The Supreme Court, executive power and market implications

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Joyce Chang: Welcome to J.P. Morgan's Making Sense. I'm Joyce Chang, chair of Global Research at J.P. Morgan. Today, I'm joined by two special guests, legal experts Sarah Isgur and Peter Harrell. We're discussing the Supreme Court cases focused on President Trump's use of executive power related to trade and tariffs, as well as his control over independent federal agencies and the Federal Reserve. Now, Sarah is widely recognized for her expertise in law and the Supreme Court and is a senior editor at The Dispatch, host of the Advisory Opinions Podcast and editor of SCOTUS Blog. She is also coming up with a new book next year called Last Branch Standing. I'm also pleased to be joined by Peter Harrell, who is a leading authority on trade policy and security economics. He is visiting scholar at Georgetown Law and a fellow at the Carnegie Endowment for International Peace. In his previous life, he worked at the White House where he worked on international economic policies related to the supply chain, sanctions, and export controls and tariffs. He is also the host of the Security Economics Podcast, where he covers the intersection of national security and economics. Sarah and Peter, thank you so much for being here today.

Sarah Isgur: Thanks for having me.

Peter Harrell: Great to be with you.

Joyce Chang: So let's dive right in. We're coming straight from our 10th annual Macro Conference in New York at our new headquarters, and we're here to discuss the ongoing legal challenges to President Trump's use of executive power and the potential economic and political consequences. There's so much to discuss, but let's start with trade. So, Sarah, let me start with you. The Supreme Court is hearing major cases about the use of executive power this term. How do you see the Roberts Court approaching the issue of institutional legitimacy and the separation of powers as it relates to the use of emergency powers for tariffs? And how can we effectively monitor the decision-making process, the voting patterns of the justices? What's your take on how the Supreme Court will rule in this case?

Sarah Isgur: Boy, I feel like we could spend the whole podcast just answering those questions and, and debating them. This tariff case has so many layers to it. Of course, at the most basic layer, the question before the Court is whether the President is authorized by the statute passed by Congress, IEEPA, to institute these specific tariffs, the reciprocal tariffs, and let's call them the fentanyl tariffs on the other side. But that's a statutory question, you know, did Congress actually authorize these tariffs? There's also a question of whether Congress can authorize a president to institute these kind of tariffs, or whether that's giving away too much power. And then above that, even, as you say, there's the institutional legitimacy of the Court as well at issue as they think about these three branches of government.

Joyce Chang: So Peter, let me turn to you. Do you think the Supreme Court will limit Trump's use of emergency powers for tariffs, or do you think he will give more discretion to the President? And if the Court limits these powers, what options does the White House have left to manage trade? How long could it take to find alternatives to IEEPA, the use of the emergency powers?

Peter Harrell: Well, Joyce, let me begin by saying, I think it would be hard to picture how the Supreme Court could give Trump, uh, more tariff authority than he is asserting under this statute, because he's essentially asserting that this 1977 emergency powers, uh, statute gives him an unbounded authority, uh, to impose tariffs subject only to a handful of sort of nominal procedural constraints. Like he has to sign a declaration that there's an emergency. His argument is that decision cannot be reviewed by the courts. Uh, and then he has to issue an executive order imposing the tariffs. His ascertation is essentially he has been delegated an unbounded authority, and it's hard to see how the Supreme Court could give him more authority than he is already claiming. Though I do want to note, because I think it's underappreciated about this case, that if the Supreme Court agrees with the President here ... Now, I don't think the Supreme Court is likely to agree with the President. I'll come back to that in a moment. But if the Supreme Court agrees with the President here, I think that the President would likely find he has an authority not just to impose tariffs on goods, but also to impose taxes on other kinds of property moving in and out of the United States, frankly, including investment capital. Because one of the, the interpretation that the government is arguing for here is that this statute's power to, quote unquote, "Regulate the import or export of property," that regulate import or export of property includes a power to tax it. But there's nothing in the statute that says that would be limited to, you know, a widget we're buying from China. It would have to apply almost textually to also empowering him to impose taxes on, on capital flows. So I guess maybe actually the Supreme Court could give him even more power by adopting the argument that he has already asserted. But, but I actually don't think that's likely. I think if you listen to the oral argument on November 5th, what you heard was a majority of the Court that appeared pretty skeptical of the administration's argument that the President has this unbounded, uh, sort of international economic taxation authority, including a tariff authority. And I think we will likely see the Court constrain that authority. Now, I think my most likely scenario is that we will see them probably conclude that this statute has no authority to impose tariffs or taxes at all, but I could also see a more mixed scenario where the Court concludes that, you know, some of these tariffs are not authorized and some are, and we may see it remanded, back to the lower courts for some further litigation around it. I, I want to close by saying I do very much agree with a point Sarah was making, that we need to see this case not just as a tariff case or a taxation case, but as a case the Supreme Court is considering alongside others about what is the role of Congress in our constitutional governance and what is the role of the executive branch in our constitutional governance. And I think the fact that they may take some other decisions and other cases that seem to give more power to the executive may give them a little bit of leeway within their own intellectual framework to rule against the President here.

