling completely changes the global trade war

"Watch the courts" was the whispered message a well-connected diplomat told me in Washington DC last month, amid the previous episode of US tariff chaos.

Most eyes were on the high-profile case in California from the Democrat Governor Gavin Newsom - that President Donald Trump's trade tariffs were illegal.

In the event, it was a separate case at the International Trade Court filed by a dozen other states and some small businesses that have pulled the rug from underneath Trump's signature policy.

It raises the real question about whether the wider so-called reciprocal tariffs due in July will ever come in to effect, whether the 10% universal tariff can stick, whether nations will bother to negotiate, whether Congress will come to the president's rescue, and of course, the eventual reaction of the Supreme Court.

Much of this can be traced back to the highly unusual dynamic underpinning the Trump's tariff actions.

The very sight of the president proclaiming sweeping tariff rates on a variety of countries, culminating in his now infamous Rose Garden moment with the blue board, is the foundational legal problem here.

Typically, indeed constitutionally, trade policy is the domain of the US Congress. The chairs of the Trade committees of the House and Senate (branches of the Ways and Means Committee) are typically very powerful positions.

President Trump bypassed all of that by proclaiming a variety of national emergencies. While he has some scope to act in actual emergencies, these cases contend that the sweeping use of these powers to announce permanent tariff changes was illegal and unconstitutional.

There is a fascinating assessment of the separation of powers in the US which includes reference to both former President Richard Nixon's limited use of the same powers and the Federalist Papers of Hamilton and Madison.

In essence, the powers he has asserted to "regulate importation" are narrow in scope and do not stretch to unlimited imposition of tariffs, in particular, to remedy trade deficits.

Of course, the Trump administration rather undermined their own logic by also levying "reciprocal" tariffs on countries with which it ran a trade surplus, such as the UK.

Separately the court also found that the president's basis for the fentanyl tariffs against Mexico, Canada, and China did not "deal with" their stated objective.

Trump's claim that they "create leverage" to do deals is not a permissible rationale for use of the powers. This dismantles the entire notion of the "art of the deal" 4D chess manoeuvres designed to extract trade advantages.

This will now be dealt with by the Supreme Court. The case appears rather robust, and also emboldens California's similar case.

It also totally undermines any attempt by the US Treasury Secretary Scott Bessent to negotiate deals with other countries.

The likes of Japan and the European Union were already holding back, after seeing the White House retreat in the face of tariff-related turbulence in US government borrowing rates.

US retailers were warning not just of tariff-related inflation, but of potential empty shelves. The row back on the China tariffs, purportedly fentanyl-trafficking enemy, means that actual G7 allies expect better treatment from the US.

And now its own courts deem the actions illegal. The White House is currently hemmed in by its own bond markets, retailers, big business, many individual states and now its courts on this policy.

While it hit back with an immediate appeal, some in the wider administration might well be privately toasting the judges.

Could the White House get Congress onside to pass these tariffs? There has to be a very big doubt about this. In any event, other countries can now return to traditional trade tactics designed to pressurise the self interest of key senators and congressmen and women, with impacts on their local industries, whether that is motorcycles, jeans, or bourbon.

Another option might be to switch to another legal basis, such as the section 232 powers underpinning the steel and automotive tariffs. This approach would alter the dynamics of the trade war away from sweeping country-specific ones, towards industry-specific tariffs instead.

In any event, the court has surfaced rather unarguable evidence of the economic harm caused to the US by its own tariffs.

For example Virginia-based educational manufacturer MicroKits says it will "be unable to pay its employees, will lose money and as a result may go out of business". New York-based wine company VOS says it is paying the tariffs "upon arrival at the Port of NY" putting immediate strain on its cash flow. Terry Cycling has already paid $25,000 and projects a total of $250,000 this year.

The court concluded: "The government does not meaningfully contest the 'economic logic' tracing the retaliatory tariffs to the plaintiffs showing of downstream harm."

Does the White House want a messy Congressional fight to pass these tariffs, with numerous examples of their real life impact?

For now, expect other negotiators around the world to put their feet up and wait, while the White House tries to disprove the illegality of the very basis of its global trade conflict.