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It seems as if a few times every week, I see a headline about President Trump announcing a new tariff or repealing a tariff, sometimes involve many countries and sometime just a few. However, it is not at all clear that any president has a right to alter tariffs. This question was raised before Trump took office, and unsurprisingly, it became a lawsuit soon after the Trump tariffs took effect. On Wednesday, the US Supreme Court is scheduled to hear oral arguments in the case of Learning Resources, Inc. v. Trump. Learning Resources is an educational toy company, selling “learning toys such as Pretend & Play Calculator Cash Register, Spike the Fine Motor Hedgehog, and Botley, the Coding Robot.” Many of these products are manufactured overseas, and thus Learning Resources is adversely affected by Trump’s tariffs.

The broad legal question is that Article 1 of the US Constitution–the part which lays out the structure and powers of the legislative branch–states in Section 8: “The Congress shall have Power To lay and collect taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States …” On its face, this certainly seems to suggest that new tariffs need to start in Congress and be signed into law, just like tax laws.

However, Congress over time has passed laws that give the President power to regulate trade in certain situations. In particular, Trump has pointed to the International Emergency Economic Powers Act of 1977 as his authority for imposing tariffs on companies like Learning Resources This law gives the president power to address “unusual and extraordinary” peacetime threats. Before use, it requires that the President declare a “national emergency” and both consult with Congress and report to Congress. However, the law does not require that the President conduct any investigation or publish any report before taking action. In the past, IEEPA has been invoked in situation like blocking economic transactions with Iran during the hostage crisis that started in 1979, or sometimes blocking transaction by individuals who are drug dealers or human rights abusers. However, my understanding is that the IEEPA does not actually mention the word “tariffs.”

Here, I will sidestep the details of the legalities, both because I’m not a lawyer and because those topics will be well-aerated before the Court on Wednesday. Here, I focus instead on a “friend of the court” brief filed by a group of 44 academic and policy economists–many of them quite prominent–making the case that President Trump has overstepped in using the IEEPA as his authority to conduct tariff policy from the White House. Here’s the summary of their arguments from the start of the brief:

Even assuming that IEEPA permits the issuance of tariffs—which is not clear from IEEPA’s plain language—IEEPA has certain requirements that must be met before the President can invoke IEEPA’s remedies. First, IEEPA requires the President to declare a national emergency based on an “unusual and extraordinary threat[] . . . to the national security, foreign policy, or economy of the United States.” … Trade deficits, however, have existed consistently over the past fifty years in the United States, for extended periods in the United States in the nineteenth century, and in most countries in most years in recent decades. They are thus not “unusual and extraordinary,” but rather ordinary and commonplace. … Second, the existence of these ordinary and recurring trade deficits is not a “threat . . . to the national security, foreign policy or the economy” of the United States, neither generically nor with the particulars stressed by the Government … Third, even if the current trade deficit constituted an unusual and extraordinary threat to national security or the economy as required by IEEPA, the tariffs imposed under IEEPA by the President do not meaningfully reduce trade deficits and hence do not “deal with” the deficits as IEEPA requires. In fact, as explained below, the additional foreign investment that the Government claims to have procured by means of the tariffs increases the U.S. trade deficit.

I will skip over the first point that US trade deficits have been common in the last half-century and indeed across US history. The fact is obviously true, and it will be up to the Court to decide if they nonetheless quality as “unusual and extraordinary.” But the other two points are perhaps less well-known, and worth a few more words.

Why aren’t trade deficits, and of themselves, a threat to the US economy? The economists walk through the standard arguments.

Yes, a legitimate national security concern arises if, for example, the US defense industry is overly dependent on imported products. The economists write: “[T]rade deficits in particular industries could pose a threat to the United States. For example, the United States may not want to offshore weapons production. But such a threat would be industry- and perhaps country-specific and cannot be measured simply in dollars or percentages of the aggregate trade deficit, nor could it be countered by generic measures aiming at aggregate trade and the aggregate trade deficit.”

But more broadly, “trade deficits are the flipside of foreign investment surpluses. The first (trade deficits) may sound bad, the second (foreign investment surpluses) good, but viewed as a whole, in and of themselves, they are neither.” To put it another way, when foreign companies make direct investments in the US economy–that is, buying land anbd equipment, and hiring US workers–they need to do so with US dollars. The source of those US dollars is products that the foreign company exported to the United States. If the foreign company used all US dollars received from exporting to the United States to buy US goods and services, then (by definition) there would be no trade deficit. The reason for the existence of a trade deficit is that foriegn companies (and government) do not use their US dollars to buy US goods and services, but instead to invest in US financial markets–for example, by purchasing US Treasury debt or US stocks. The economists write:

