Reciprocal Tariffs: Supreme Court Strike Down

The Supreme court has ruled against President Donald Trump reciprocal tariffs   What will be the impact?   

Figure 1: Cumulative Tariff Revenue (USD Blns)

Source: U.S. Treasury

A couple of points are worth making.    

·        Politically this is a big disappointment for the Trump administration and Trump has already voiced his outrage.  The Trump playbook will follow through with threats of replacement tariffs (see below); anger and also distraction (e.g. dialing up Iran and/or Cuba tensions).  Additionally, it appears that the prospect of a tariff refund could have to be shelved and Congress is unlikely to be in a mood to undertake new tax cuts without rebuilt tariff revenue given the fiscal situation.

·        For the budget deficit the CBO had forecast USD418bln for custom duties in 2026 from the 10yr forecasts released this month.  The Supreme court ruling should initially knock this down by around USD200bln, but this would only increase the budget deficit marginally from 5.8% to 5.9% of GDP. Additionally, the Supreme court has left the decision on rebates to lower courts, but this could add a further USD170bln to the deficit.  This is disappointment for the Treasury market, but not a killer blow. Trump will also look to collect revenue by other tariffs and codifying existing trade framework deals. This will also mean that the economy does not get a boost from lower effective tariffs.

·        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 was used in Trump first term and has investigations underway against China.  The problem for an impatient Trump is that these require prior investigation and this take time that create 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 is now at a lower rate relative to current levels for EU/Japan and other major trading partners.  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 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.  This could curtail the scale of any new tariffs implemented.

·        China//Mexico/Canada.  Some countries with existing framework deals could use the 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/India/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 does not have a framework deal and the Supreme court ruling sees 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 will 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.  Even so, the U.S. may not be able to get great results in the 2026 USMCA renegotiations (here).