U.S. tariffs: Struck down by the Supreme Court

The U.S. Supreme Court ruled that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) are unconstitutional. In principle, this would require tariff levels to revert to their pre‑Liberation Day baseline. In practice, however, the U.S. administration moved quickly to prevent a sharp rollback.

Within hours of the ruling, President Trump announced a new 10% “global tariff,” invoking Section 122 of the Trade Act of 1974. He subsequently signaled his intention to raise the tariff to 15% (the maximum level permitted under this authority) though the timing of that increase has yet to be clarified. Under Section 122, the tariff can remain in place for only 150 days (until July 24), after which congressional approval would be required for any extension.

Key details of the new tariff regime remain unresolved. U.S. Trade Representative Jamieson Greer suggested that categories previously exempt from IEEPA tariffs—such as energy, semiconductors, critical minerals, pharmaceuticals, and USMCA‑compliant goods—will remain exempt. However, there is still considerable uncertainty around the treatment of existing trade agreements.

White House officials have indicated that countries with already-finalized trade deals are expected to honor their commitments while the administration rolls out its revised tariff strategy in the coming weeks. The EU, by contrast, has signaled that it may freeze ratification of its trade agreement with the U.S. pending greater clarity on the new tariff framework.

Notably, the Supreme Court did not address the issue of refunds. The government may ultimately be liable to refund roughly $175bn in IEEPA tariff revenues already collected, potentially with interest.

The market reaction was initially muted, reflecting that the Court’s decision was widely anticipated and largely priced in. However, as investors digested the implications over the weekend, particularly the renewed uncertainty around tariff policy, the news contributed to broad weakness across U.S. assets. 

Although the administration acted swiftly by invoking Section 122, the temporary nature of this authority leaves considerable uncertainty about what will follow once the 150‑day window expires.

At that point, the administration can either seek congressional approval for an extension or turn to alternative tariff authorities to establish a more durable regime. Several such avenues exist, but they are narrower in scope and, in most cases, require formal investigations that could take several months.

That said, given that the ruling was widely expected, preparatory work is likely already underway. The key takeaway is that the Supreme Court decision constrains one channel for imposing tariffs, but it does not materially reduce the administration’s ability, or willingness, to use tariffs as a policy tool. Tariffs will likely remain a persistent feature of the policy landscape.

The ruling may nevertheless create a short‑term political and economic off‑ramp.

Striking down the IEEPA tariffs nearly halves the average effective tariff rate, from around 16% to about 9%. Replacing them with a universal 15% global tariff raises the average effective rate back to roughly 14%, still well above the 2–3% level that prevailed before Liberation Day in 2025. By deploying additional tariff authorities, the administration could, in principle, restore the average effective rate close to 16%.

However, the Court’s decision also provides the administration with an opportunity to delay or partially scale back tariffs in the near term, easing affordability pressures ahead of the mid‑term elections. Public opinion remains a constraint: a Washington Post/ABC/Ipsos survey found that 64% of Americans disapprove of President Trump’s handling of tariffs.

Estimates suggest that the cumulative cost of the Trump tariffs averages roughly $1,700 per household per year, with the burden falling disproportionately on lower‑income households. Against that backdrop, a “lighter‑touch” approach beneath the surface is likely, characterized by more exemptions, carve‑outs, and implementation delays.

Indeed, signs of moderation have already emerged. Despite persistent rhetoric, no new tariffs have been introduced since September of last year, and in November the administration rolled back tariffs on hundreds of staple food products, including coffee, beef, and bananas. With domestic political constraints limiting the scope for further escalation, a combination of lower effective rates and broader exemptions could help support consumption among more vulnerable cohorts.

Our baseline outlook, therefore, remains that while the administration will use alternative legal avenues to impose tariffs, it will only partially replace the IEEPA measures. We expect the average effective tariff rate to edge modestly higher from today’s 14%, but to remain below last year’s 16%, at least until the mid‑term elections in November.

Since late last year, the U.S. Court of International Trade has received more than 1,500 lawsuits from companies seeking refunds if the IEEPA tariffs were struck down. These cases had been stayed pending the Supreme Court’s ruling. While Friday’s decision resolves the constitutional question, it offers little clarity on the mechanics or timing of refunds.