Turning to the underlying reasons why some countries run trade surpluses while others run trade deficits, the leading explanations of the U.S. trade deficit view it as a sign of U.S. strength, not weakness. The reasons why the United States has been the preferred destination of capital for many decades are the same reasons it has persistently run trade deficits: its innovative and dynamic economy, deep and liquid markets, and status as a safe haven. As this brief emphasizes repeatedly, a trade deficit is the flipside of a foreign investment surplus. Thus, one explanation for persistent U.S. trade deficits is simply that the United States is a superior investment. This is what generates Americans’ ability to buy more from the rest of the world than we sell to it (i.e., running a trade deficit) …

Other complementary theories stress the role of the U.S. budget deficit. Empirically, the United States started running a trade deficit at about the same time that it started running a budget deficit. This is not a coincidence. A budget deficit means that the government spends more than it earns. This is offset by U.S. citizens earning more than they spend, but only partly. On net, the United States—government and citizens combined—spends more than it earns. At the national level, spending more than one earns means importing more than one exports, i.e., running a trade deficit.

This insight leads to the third point in the economists’ brief: the argument that higher tariffs are unlikely to have much effect on trade imbalances. Remember, “a trade deficit is the flipside of a foreign investment surplus.” Conversely, the height of tariffs or other trade barriers is not correlated with the size of trade imbalances. Moreover, one cannot reasonably look at rises or falls in the US trade deficit over time and ascribe the changes to trade barriers going up or down, or trade becoming more or less “fair.” The balance of trade is a macroeconomic outcome.

The economists’ brief offers several nice illustrations of this point. One is focused on the US oil and gas industry:

An illustration of the importance of macroeconomic factors in determining the aggregate trade deficit comes from the dramatic growth in U.S. domestic oil and gas production in the 2010s. In 2011 the U.S. trade deficit in petroleum products peaked at $330 billion, well over half of the entire trade deficit of $558 billion. Then, domestic oil and gas production dramatically increased. The trade deficit in that industry disappeared by 2019. Nevertheless, the overall U.S. trade deficit grew to $617 billion, consistent with the wider saving gap that developed over this period.

Just to be clear, literally no one believes that the lower trade deficit for US oil and gas happened as a result of shifts in tariffs. The point is that “a trade deficit is the flipside of a foreign investment surplus.” As long as the US economy remains so attractive to foreign capital, for buying US Treasury debt, investing in the US stock market, and other purpose, the US economy will have a trade deficit. As another example, Trump’s tariffs in 2025 are happening at the same time as a growing US trade deficit:

Empirically, there is no correlation between tariffs and trade imbalances even at the highest rates observed in the last 60 or so years. … The fact that the trade deficit in goods from the beginning of 2025 through the end of July—the most recent available numbers—exceeds last year’s trade deficit over the same period illustrates this. The increase has happened despite a very large increase in tariffs from both the reciprocal tariffs discussed here and a range of others. The full set of tariffs imposed this year to date corresponds to a 15.6 percentage point increase in the U.S. average effective tariff rate … Despite those increases, the goods trade deficit equaled $840 billion for January through July of 2025, about a 23% increase from last year’s $682 billion.

How can it be that Trump’s tariffs are coexisting with a higher trade deficit, not a lower one? One more time, “a trade deficit is the flipside of a foreign investment surplus.” Or as yet another example:

During the first Trump administration, the United States increased tariffs on imports from China significantly, from about 3% to about 19%. At least partially as a result, between 2016 and 2020 imports from China decreased—as did the bilateral trade deficit with China. At the same time, the U.S. trade deficit with a number of other major trading partners increased, more than offsetting the decrease in the bilateral deficit with China.

So yes, tariffs can reshape the face of trade, making trade with certain countries or certain products more or less attractive. But the overall trade deficits is not caused by tariffs, or the lack of tariffs. One more time, with feeling, “a trade deficit is the flipside of a foreign investment surplus.”

(Finally, I will add that it is darkly comic that President Trump claims that US national security is threatened “by large and persistent annual U.S. goods trade deficits,” but does not say a word about the large, persistent and growing US trade surpluses in services industries.)

One can certainly make a strong case that the US economy should have a stronger focus on technology, innovation, and manufacturing. The broad outlines of public policy for these goals are clear: improved worker training, support for research and development, expanded power generation and transmission, rethinking the regulations that often hinder both public and private investments, and so on. Tariffs are a hindrance and a distraction from this agenda.

The current Supreme Court case is unlikely to give a final answer to the question of the President’s tariff authority. Over the years, Congress has passed other laws, with other conditions, that give the President the power to impose tariffs in specific conditions. For example, Section 232 of the Trade Expansion Act of 1962 gives the President power to restrict imports when “national security” is threatened, and Section 301 of the Trade Act of 1974 grants the President (through the office of the US Trade Representative) the power to investigate and seek to remedy “unfair” foreign trading practices. Thus, my guess is that if the US Supreme Court rules that Trump’s tariffs are not Constitutional under the IEEPA, the next step will be for Trump to offer other laws like these as his authority for imposing tariffs.  The underlying issue–how much tariff authority has Congress ceded to the President–may thus come up again.

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