Corporate Law: Tariffs

Written by Marsela Shalabi, Claire Easterling, Hansini Mahajan, Nela Labuzek, and Anna Ramesh

Edited by Anna Ramesh

Tariffs are taxes the government charges on goods when they cross a country's border, usually on imports. Governments use tariffs for a few reasons: to raise revenue, to make imported products more expensive (so domestic companies can compete more easily), and to influence trade behavior with other countries. In practice, a tariff increases the price of foreign goods in the U.S. market, which can shift demand toward domestically made products. This can also increase costs for businesses and consumers that depend on imported materials or products.

When discussing economics and commerce, legislative and judicial powers play different roles. On the legislative side, Congress holds the primary power to set economic policy, such as setting taxes, tariffs, and regulating trade, because the Constitution gives Congress the power to tax and to regulate commerce, especially with foreign nations. Instead of creating tariff policies, courts interpret the laws Congress passes and decide whether those laws fit within constitutional limits. Thus, the legislature sets the rules, and the judiciary checks how those rules are interpreted and enforced.

Precedent #1: Gibbons v. Ogden (1824)

One of the first major interpretations of the Commerce Clause, particularly interstate commerce, occurred in Gibbons v. Ogden. This Supreme Court case accentuated the distinction between interstate and intrastate commerce. The Commerce Clause is found in Article I, Section 8, Clause 3, and defined as "[The Congress shall have Power . . . ] To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes; . . ." Interstate commerce means between states, crossing state boundaries while intrastate commerce means within the borders of the state.

The case centered on the New York legislature passing a law granting exclusive rights to use steamboats on waterways. Aaron Ogden had obtained an exclusive license from New York to operate steamboats between New York and New Jersey, which fell under interstate commerce. Thomas Gibbons, the plaintiff, had an exclusive license from the federal government, obtained under the 1793 Act of Congress. This license signified that Gibbons ran a competing steamboat service on Ogden's routes; hence, Ogden filed a lawsuit against Gibbons for breaking the New York law by operating outside of his monopoly on the route.

The issue in this case was whether New York state law interfered with Congress's exclusive right to regulate commerce. The court ruled unanimously that the New York state law did interfere with Congress's exclusive right to regulate commerce. According to Chief Justice Marshall, controlling the navigation of steamboat operators was a power vested and reserved to Congress under the Commerce Clause. Commerce includes navigation ("intercourse") and, therefore, commerce can extend beyond state boundaries (i.e., Congress has the authority to regulate commerce between and across multiple states).

Among the constitutional provisions, the Supremacy Clause, found in Article VI, Clause 2 defined as "This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding" highlighting that the Constitution is the foundation our political system. This means that federal law is supreme if state and federal laws conflict with one another. Regardless of the circumstances, when power is expressed within the Constitution, federal acts take precedence over state-level acts. Therefore, the New York state law was unconstitutional, indicating that any matter affecting interstate commerce falls within the power of Congress.

Gibbons v. Ogden focuses on navigation, railroads, and the transportation of goods across and between state lines. This case represents how federal laws trump state law when in conflict.

J.W. Hampton, Jr. & Co. v. United States dealt with section 315 of the Tariff Act of 1922, questioning Congress's ability to delegate the power to set duty rates. On March 1st, 1928, J. W. Hampton, Jr. & Co. argued to the Supreme Court that, upon importing barium dioxide into New York, they faced a higher tariff than expected: 6 cents per pound instead of 4. At the time, the President had established a tariff greater than the statute in place. The President's action fell under the "flexible tariff provision" included in the Tariff Act of 1922, allowing the increase of duties in this case and the decrease in others. J.W. Hampton, Jr. & Co. raised the issue of whether the Executive Branch had the power to set tariffs. 

The Supreme Court, on April 9, 1928, decided that the President did not illegally exercise law-making power reserved to Congress. Instead, the Court affirmed that Congress's delegation was constitutional because the Executive Branch fulfills a "fact-finding power" in which the President can determine the monetary value difference between domestic and foreign products. The Supreme Court outlined that the President must follow a set of criteria, abide by limits, and involve the Tariff Commission when enacting a tariff.Therefore, the verdict of J.W. Hampton, Jr. & Co. v. United States introduced the Intelligible Principle Standard. Congress can remit its power to the Executive Branch as long as the tariffs are regulated through administrative agencies and further limitations or "intelligible principles."This case demonstrates the constraint of the Constitution in limiting the separation of powers. Congress needs agents to execute its legislative acts, such as commerce, and J.W. Hampton, Jr. & Co. v. United States goes further, showing a transfer of power.

