Leibowitz on Trade: How war, tariffs, and politics interact

Meanwhile, we don’t see a clear or workable solution to the energy situation. Iran and its wounded but still dangerous proxies have weapons that can put shipping in harm’s way. Last year, the Houthis in Yemen wrought havoc in the Red Sea and effectively blocked the Suez Canal. The next few weeks will be crucial.

For the American economy, which does not directly depend on oil from the Middle East (thanks to enhanced recovery techniques such as fracking), physical shortages of oil and gas are not the problem. Instead, it’s inflation. Energy is a global commodity, and the war has triggered inflation. Price hikes filter through to transportation, agriculture, and heavy industry. Steel and aluminum producers face higher input costs (e.g., energy-intensive electric arc furnaces). Downstream users confront rising prices with limited ability to pass them on.

Which brings us to tariffs and their future. The end of the “reciprocal” tariffs—aka the International Emergency Economic Powers Act (IEEPA) tariffs—thanks to the Supreme Court decision last month triggered an immediate, but temporary, response. Namely, the 10-percent across the board (but not quite across the board) tariffs under Section 122. They have already been challenged as illegal in court.

The chances of Section 122 tariffs going beyond their 150-day statutory limit are around zero. And a loss by the administration on the legality of these tariffs is likely, meaning more refunds to importers, on top of the $150 billion or so that are due under IEEPA. The resulting loss of federal revenue makes a supplemental appropriations bill almost certain, meaning that Congress will have a say on the conduct of the Middle East war. On top of that, the War Powers Act requires withdrawal of troops unless Congress approves the hostilities within 60 days of their commencement.

Already, major confrontations are playing out over ICE reforms, the War Powers Act, new appropriations to fund further war expenditures, and a lack of certainty over where the war is going and how it will end. Things are coming to a head.

Which brings me to the midterm elections. Primaries are already taking place. The political implications of these confrontations are immediate. Midterm elections generally turn on economic conditions in the country. Gas prices, food prices, and other constraints are hurting Americans right now.

Inflation and “affordability” have emerged as major political issues. Democrats, seeking to flip the House and the Senate (both houses are clearly in play), will beat the inflation drum. The war has given them another major issue because of the its link with energy inflation.

The combination of war and tariffs have put Republicans in a highly pressurized position. Democrats only need a net gain of three seats this coming November to turn the House of Representatives blue. Traditionally, the party in power loses seats in the midterm elections, so the Democrats have a natural advantage. This, in part, explains President Trump’s push to pass the SAVE Act, which will require proof of citizenship to vote.

The election could well turn on a rapid decrease in energy prices, which seems to dictate an early end to the Middle East war. Because the administration needs revenue, tariffs will not come down before November, in the absence of court action. The refunds are not likely to flow before November, despite current efforts by the Court of International Trade to speed them up. 

The war is a key variable. The spiriting away of Nicolas Maduro and his wife in January was a plus for Trump. But the current war has resulted in negative vibrations. The Middle East war has no “magic bullet” like that. Perhaps the Trump team are planning a decisive turning point, a new tactic “never seen before.” If so, it should happen “very soon.”

There is an inherent tension in the current policy mix that may become more pronounced as the election approaches.

The interplay between the Middle East war, tariff policy, and the midterm elections underscores the extent to which economic and geopolitical considerations are now inseparable and likely to remain so. Tariffs are not just instruments of trade policy. They are tools of political strategy. One of the key arguments the Trump administration made in the first term was to make supply chains more reliable. They have strengthened that argument through a war that makes global supply chains much less reliable, particularly for those countries that rely on energy emanating from the Middle East. And that’s just about everyone other than Russia and the United States.

Similarly, foreign conflicts are not confined to the realm of national security. They can shape domestic economic conditions and the outcome of elections.

For policymakers, the challenge lies in managing these interconnected dynamics without allowing one domain to undermine another. The current moment offers a clear reminder, as if we needed one: trade measures are driven not only by trade and economic considerations but also by broader strategic and political imperatives operating alongside. Tariffs and waging war are tools. And we must pay attention to the structures those tools are tearing down as well as to what those tools are building.