Joyce Chang: No, I think you both make just such a great point, that this is not one that we can look at in isolation, particularly given just the sheer number of, of, uh, cases that are going to the Supreme Court, whether it is about the firing of government officials at federal agencies, whether it is about, um, the Federal Reserve, but it is really taking a broader perspective on just how we look at sort of the institutional legitimacy of the different branches of government. So this is a point where I would really like to actually turn and focus on the issue of executive control over the independent agencies like the Federal Trade Commission and the Federal Reserve Bank. So Sarah, there's a big debate about whether presidents should have more authority over appointing or removing leaders from the independent agencies like the Federal Trade Commission and the Federal Reserve. Do you think the Supreme Court will give the President more discretion to fire? And, and if the Supreme Court allows more influence over the Fed, what are the legal and practical implications, um, for the independence of the Fed and the regulatory agencies?

Sarah Isgur: You know, Peter and I both see a scenario, a pretty reasonable scenario, that President Trump could win the tariff case. I think we also both think it is more likely that he loses the tariff case. But the possibilities have a broad spectrum in the tariff case. That is not true in the Slaughter case. This is about whether, uh, the President can remove a commissioner on the Federal Trade Commission despite Congress putting limitations on that removal power, uh, and for instance, requiring partisan appointments and things like that and for cause removal. This one feels pretty baked. I predict it'll be 6-3. It will look like it's along ideological lines, not because it's partisan, but because this is one of the animating principles of the conservative legal movement for the last 40 years. And so, you know, we have these elections where presidents argue that this is the most important election of our lifetime when they don't actually have a lot of control over vast swaths of our economy and our regulatory state, because those decisions are made by people who they cannot hire or fire. And so that's what's at stake in this case. But again, if you match it with the tariff case and say, on the one hand, everyone in the executive branch is accountable to the President and gets their power delegated from the President alone, not from Congress. Uh, at the same time, Congress, you must actually pass specific laws and you can't delegate legislative authority to those independent agencies in the first place. Again, you basically give more power to the President and less power to the presidency.

Joyce Chang: That's a great point, Sarah. And so I want to just stay on the Congress and, and really just ask you, Peter, how do you think that Congress might respond to either outcome of the Supreme Court decision? Because, you know, I think from a market's perspective, so many people feel that the Congress has sort of ceded a lot of this authority over to the executive brands, hasn't pushed back on this. But how do you see this playing out with respect to what Congress could do?

Peter Harrell: Well, let me answer that first on the, the specifics of the tariff case, Joyce, because I, I realize I, uh, failed to answer your earlier question about what, uh, the President's fallback options are if he does in fact lose his tariff case. And I think, you know, his first fallback option is that there are a couple of other statutes, including in particular Section 122 of the Trade Act in 1974 and Section 301 of the Trade Act of 1974 that would probably, over a period of a couple of months to a year, allow him to recreate more than half of the tariffs that he currently has done under IEEPA. So he does have some executive branch authorities. I also think there is a chance that if he loses this tariff case, he may go to Congress. I don't know if Congress will in fact, choose to pass new tariff legislation for him, but I could see him, for example, having, you know, closed these deals he's been touting as very successful with Japan, with the European Union, at least going to Congress to try to seek some kind of ratification of those deals. So I think it is possible that he goes to Congress having lost this case and sort of asked Congress to do what I view as its constitutional job of, of, of enacting tariffs or not enacting tariffs pursuant to what it thinks is, is, is correct.

Joyce Chang: Well, there's so much to watch here with these decisions and how the Congress reacts. But Peter, let me just stay with you for a minute. What, what are you telling businesses and investors to do just with this uncertainty on what happens with the tariffs? How are you advising them to look at the business implications and to plan around this?

Peter Harrell: Yeah. So there are a couple of really important practical questions for business, kind of going from the big picture constitutional and political questions to what businesses need to be thinking about, one of which is obviously very much, can businesses that have paid IEEPA tariffs get refunds if these IEEPA tariffs are unlawful. And I think for, for operating businesses and for investors in operating businesses, there are steps, mechanical steps that they need, may need to take in order to preserve their right to get refunds. I think at the end of the day, probably most businesses that have paid tariffs would be entitled to refunds, but they may have had to take mechanical steps in order to preserve their right to get that refund. So I ... On the, on the kind of importer side, there's a lot that companies need to be thinking about how to preserve that right. I think for the investor side of this equation, the big question is if the courts strike down these IEEPA tariffs, how many and what percentage of the tariffs can Trump recreate under other authorities? Because if you sort of posit that today we have maybe, I don't know, 13, 14%, average tariff rate, you, you, I'd ask your research analyst what you think it is that changes, you know, and if he can only recreate, say 9%, uh, average tariffs under the other authorities, that, that's a relevant material difference for investors. So I do think you want to begin modeling, you know, what the, the fallback options are and what, A, from a fiscal perspective, that'll raise for the government, but B, from a corporate perspective, what's that's going to mean for sort of effective corporate taxation if you include tariffs as part of the effect of corporate taxation?

Joyce Chang: You make a great point, Peter, that's a whole process that we're embarking on, but the midterm elections come in could be another, you know, uh, point where we see just, \----more of the trends that we will need to watch in the marketplace. So with that, I want to thank both Sarah and Peter for being here with us today and sharing their insights. What a fascinating discussion on the future of executive power, its impact on the markets and government. And for our listeners, stay tuned for more episodes as we continue to explore the trends shaping financial markets. And I encourage everyone to follow both Sarah and Peter's podcasts and their work. Thank you so much, Sarah and Peter, for being with us.

Peter Harrell: Thank you.

Sarah Isgur: Thanks for having us.

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