Tariffs Meet Administrative and Legal Challenges

Three weeks since April 2’s “Liberation Day,” uncertainty remains high. The Trump administration’s tariffs exceeded anything (in terms of quantity, size and format) the president mentioned on the campaign trail or since entering office. In our view, that negative surprise exceeded what markets anticipated—spurring stocks’ sharp pullback.

At the time, we saw three outcomes from the tariff fracas: administrative and legal challenges torpedoing tariffs, negotiations rendering them moot or (bearishly but more unlikely) coordinated retaliation. We thought some combination of one and two was most probable. Today, negotiations are stealing the spotlight since the 90-day reprieve announcement, especially after yesterday’s chatter that America is open to lowering China’s tariff rate “substantially” … perhaps even before reaching a deal. However, scenario one is also progressing, as tariff collection issues and legal blowback dampen tariffs’ effects. Let us check in on these less-discussed developments.

On Tariff Collection and Logistics

Talking about tariffs is easy, but logistically, America lacks the infrastructure, systems and manpower to collect them. US Customs and Border Protection (CBP) is responsible for tariff collection, and the understaffed group has 2,500 tariff employees responsible for monitoring hundreds of locations. Hiring additional staff isn’t a quick fix, either. Onboarding new workers takes about a year, and there doesn’t appear to be a huge hiring push on CBP’s website (which would cut against the administration’s efforts to downsize federal government anyway).

Then there is the matter of tariff collection. The process is largely an honor system. The importer is supposed to declare the merchandise’s value, classification and applicable tariff rate to CBP, and customs conducts random spot checks to ensure things are correct.^[i] In practice, just 3% - 5% of 37 million imported containers undergo physical inspections in a year, and most reviews last 1-2 days.^[ii] This is a laborious, tedious process. Simply hiking tariff rates doesn’t cause new revenues to pour in.

In our view, these mundane administrative realities contribute to the big undershoot in reported tariff collections so far, which aren’t close to the “$2 billion a day” Trump projected. According to CBP, China, Mexico and Canada have paid approximately $8.6 billion in tariffs, though it is unclear the exact timeframe this covers.^[iii]

Looking more broadly, in March, the Treasury received $8.16 billion in customs duties (~$263 million a day), the first full month when some tariffs were in effect.^[iv] For reference, the federal government collected $76 billion in customs duties in fiscal year 2024 (about $210 million a day).^[v] Through the end of last week, the Treasury received $3.4 billion in customs duties and excise taxes month-to-date, putting April roughly on track to hit similar levels as last month.^[vi] However you break it down, the data don’t indicate new tariffs are adding billions of dollars daily to government coffers.

On the Legal Challenges

Trump’s tariffs also face legal challenges from several parties, including the New Civil Liberties Alliance, members of Blackfeet Nation, the Liberty Justice Center and the state of California.^[vii] These four may be eventually consolidated into one case, although that remains to be seen. While the plaintiffs frame their arguments differently, all argue the White House’s 10% universal tariff is unconstitutional.

Their case has strong merits, in our view. One, universal tariffs unilaterally tax trade, and taxation is the realm of Congress. Now, the president does have limited authority to restrain trade, either via sanctions or using tariffs, usually on one specific country citing national security, dumping or currency manipulation grounds, using powers granted under various sections of previous trade acts. Those largely underpinned the first Trump presidency’s China actions. This time, Trump is trying to justify implementing his 10% blanket tariff without Congressional action by calling the trade deficit a “national emergency” and invoking the International Emergency Economic Powers Act (IEEPA). The lawsuits argue the trade deficit is no national emergency (we agree!) and declaring it such violates Congress’s intent in passing IEEPA.

The Supreme Court has ruled that when an agency claims to resolve a “major question”—an issue with “vast economic and political significance”—there must be clear statement of intent from Congress on the matter. The Court has also repeatedly ruled against broad uses of IEEPA to regulate the economy and trade (e.g., ruling against the Obama administration’s greenhouse gas emissions standards). It isn’t assured they would rule similarly here. Some suggest the Nixon administration’s use of broad tariffs in 1971 provides precedent for them (although opponents note IEEPA, passed later, was designed to rein this power in). But this is worth watching.

Should the Court rule the executive branch overstepped its authority, it is unlikely Congress picks up the pieces with new tariff laws. The Senate (including some Republicans) passed symbolic measures rebuking Trump’s Canada duties … even pushing legislation that could cap the president’s authority to act unilaterally on trade. Still others have made rather tough statements in hearings on the subject. Political talk is, of course, cheap. But these tariffs are seeing blowback even within the GOP.

We aren’t predicting whether these lawsuits will succeed or fail. Rather, we are simply pointing out a host of potential factors mitigating tariffs exist. Now, under a worst-case scenario in which all levies on US imports are in effect, our research shows America would have a maximum tariff payment of just north of $1 trillion.^[viii] That is a big number in a vacuum, but we are well short of that so far and may get shorter still if tariffs die. That said, we don’t dismiss tariffs as a trifling inconvenience. Though Trump paused “reciprocal” duties for 90 days, others—including steel, aluminum, auto and the 10% blanket duty—remain in place. These hinder global commerce, pick winners and losers and drive uncertainty over the on-off implementation—a headache for businesses trying to plan longer term. But contrary to fearful projections, tariffs also haven’t rolled out and roiled businesses globally.

For investors, ask a question inspired by Fisher Investments founder and Executive Chairman Ken Fisher’s The Only Three Questions That Count: Do you know something about Trump’s tariff plans that others don’t? Markets are efficient discounters of widely known information. Considering tariffs have been the dominant story this year, we have a tough time coming up with a negative angle that hasn’t been discussed yet. The surprise potential appears to be on the positive end, which argues against dumping stocks based on tariff policy, in our view. We will continue to monitor developments and will share any updates if our views change. But at the moment, we think now is a time for patience.

H/T: Fisher Investments Research Analysts Ray Chen, Natasha Bradvica, Nicole Broersma, Kevin Johnson, Ben Lederer, Alexander Leiken, Andrew Saxton and YoungRo Yoon.