Fine points of the law are likely to dominate legal arguments in the case before the Supreme Court challenging the Trump administration’s use of the International Emergency Economic Powers Act (IEEPA) to impose tariffs. Facts, however, matter and should play an important, even dominant, role.
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Unfortunately, facts were missing in the dissenting opinion in the U.S. Court of Appeals (case 25-1820, Taranto Circuit Judge dissenting). The justices uncritically accepted the administration’s litany of alleged negative effects caused by trade deficits recounted in President Donald Trump’s April 2 executive order (so-called Liberation Day) and the accompanying Federal Register Notice on April 7.
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Evidence presented to the Supreme Court should demonstrate that the administration’s alleged facts do not support the preconditions for invoking IEEPA. An amicus brief submitted by economists expertly challenged part of the dissenting opinion. But since the dissenting opinion noted that the majority also did not disagree that there is a basis for invoking IEEPA, certain economic realities are worth repeating and elaborating.
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The dissenting judges opined that the four requirements for the president to exercise IEEPA authorities had been met: that (1) there must be an unusual and extraordinary threat to national security, foreign policy, or economy of the United States; (2) the threat must wholly or substantially have a source outside the United States; (3) the president must declare a national emergency with respect to that threat; and (4) the authorities must be exercised to deal with that threat and not for any other purpose.
More needs to be said on the second and fourth points: whether the threat has a source outside the United States, and whether authorities exercised deal only with that threat.
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Trade Deficits Are Not Foreign in OriginÂ
The dissenting opinion regards trade deficits as unusual and extraordinary because they have grown by over 40 percent in the last five years. Ensuing harmful effects include “domestic manufacturing deficiencies caused by underlying conditions like lack of reciprocity, disparate tariff rates and non-tariff barriers and US trading partners’ economic policies.”
The dissenting opinion’s fatal flaw is ignoring—or failing to understand—that trade deficits result from domestic policies and are not foreign in origin. In balance of payments accounting, a current account (in the case of the U.S. economy, primarily trade) deficit is offset by foreign investment inflows recorded in the capital account, thus balancing the payments. Those foreign investment inflows cover the shortfall in domestic savings that, in completely balanced trade (i.e., no deficit or surplus), would fund all investment. Simply put: Exports – Imports = Savings – Investment. In other words, the counterpart to a trade deficit are domestic savings that are insufficient to fund domestic investment.
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The above equation illustrates that the recent trade deficit increase is associated with the escalation of the federal budget deficit, which has decreased savings. The U.S. current account deficit widened from $380 billion in the first quarter of 2020 to $1,500 billion in in the first quarter of 2025, as the U.S. federal government deficit ballooned from $100 billion in 2019 to $1,775 billion in 2025. The reconciliation bill of July will increase the federal budget deficit and, coupled with investment flows extracted from trading partners, such as $550 billion from Japan, will further widen the trade deficit.
When the United States was negotiating the North American Free Trade Agreement, the Mexican delegation, led by expert economists, questioned why a provision was needed that allowed trade measures to address a balance-of-payments problem. They pointed out that any such imbalance would stem from domestic policies, not trade. And they were right: U.S. trade deficits are sourced inside, not outside, the country and the imposition of tariffs will not reduce that deficit.
Manufacturing, Agriculture, DefenseÂ
Relying on the executive order, the dissenting opinion recounts that goods deficits have led to the “hollowing out of our manufacturing base, inhibited our ability to scale advance domestic manufacturing capacity, [and] undermined critical supply chains,” and asserts that the “decline of manufacturing capacity threatens the U.S. economy through the lack of jobs.”
However, there is no connection between trade balances and manufacturing. Germany and China have trade surpluses and have seen a drop in manufacturing as a share of GDP. Among the ten largest manufacturing nations, the United States is second only to South Korea in manufacturing output per capita.
U.S. manufacturing as a share of GDP has held rather steady even though the number of employed has fallen thanks to boosts in productivity. For example, in 1980 a ton of steel took 10.1 hours to produce; now it takes just 1.5 hours. An estimate puts job losses due to trade at 3.5 million compared to 18 million lost due to productivity. Manufacturing centers have gravitated from one region of the United States to another, but employment has not suffered. Recent data shows that lower- and middle-level incomes have steadily grown, even in areas hit by the China shock.
With respect to supply chain vulnerability, about 80 percent of all intermediate products are sourced domestically in the United States. Certainly, there are notable sectoral and industry exceptions, such as semiconductors and rare earth magnets. Notably, both were developed in the United States, but Intel outsourced semiconductor production to Taiwan and GM sold its rare earth magnetic operations (Magnaquench) to Chinese interests.
The dissenting opinion does have a point that recent agricultural trade deficits, projected to be $49 billion, are unusual compared to decades of surpluses. This development primarily reflects price movements, however, not foreign trade policies. Prices of U.S. bulk exports (e.g., corn) have softened while prices of intermediate goods (e.g., vegetable oils) and consumer goods (e.g., fresh fruits and vegetables, beer, pastas) have increased. Using 2022 prices, the U.S. agricultural trade deficit would have been $5 billion in 2024 rather than $38 billion. Soybean exports have also weakened as more are being consumed domestically due to biofuel mandates. Rather than addressing the alleged emergency, the remedies under IEEPA have increased the prices of fertilizers and machinery and provoked China to cease soybean imports. Those factors, together with rising labor costs resulting from the administration’s deportation of immigrants, have created a strain on U.S. agriculture.
With respect to defense, the dissenting opinion flips the script by expressing concern about too many exports rather than imports. Indeed, in fiscal year 2024 the United States sold $319 billion worth of arms, a record, and captured 43 percent of the global arms trade during 2020–24. Citing the administration, the judges believe that “U.S. stockpiles of military goods are too low to be compatible with U.S. national defense interests.”
The decision to export arms, including to Ukraine and Israel, is a domestic one, not foreign. Although there are some international supply chains, as one expert explains, “manufacturing of arms is driven by politics, policy debates, military doctrine, expert predictions, taxpayer money, and, ultimately, the application of national will.” That is to say, not tariffs.
The dissenting opinion performed a service in clearly presenting the preconditions for applying IEEPA. However, the goods trade deficit and most of its alleged negative effects are rooted in domestic, not foreign, policy. Applying tariffs will not deal with the perceived threat. Rules of evidence suggest that the Supreme Court may only consider arguments presented to them. The justices would do the nation an injustice if they did not consider facts. Fact do matter in finding the truth.