Refund cheques will start flowing next week as the revenues from Donald Trump’s most contentious tariffs are returned to those who paid them.
Those cheques are the first tranche of Trump’s $US166 billion ($231 billion) “reciprocal” tariffs on imports to the US that the Supreme Court declared illegal in February.
With interest accruing every day at rates of 4.5 per cent or 6 per cent, depending on the size of the shipment, the total the Trump administration will have to return could top $US174 billion.
So, the US government will not get to keep its tariff revenue. The country’s deficit will be larger and government debt higher. And while US households won’t receive the tariff “dividends” that Trump promised, the inflationary effects of the tariffs – and the consumer and voter angst they generated as prices rose – won’t be undone.
Consumer anger about this is already evidenced by a range of class actions – about 20 so far – taken against big companies. Companies like Costco and Nintendo and the big shipping couriers like FedEx, UPS and DHL have all been targeted by actions seeking the disbursement of the refund monies to consumers.
But that’s not going to happen. It would be a logistical nightmare. The refunds will go to the importers of record – the companies that handed over the cheques to pay the duties. While the shipping couriers have said they will refund their customers for duties paid, the recipients will themselves be companies, not end-consumers.
‘The people that have hated the United States, we’re giving them cheques for billions of dollars. It’s so sad to see.’
Donald Trump
When Trump imposed the tariffs on April 2 last year – “Liberation Day”, as he dubbed it – companies responded in a variety of ways.
Some leaned on their foreign suppliers, some absorbed the costs within thinner profit margins and some passed some or all of the cost on to their own customers via lifting their retail prices.
Not much of the cost was picked up by the foreign exporters. A New York Federal Reserve Board analysis (which infuriated Trump) concluded that nearly 90 per cent of the tariffs’ cost was borne by US companies and consumers.
Trying to determine how much individual companies passed onto their customers, within a more broadly inflationary environment, would be impossible.
Companies receiving refund cheques might, as Costco has promised, seek to use the funds to deliver better value to their customers or, like Apple (which is owed between $US2.5 billion and $US3.3 billion), may say they will invest them in innovation – but most will simply add the money to their bottom lines.
The numbers for individual companies can be sizeable. Walmart, for instance, could be in line for cheques totalling about $US10 billion. Target says it is owed about $US2 billion. Nike expects $US1 billion and Home Depot more than $US500 million.
The carmakers should also bank big cheques, with Ford ($US1.3 billion) and General Motors ($US500 million) using them to blunt the even larger impact of other Trump commodity-specific tariffs that were unaffected by the Supreme Court decision.
Some companies entitled to refunds might be daunted by the complexity of the process, which involves considerable paperwork. Others might be fearful of Trump’s response.
‘If they don’t [claim refunds], I’ll remember them.’
Donald Trump
Trump has said it would be “brilliant” if companies don’t claim their refunds.
“If they don’t do that, I’ll remember them,” he said. Implicit in that comment is that, if they do claim their entitlements, he’ll also remember them. Trump tends to reward his supporters and punish perceived enemies.
He also claimed that “in many cases” the “enemy” – foreign companies – would be getting the money.
“The people that have hated the United States, we’re giving them cheques for billions of dollars. It’s so sad to see.”
It has never been the case – contrary to what Trump and his economic team have persistently claimed – that foreign exporters have paid the tariffs.
There might be some foreign-owned companies, importing goods for their US operations, that receive refunds, but the list of the biggest beneficiaries of the Supreme Court decision is dominated by US retailers, wholesalers and manufacturers.
How the tariffs will ultimately be disbursed is complicated by the creation of a market before the Supreme Court judgment was even known for potential refunds.
There were companies who were bidding as little as US10¢ to US20¢ in the dollar to acquire claims to refunds, betting on a successful challenge to the tariffs’ legality. Those selling their rights wanted the certainty of immediate cash rather than waiting for an uncertain outcome in the court.
Once the court hearing got under way and the judges’ scepticism of the administration’s position became apparent, the rate rose to around US90¢ in the dollar.
There’s already litigation over the matter, with Oaktree Capital Management suing BJ’s Wholesale Club for, it says, backing out of a deal that Oaktree claims enabled it to acquire the right to $US29 million of refunds for $US20 million, or US70¢ in the dollar.
There’s also some controversy over allegations that the family of US Commerce Secretary Howard Lutnick was among those acquiring rights to refunds at distressed prices. The Lutnick family’s securities firm, Cantor Fitzgerald, has said it considered buying the rights to refunds, but in the end opted not to.
When the Supreme Court struck out the reciprocal tariffs, the Trump administration rushed to impose a replacement set under a different legislative heading, Section 122 of the Trade Practices Act. That legislation allows an administration to impose tariffs of up to 15 per cent for 150 days – in response to a chronic balance of payments issue.
In a world of floating exchange rates, the US doesn’t have a balance of payments problem, let alone a threatening one. Those tariffs, scheduled to expire on July 24 unless Congress extends them, have already been challenged in the courts by 24 US states and a number of US companies.
If those temporary tariffs were to also be ruled illegal, there’s another $US35 billion or so of the administration’s revenue at risk.
When the Section 122 tariffs expire in July, they will be replaced by yet another set of tariffs, under Section 301 of the Trade Act, which requires investigations of trade partners for unfair trade practices, which the administration initiated within weeks of the court ruling. There’s a parallel investigation of trade partners for failing to adopt prohibitions on the imports of goods made with forced labour.
The investigations are a pretext for replacing the reciprocal tariffs, but weren’t used previously because they involve months, if not years, of investigation, consultations, public submissions and hearings. Those tariffs are also supposed to be applied to specific unfair trading practices within individual economies, unlike the economy-wide tariffs they will replace.
They don’t give Trump the discretion to do what he has done in the past and announce new economy-wide tariffs or rates on a whim because someone has said or done something he doesn’t like.
The administration is scrambling to complete the investigatory processes to get the new tariffs in place before July 24.
While they might have a stronger legal basis than their predecessors – they’ve held up under challenge in the courts before – their rushed nature and artificial basis means they may be tested again. The prospect of more rounds of refunds can’t be ruled out.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
