Reciprocal Tariffs: Supreme Court Ruling and The Aftermath
· A Supreme Court ruling, partially or in full against reciprocal tariffs, would not produce a major slowdown in U.S. inflation or boost to growth, as the Trump administration would be full of threats for replacement tariffs – Trump would be worried about the loss of negotiating power more than tariff revenues. Some of these could be introduced, though voters concern over cost of living are a restraint on the scale of new actual tariff measures. Such a ruling would also weaken the U.S. negotiating position with China and India.
The Supreme Court will rule on President Donald Trump’s reciprocal and fentanyl tariffs (potentially as soon as the first opinion day on January 9). What will be the ruling and impact?
Figure 1: Cumulative Tariff Revenue (USD Blns)
Source: U.S. Treasury
A couple of points are worth making.
· Supreme Court hearings in 2025 saw probing questions from justices, that have prompted a view in the market that a high risk exists of the court rejecting part or all of the Trump administration’s reciprocal and fentanyl tariffs. We would attach a 70% probability to this scenario which is in line with betting markets. The Trump administration could argue that the ruling only applies to companies that brought the original lawsuit, rather than the whole U.S. economy (here). A partial ruling against reciprocal and fentanyl tariffs, would likely cause some short-term volatility. However, the Trump administration could eventually smooth a portion of the shortfall with extra product and other tariffs (see below) and codifying existing trade framework deals into actual agreed tariff rates. A full rejection of reciprocal and fentanyl tariffs would be more difficult to fully replace, which would worsen the 2026 budget deficit by around 0.5% of GDP to 6.5%, with the Tax foundation estimating IEEPA would have raised USD137bln in 2026 (here). This would reduce Trump’s negotiating leverage with China and India and to a lesser degree Mexico and Canada.
· Section 232 and 301. These two sections have been used in the past and 232 is the basis for 2025 product tariffs on steel/cars etc. However, cost of living concerns has prompted the Trump administration to shelve pharmaceuticals tariffs. 301 is against individual countries, which were used in Trump’s first term and has investigations underway against China. The problem for an impatient Trump is that these require prior investigation and will take time that creates a short term vacuum.
· Section 122 and 338. Section 122 (1974 act) allows the president up to 15 percent tariff to address “large and serious United States balance-of-payments deficits.” This is for a maximum of 150 days and is not supposed to discriminate between countries i.e. China and India would get a lower rate relative to current levels. This has the merit of giving Trump bargaining power quickly, but only for months and the Trump administration has been very slow in turning the trade framework deals into actual trade deals. A 2nd alternative is the previously unused section 338 (1930 act), which authorizes the president to impose tariffs of up to 50 percent if another country is discriminating against U.S. trade. However, it is not clear whether this requires an investigation before implementation.
· U.S. voter and business worries. Though Trump has downplayed cost of living concerns, they remain a big issue for voters before the November mid-term elections and Trump tariff actions have been more measured in recent months for this reason. Meanwhile, businesses will be feeding back to the Trump administration that a further year of new and multiple tariffs could hurt business sentiment outside the tech sector.
· China/India/Mexico/Canada and other countries. Some countries with existing framework deals could use a part or full rejection of reciprocal tariffs to enhance their negotiating hand with the U.S. on outstanding issues. However, this is a delicate game and the EU/UK/Japan/other Asian countries would likely be reluctant to break the framework deals to try to get major new concessions. This would still leave the Trump administration bogged down in trying to codify existing framework deals. China and India do not have framework deals and any Supreme Court ruling could see them with a better position than currently, but the Trump administration could use section 122 or 338 threats and implementation to regain negotiating leverage and then consider section 301 action. This would be messy for Trump, especially as it could weaken him before the expected visit to China in April. Brazil and S Africa would also benefit, but the Trump administration has more issues with them that will not be quick to resolve. The U.S. negotiating position with Canada and Mexico would be undermined less, as a lot of goods are exempt from reciprocal tariffs under USMCA and the U.S. could take a tougher stance in the 2026 USMCA renegotiations (here).