Trade is more than just a transaction. It’s about relationships and trust built and earned over time.
Just over a year ago, President Trump began unilaterally changing tariff rates with countries around the world, citing the International Emergency Economic Powers Act (IEEPA). The goal was to restructure world trade. It was the first time a president had used IEEPA in this way, which always posed challenges.
In May, the U.S. Court of International Trade ruled against the president. In November, the Supreme Court heard oral arguments in the case. Last week, in a 6-3 decision in Learning Resources v. Trump, the court found that the IEEPA does not give the president the power to unilaterally impose, rescind, or adjust tariffs to suit the president. Chief Justice Roberts, who wrote the majority opinion, argued that tariffs are essentially taxing rights and, as such, differ not only in degree but in kind from the trade tools expressly authorized by IEEPA.
While this opinion is certainly an important legal victory, it should not be confused with an economic victory. The damage from tariffs has already been done and continues to be done.
Consider that just hours after the court’s opinion was released, President Trump held a press conference and said:[Foreign countries] They are ecstatic after years of deceiving us. They are very happy and dancing in the street, but they don’t dance for long. I guarantee that. True to his words, the president announced later that day that he would use Section 122 of the Trade Act of 1974 to impose a 10% worldwide tariff on all imported goods for 150 days starting February 24th. As if wondering about this, the White House also posted to X, “Stay calm and impose tariffs.” Late over the weekend, the president announced that the new tariff rate would be 15%, the highest rate allowed under Section 122. However, now that these tariffs have come into effect, the tax rate is set at 10%, causing further confusion. It remains unclear whether this will be in addition to previously concluded trade agreements or whether these countries will be exempted in some way. And these new tariffs are already raising serious concerns about their legality.
A 2021 survey of American Economic Association members found that 95% of economists agree that tariffs are economically destructive. In other words, a group of people so famous for their disagreements that the jokes are actually written by themselves have 95% agreement on this issue.
Many prominent people have raised questions about what the effective tariff rate will be, who will actually pay the tariffs, and how many jobs will be created or lost. This is important for the work of gathering (further) evidence on the destructive effects of tariffs. However, decades of empirical, historical, and theoretical research in this area have failed to capture the true cost of tariffs. This doesn’t appear in BLS reports, BEA releases, or any other economic report imaginable.
The real cost is the destruction of trust on the world stage.
Trade is more than just a transaction. It’s about relationships and trust built and earned over time. This establishes that trading partners behave according to agreed rules, and that market access is not a bargaining chip that can be used whenever one side (in this case Washington) needs a political victory.
“Political leaders and business leaders around the world must ask themselves a new question in international trade: Is access to the world’s largest consumer market worth the cost of doing business with partners who treat market access as a bargaining chip?”
Adam Smith understood this. He knew that the wealth of nations was not built on clever tariff schedules or trying to hold the rest of the world hostage. It is built on expanding the division of labor, expanding the scope of markets, and enabling the human tendency to “truck, barter, and trade.” All this is made possible by stable rules and a predictable exchange network. Smith understood that tariffs would change these incentives, but even he may have underestimated the role of trust in international trade, how quickly it can disappear, and what happens when it does.
Rather than breathing a sigh of relief in response to the court’s decision, the rest of the world is further confirming that this administration, and by extension the United States, is no longer trustworthy. The first trade deal for 2026 includes agreements aimed at limiting the damage that could result from a U.S. withdrawal from trade. Canada and China announced a “trade reset,” and Canadian Prime Minister Mark Carney referred to China as more “predictable” than the United States. You know something is very, very wrong, especially when China is seen as more predictable than the United States.
These aren’t the only warning signs we’re seeing.
The EU has trade agreements with Mercosur and India, covering 31 countries. The agreement with India is particularly noteworthy as it covers 25% of global GDP and a population of over 2 billion people. The deal is so large that European Commission President Ursula von der Leyen called it “the mother of all agreements.”
And after his impassioned speech at Davos, Carney is leading a group of “middle powers” united around free trade and offering other countries an alternative to U.S. trade policy. The rest of the world is paying attention to Canada and Mark Carney, not because they are somehow world leaders in this area, but because when Canada, with the longest undefended border in the entire world and one of America’s oldest and closest allies, says “enough is enough,” other countries are sure to say enough is enough. Mr. Carney’s polling numbers show that Canadians support him, even if standing up to Mr. Trump comes with serious economic costs.
Political leaders and business leaders around the world must ask themselves new questions when it comes to international trade. Is access to the world’s largest consumer market worth the cost of dealing with a partner who treats market access as a bargaining chip, or is it better to work with a smaller, more dependent market that doesn’t have leadership that wakes up one morning and decides the deal needs to be changed?
International trade was once based on David Ricardo’s insights about comparative advantage and maximizing the profits from trade. This time, we will talk about Harry Markowitz’s portfolio theory, which diversifies risk and minimizes worst-case losses. The risk they are hedging is US policy. While the United States is deglobalizing, the rest of the world is reglobalizing around partners committed to the impersonal rules of an open-access liberal order.
The court’s decision in Learning Resources does not resolve this. Worse, neither will the next election. Even if America happens to elect a man to tour the world promising to be a more reliable trading partner, it will not be easy to regain trust once it has been lost. Even if trust could be rebuilt, it would be a long process starting from a worse position.
The rest of the world is moving on too. Supply chains are being rerouted in boardrooms and government agencies. We are currently applying for permission to construct a factory. A long-term contract has been signed. Investment decisions are now being made amid greater uncertainty surrounding U.S. policy, and this uncertainty is being taken for granted rather than the result of short-term perceived mistakes.
Just because the next president holds a press conference and apologizes doesn’t mean all new factories around the world will be packed up and moved to America. The supply chain currently in place will not be rerouted through the United States, as social media posts promise that politics in Washington has changed. Trump showed the rest of the world what is possible with the American system. And the rest of the world is reacting in a predictable way.
The word that describes this moment in American history is “hysteresis.” The idea is that what appears to be a small or temporary event, such as a temporary layoff, can have a much larger impact than anticipated. Hysteresis is a term often used in economics to describe unemployment, and refers to a situation in which workers who were originally only temporarily laid off due to a recession do not return to the labor market, or only return in a limited capacity. Now, here’s another example you can use in your classroom.
The court’s decision in Learning Resources is a real victory against constitutional restrictions on free trade and executive power. However, it does nothing to rebuild relationships that are already strained. Every workaround, every legal maneuver, every new state of emergency will send the same message to the world. “The United States can no longer be trusted.” Lasting trade relationships cannot be built on that foundation, and the rest of the world is learning not to try.
The Trump administration wanted to restructure global trade. Their wish came true, but not in the way they imagined. The rest of the world is also restructuring, not with the United States but around the United States.
This essay was also published in Law and Freedom, part of the Freedom Fund Network.
*Dr. David Hebert is a senior research fellow at AIER. He is also a Fellow of the U.S. Senate Budget Committee and has served on the U.S. Joint Economic Committee. He also serves as Deputy Director of The Entangled Political Economy Research Network.