Smaller importers, with fewer legal and financial resources, may be at a disadvantage relative to larger firms in pursuing claims. Even so, the government has a strong incentive to move quickly: statutory interest accrues daily and is compounded, meaning delays could add billions to the ultimate cost.

In aggregate, the administration could be liable for the full $175bn in IEEPA revenues collected to date, plus interest. The Committee for a Responsible Federal Budget estimates that refunding these tariffs could raise federal debt by $2.4 trillion through FY2036, assuming no replacement tariffs.

That assumption is unlikely to hold, however. If the administration succeeds in reimposing tariffs under alternative authorities, the current tariff revenue run rate of roughly $30bn per month would likely be maintained. In that scenario, the near‑term fiscal trajectory would not change materially, despite the refund overhang.

Ultimately, the issue of tariff refunds may not have a meaningful macro impact, but it is likely to be highly disruptive for the many large and small businesses pursuing refunds.

Neither the Court’s ruling nor the administration’s pivot to alternative tariff tools meaningfully alter our macro outlook:

1. Growth: Since Liberation Day, firms have adapted to a higher‑tariff environment by postponing investment, restructuring supply chains, and adjusting pricing strategies. Despite this, the U.S. economy grew at a 2.2% pace, broadly in line with trend. Household consumption remained resilient, and corporate profit margins reached cycle highs, as firms offset tariff costs through price increases, cost reductions, and supplier negotiations.
2. Trade dynamics: Tariffs have reshaped trade flows—China’s share of U.S. imports has fallen materially—but the overall trade balance has changed little. We continue to expect solid economic performance in 2026, with any tariff drag offset by fiscal stimulus from tax cuts. Depending on timing, tariff refunds could even provide a modest boost to corporate margins, introducing a slight upside risk to growth.
3. Inflation: Tariff pass‑through has so far been muted, with most of the burden absorbed by U.S. firms rather than consumers. We had already expected tariff-driven inflation to rise gradually, peaking around mid‑2026 before easing in the second half of the year. A somewhat lower average effective tariff rate implies that pass‑through to core goods inflation may be marginally smaller and shorter‑lived than previously assumed.
4. Monetary policy: The implications for the Fed are limited. Policymakers have largely looked through tariff‑related inflation, and the growth impact remains modest.
5. Rates markets: Tariff refunds could lead to some fiscal deterioration, contributing to a modestly steeper yield curve.

Overall, as both the ruling and the subsequent policy response were broadly anticipated, the decision does not materially alter the near‑term economic trajectory.

Globally, the impact is more nuanced. The new tariff framework may temporarily lower effective rates for some countries while raising them for others. U.S. imports from countries facing tariff reductions are likely to increase, providing a modest boost to those economies.

On balance, with alternative tariff authorities likely to keep the average effective rate only slightly below recent levels, the net effect on global growth should be marginally positive.

More importantly, the Supreme Court’s decision constrains the administration’s ability to impose tariffs unilaterally and without process. That slightly reduces geopolitical trade policy risk and, in turn, downside pressure on the U.S. dollar, assuming policy uncertainty is resolved reasonably quickly.

At the same time, the ruling may embolden trading partners to push back more forcefully in negotiations, thereby shifting the dynamics of trade diplomacy.

Looking ahead, tariff policy is likely to remain fluid over the coming year. Markets have become more skeptical of headline risk, particularly as the most aggressive tariff threats have often been diluted, delayed, or reversed. Companies have also demonstrated the ability to absorb tariff shocks through pricing, cost management, and supply‑chain adjustments, thereby limiting their impact on margins.

Nevertheless, one theme continues to dominate: uncertainty. The Court’s ruling is unlikely to bring a swift resolution and may instead usher in a new phase of legal and policy volatility as firms pursue refunds and the administration tests alternative authorities.

For investors, this persistent policy churn is weighing on the relative appeal of U.S. assets. With international markets delivering strong earnings growth at more attractive valuations, U.S. policy noise is reinforcing the case for greater exposure outside the U.S.

In this environment, broad diversification across geographies, currencies, sectors, and policy regimes remains essential. Markets may continue to absorb episodic shocks, but the cumulative effect of policy volatility argues for more balanced global portfolios built to withstand sharper swings in trade and geopolitical risk.