Chief Market Strategist, Asia Pacific
What happened?
In a 6–3 decision, the U.S. Supreme Court (SCOTUS) ruled that U.S. President Trump exceeded his authority by using the federal emergency powers law (IEEPA) to impose “reciprocal” tariffs globally, as well as targeted import taxes intended to address fentanyl trafficking. The tariffs on steel, aluminum, and automobiles were put in place under Section 232 of the Trade Act of 1962, and tariffs on Chinese electric vehicles, solar power panels and battery under Section 301 of the Trade Act of 1974 therefore are not directly affected.
What has been the administration’s reaction?
U.S. President Trump was unsurprisingly critical of the Supreme Court’s decision. He then imposed a 15% global tariff, effective on February 24, implemented under Section 122 of the Trade Act of 1974. This allows the administration to raise tariffs for 150 days due to trade imbalances, while congressional approval is required for any extension. According to the White House, some goods needed by the U.S. economy will be exempt, including critical minerals, agricultural products, pharmaceuticals, certain electronics (e.g., semiconductors) and automobiles. USMCA-compliant goods from Canada and Mexico will also be exempt.
There are also other legislations the president could deploy that have more solid legal foundation—for example, the Section 232 and 301 tariffs mentioned above. However, these tariffs require lengthy investigations and are likely to be more narrowly based on specific products or markets.
U.S. President Trump has already directed the Office of the U.S. Trade Representative to start a Section 301 investigation. U.S. Trade Representative Greer issued a statement noting that the investigation would cover “most major trading partners” and address concerns “such as industrial excess capacity, forced labor, pharmaceutical pricing practices, discrimination against U.S. technology companies and digital goods and services, digital services taxes…” China and the EU appear most exposed to these investigations.
While the threat of tariffs remains, we see the latest court ruling as likely to limit the overall scope of tariffs going forward. Moreover, the upcoming midterm elections and voters’ focus on the cost of living should persuade the administration to be more cautious about broad tariffs that could raise prices.
The ruling that IEEPA tariffs are illegal also blunts one of the president’s preferred foreign policy tools. U.S. President Trump has threatened to impose tariffs not just on issues of trade imbalance but also in other areas of foreign policy, although many of these threats were not implemented.
Other questions to be answered
SCOTUS did not clarify whether importers are entitled to refunds, leaving that issue to a lower court to resolve. If refunds are fully granted, they could total up to USD 170billion—over half the revenue generated by U.S. President Trump’s tariffs. However, significant uncertainty remains: only companies directly involved in the litigation may receive refunds. Otherwise, importers will need to file individual lawsuits with the Court of International Trade to claim reimbursement. Some companies, especially small and medium enterprises, may be in a disadvantaged position due to high litigation costs relative to the reimbursement amount
There are also questions about trade deals with partners that have been struck in recent months, especially those that have not been ratified by their parliaments or are still under negotiation. Overall, we expect these governments to maintain dialogue given the prospects of other tariffs that could impact their exports, but the overall pace of negotiation could slowdown depending on the Trump administration’s next steps.
Market implications
The U.S. equity market reaction was fairly muted on Friday after the court ruling was announced. This is largely because of the uncertainties from the administration’s next steps and the potential refund process. The 10-year U.S. Treasury yield rose about 3 basis points (bps) after the announcement. This could be due to the market’s focus on lost tariff revenue adding to the federal government deficit. The short end of the yield curve also rose. The futures market on the Federal Reserve policy rate has not changed much either, despite very weak advance 4Q gross domestic product (GDP) data. Although the end of reciprocal tariffs could intuitively help reduce inflation, other tariffs could still introduce uncertainty.
Overall, we expect the latest Supreme Court ruling to help limit the overall impact from the administration’s tariff policy, despite medium-term uncertainty from other forms of tariffs with a more solid legal basis. This should contain inflation in the U.S. at the margin, while tax rebates could provide a temporary boost to consumption in the near term. Margin compression for the corporate sector could be more concentrated in importers that are affected by Section 301 or Section 232 investigations and subsequent tariff implementation. There are sectors where the administration has shown more willingness to be lenient with tariffs, such as critical minerals and energy, foodstuffs, pharmaceuticals and semiconductors. In terms of trade partners, the end of IEEPA tariffs and the introduction of Section 122 tariff would create some winners and losers, at least temporarily. Brazil, China, and India would have seen the largest reduction in trade weighted tariff rates against the U.S., while the EU, Singapore, and the UK would have a modest increase. However, this could all change depending on the incoming Section 301 investigation as mentioned by the U.S. Trade Representative mentioned above, so market reaction may be limited and temporary.