Trade, Tariffs, and Trust – Econlib

In a bold move that would reshape the landscape of global trade, President Trump invoked the International Emergency Economic Powers Act (IEEPA) just over a year ago, altering tariff rates with countries worldwide. This unprecedented use of IEEPA was bound to provoke legal challenges, given that it was the first occasion a sitting president had wielded it in such a manner.

In May, the U.S. Court of International Trade ruled against the president’s actions. By November, the Supreme Court was hearing oral arguments on the matter. Last week, in Learning Resources v. Trump, the Court issued a definitive 6-3 ruling, clarifying that IEEPA does not empower the president to unilaterally impose, rescind, or adjust tariffs at will. Chief Justice Roberts, who penned the majority opinion, asserted that tariffs are fundamentally a taxing authority, thereby distinguishing them from the trade tools expressly authorized by IEEPA.

While this legal victory is noteworthy, it should not be mistaken for an economic triumph. The repercussions of these tariffs have already been felt and continue to unfold.

Consider this: mere hours after the Court’s ruling was made public, President Trump addressed the media, declaring that “[Foreign countries] that have been ripping us off for years are ecstatic. They’re so happy and they’re dancing in the streets, but they won’t be dancing for long. That I can assure you.” Following through on his word, the president announced that he would invoke Section 122 of the Trade Act of 1974 to implement a 10% global tariff on all imports for 150 days starting February 24th. With impeccable timing, the White House even posted on X, “Keep Calm and Tariff On.” Shortly after, the president indicated that the tariff rate would be raised to 15%, the maximum permissible under Section 122. As it stands, these tariffs are now set at 10%, leading to further confusion about their application regarding existing trade agreements. Legal experts are already expressing serious concerns regarding their legality.

A survey conducted in 2021 among members of the American Economic Association revealed that 95% of economists concurred that tariffs are economically detrimental. It’s quite remarkable that a group typically known for its disagreements has reached such a strong consensus.

Various reputable sources have delved into questions surrounding the effective tariff rate, who bears the burden of these tariffs, and how many jobs may be created or lost as a result. This is crucial for gathering further evidence of the destructive impact tariffs can impose. Nevertheless, extensive empirical and theoretical research fails to encapsulate the true cost of tariffs, which is not reflected in any BLS report or BEA release.

The real cost, however, is the erosion of trust on the international stage.

Trade is not merely transactional; it hinges on relationships and the trust that is painstakingly built over time. This trust ensures that trading partners adhere to mutually agreed-upon rules and that market access is not treated as a bargaining chip to be leveraged whenever Washington requires a political win.

Adam Smith grasped this concept well. He recognized that the prosperity of nations is not derived from convoluted tariff schedules or attempts to coerce the global economy. Instead, it is founded on enhancing the division of labor, expanding market reach, and facilitating humanity’s innate propensity to “truck, barter, and exchange.” These principles thrive under stable rules and predictable exchange networks. Smith understood that tariffs distort these incentives, but perhaps he underestimated how swiftly trust can be undermined in international trade and the ramifications that follow.

Instead of exhaling a sigh of relief after the Court’s ruling, the global community is receiving further affirmation that this administration—and by extension, the United States—is perceived as increasingly untrustworthy. Recent trade agreements in 2026 have emerged to mitigate the fallout from the U.S.’s withdrawal from cooperative trade. Canada and China have announced a “trade reset,” with Canadian Prime Minister Mark Carney describing China as “more predictable” than the United States. When even China is seen as a more reliable partner than the U.S., one must acknowledge that something has gone horribly awry.

Additional warning signs abound.

The EU has secured trade agreements with Mercosur, encompassing 31 countries, and with India. The deal with India is particularly significant, covering 25% of global GDP and over 2 billion people. Its magnitude prompted the president of the European Commission, Ursula von der Leyen, to label it “the mother of all deals.”

Prime Minister Carney, following an emphatic address at Davos, is spearheading efforts among “middle powers” to unite around free trade, offering countries an alternative to U.S. trade policy. The world is not gravitating toward Canada and Mark Carney because they are viewed as leaders in trade; rather, they are responding to the reality that if Canada—one of America’s longest-standing allies with the world’s longest undefended border—has reached its limit, it’s likely that many others have as well. Carney’s popularity reflects Canadian support for his stance, even in the face of potential economic repercussions.

Political leaders and business executives globally must confront a pivotal question in international trade: Is access to the largest consumer market in the world worth the price of collaborating with a partner who treats market access as a bargaining tool? Or is it wiser to engage with smaller, more reliable markets whose leaders won’t abruptly decide to alter the agreement?

International trade once revolved around David Ricardo’s principles of comparative advantage and optimizing trade benefits. Now, it resembles Harry Markowitz’s portfolio theory, emphasizing risk diversification and minimizing losses in dire circumstances. The risk being hedged against is U.S. policy. As the U.S. retreats from globalization, the rest of the world is re-globalizing with partners committed to the impartial rules of an open-access liberal order.

The Court’s decision in Learning Resources does little to remedy this situation. Worse yet, neither will the next presidential election. Even if a future administration embarks on a global goodwill tour, promising to restore America as a reliable trading partner, rebuilding trust is no simple task. If it is achievable at all, it will require a lengthy process commencing from a deficit of credibility.

Meanwhile, the rest of the world forges ahead. In boardrooms and government offices, supply chains are being reconfigured. Permits for new factories are being filed. Long-term contracts are being established. Investment choices are being made today amid heightened uncertainty regarding American policy, and this uncertainty is now viewed as a constant rather than a temporary blip attributable to a short-term miscalculation.

New factories emerging globally are not going to be dismantled and relocated to America simply because the next president holds a press conference and expresses regret. Supply chains that are being constructed now will not be rerouted through the U.S. based on a social media update that suggests a shift in Washington’s politics. Trump has demonstrated to the world what is feasible within the American system, and the rest of the globe is responding predictably.

The term that encapsulates this juncture in American history is “hysteresis.” This concept illustrates how seemingly minor or temporary events, like a short-lived layoff, can yield impacts far exceeding initial expectations. Hysteresis is a term often associated with economics, describing situations where individuals who are temporarily displaced from the workforce during a recession may not return fully, or at all, to the labor market. We now have another instance to illustrate in academic discussions.

While the Court’s ruling in Learning Resources stands as a genuine victory for free trade and for the constitutional limitations placed on executive authority, it does little to mend the already frayed relationships. Every workaround, every legal tactic, and every new emergency declaration will convey the same message to the world: The United States can no longer be relied upon. Lasting trade relationships cannot be built on such a shaky foundation, and the global community is learning not to attempt that.

In its quest to reshape global trade, the Trump Administration has achieved its goal, albeit not in the manner it envisioned. The rest of the world is also restructuring, but it is doing so independently of the United States.

This essay has also been published on Law & Liberty, part of the Liberty Fund network.

*David Hebert, PhD, is a senior research fellow at AIER. He has also served as a fellow with the US Senate Committee on the Budget and has worked for the US Joint Economic Committee. He is also an associate director of The Entangled Political Economy Research Network.