Precedent #3: United States v. Stone & Downer Co. (1927)

The Supreme Court Case U.S. v. Stone & Downer Co (1927) was twofold, addressing both the application of res judicata in customs cases and the different and nuanced classifications of tariffs. The case involved the United States government, the Stone Downer Company, and two specific tariff acts: the Tariff Act of 1913 and the Emergency Tariff Act of 1921. Stone & Downer imported wool yarns that the government wanted to tax under the Emergency Act of 1921, which imposed taxes on "yarns made wholly or in chief value of wool." Tariff Act of October 3, 1913, c. 16, 38 Stat. 114, 142. Stone & Downer contested their classification, relying on the Tariff Act of 1913, which exempted wool that was commonly known as clothing wool from duties, to argue that its imports were duty-free. 

The Court of Customs Appeals had previously ruled in favor of Stone & Downer, Co., classifying the imported wool as duty-free clothing wool. In doing so, they also barred the government from contesting future classifications under the principle of res judicata. This concept states that an already adjudicated matter with a final verdict may not be pursued again by the same party. It essentially bars losing plaintiffs from suing the same defendant again on the same issue and bars winning plaintiffs seeking further recovery from suing the same defendant. Because of this principle, however, the government would be unable to relitigate in the future.

The two issues presented before the Supreme Court thus became whether the imported wool constituted clothing wool under the meaning of the tariff acts, and whether res judicata applied to the decisions of the Court of Customs Appeals in later importations.

Considering the first issue, the US Supreme Court reaffirmed the principle that tariff terms are generally interpreted according to their commercial meaning, unless clearly indicated otherwise, which Congress did when adding the phrase commonly known. While experts in the field may further distinguish between the different types of clothing wool based on the yarn's preparation process, the Court held that this distinction is neither relevant nor necessary for wool to constitute clothing wool as deemed by the tariff acts. Citing Cadwalader v. Zeh (1894), which stated that the commercial meaning is most relevant unless otherwise stated by Congress, the Supreme Court reasoned that with the specific inclusion of "commonly known" in the Tariff Act of 1913, the original legislative intent of Congress was to include any wool used to make clothing, and that the general understanding of the term must prevail over its technical one. 

Considering the second issue, the Supreme Court acknowledged that while res judicata was logical in certain situations, customs cases were fundamentally different from ordinary tax suits. They reasoned that because circumstances are constantly changing, a court should not bear the burden of permanently deciding the outcome of future potential cases as well. In cases where the "the evidence which may be presented in one case may be much varied in the next[,] the importance of a classification and its far-reaching effect may not have been fully understood or clearly known when the first litigation was carried through." Stone & Downer Co.., 274 U.S. at 236. They thus held that the judgment of the Court of Customs Appeals did not constitute res judicata for later importations and that it did not bar the government from future contests.

Conclusion

Taken together, cases such as Gibbons v. Ogden, J.W. Hampton, Jr. & Co. v. United States, and United States v. Stone & Downer Co. illustrate how the constitutional framework shapes tariff policy and the broader regulation of commerce. Gibbons firmly established Congress's dominant authority over interstate and foreign commerce under the Commerce Clause and reinforced the supremacy of federal law over conflicting state enactments. J.W. Hampton clarified that while Congress holds the power to impose tariffs, it may delegate limited authority to the Executive Branch so long as it provides an intelligible principle to guide that discretion. Stone & Downer further demonstrated the judiciary's role in interpreting tariff classifications and procedural doctrines, ensuring that trade laws are applied consistently while allowing flexibility in changing economic circumstances. Together, these precedents underscore the balance of powers: Congress creates economic policy, the Executive implements it within constitutional limits, and the judiciary interprets and safeguards those boundaries, maintaining the constitutional structure that governs American commerce.