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The Supreme Court ruled 6-3 to strike down a portion of the administration’s tariffs. We expect uncertainty over the process for refunds to be protracted. However, we ultimately expect the administration to reconstruct its tariff regime using alternative powers. The ruling may have marginal implications for inflation and growth, but we do not currently expect the ruling to change the trajectory either.

The ruling impacts most country tariffs

The ruling impacts all tariffs enacted under the International Emergency Economic Powers Act (IEEPA) of 1977, which includes most country-specific tariffs, such as the 10% global baseline “reciprocal” tariff.

It does not impact the administration’s sector-based tariffs on steel, aluminum, autos, furniture, and other goods, which were granted under Section 232 of the Trade Expansion Act of 1962 (which authorizes tariffs on national security grounds).

It also leaves in place tariffs originally implemented under Section 301 of the Trade Act of 1974 (on the basis of “unjustifiable, unreasonable, or discriminatory” foreign practices) which is the basis for a portion of tariffs on China since 2018.

Nonetheless, the impact is significant, as the IEEPA tariffs have been responsible for well over 70% of the tariff revenues amassed over President Trump’s second term (Figure 1).

Figure 1: The struck down IEEPA tariffs have raised the lion’s share of import duties¹

The Supreme Court made no ruling on a refund mechanism for the tariffs that have already been paid, leaving it to the lower courts. We expect that this could take a considerable amount of time to resolve and may spur a web of messy legal claims.

The administration will aim to reconstruct its tariffs with alternate powers

The Supreme Court ruling conceded “many current federal laws continue to grant the President expansive tariff authority.” Almost immediately, the administration issued an Executive Order invoking Section 122 of the 1974 Trade Act, implementing a 10% baseline tariff, effective February 24. President Trump later stated it will be amended to the maximum allowable 15%.

Section 122 allows the President to unilaterally implement flat tariffs without country differentiation, but only with a shelf life of 150 days (implying an expiration in late July) unless Congress authorizes an extension, which we currently view as unlikely. The action may even face legal challenges. Section 122 has never previously been invoked and was designed as a stop-gap solution to prevent developing balance of payments emergencies in a fixed exchange rate world, a system which has been dead for over 50 years.

In the meantime, however, the administration intends to use this window to more permanently reconstruct its IEEPA tariffs using authorities such as the (aforementioned) Section 232 and/or Section 301. These paths will be slower, as these powers face a more bureaucratic process with multiple steps, and can take up to a year to enact.

Another option, albeit unorthodox, would be to invoke Section 338 of the Tariff Act of 1930. It grants the President authority to implement up to 50% tariffs and even block all imports with relatively little bureaucracy (against those deemed to discriminate against US commerce). However, the act is already subject to an initiative in the House of Representatives to repeal it, underlining litigation risk. It would also likely face World Trade Organization (WTO) objections.

Trade uncertainty will continue

In our view, legal wrangling over refunds and continuing disruptions to tariff policy will keep trade uncertainty ongoing. Nonetheless, the relatively muted market reaction so far indicates that the ruling was not a surprise and does not fundamentally change the administration’s policies.

At this stage, while we expect the ruling to impact inflation and growth, we do not anticipate it to be significant. That said, ongoing legal challenges could continue to disrupt the administration’s plans, and we will be monitoring developments closely.