The tariff genie will not go back in the bottle

It appears increasingly likely that a swathe of US import tariffs, including the ‘reciprocal’ levies announced on ‘Liberation Day’ in April, will be declared illegal by the US Supreme Court. We assess what is at stake, the likely next steps from the Trump administration, and the implications for investors.

The Supreme Court is currently considering the legality of tariffs imposed by President Donald Trump under the International Emergency Economic Powers Act (IEEPA). These include tariffs that target individual countries. Those imposed under different provisions in US trade law, including sector-level tariffs, would remain unaffected.

The US Constitution gives Congress the authority to set tariffs, but over the years, powers to set them have been delegated to the president in certain cases, including where national security is at risk, or in response to unfair foreign trade practices. The IEEPA gives the US president authority to “regulate a variety of economic transactions following a declaration of national emergency.” Typically used to impose sanctions, the IEEPA has never before been used to impose tariffs. The Trump administration has pointed to the country’s trade deficit with the rest of the world to justify emergency powers, although the US has not recorded a goods trade surplus since 1975.

We expect a relatively rapid verdict from the Supreme Court

The Trump administration’s decision to impose ‘reciprocal’ country-level tariffs in April has taken average tariffs on US imports to more than 15%, a level not seen in nearly a century, raising costs for consumers and businesses. Still, the duties have raised government revenues, offsetting some of the concerns about the path of US government deficits under the ‘One Big Beautiful Bill’ passed in July.

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Lower US courts have already ruled against the legality of the IEEPA tariffs, and the case for upholding them was picked apart in the Supreme Court’s oral arguments in early November, which are usually a prelude to their final decision. Given the importance of the topic and tentative signs of alignment among the different judges, we expect a relatively rapid verdict from the Supreme Court, even in the coming weeks.

Our expectation is that the verdict will declare at least part of the IEEPA tariffs illegal. The oral arguments gave no clear indication of what a compromise on retaining part of the IEEPA tariffs might look like. One possibility would be allowing IEEPA tariffs where the justification for imposing them was in response to a failure – for example to crack down on the trafficking of fentanyl by China and other countries. Another compromise may involve allowing IEEPA tariffs, but only for a limited period of time.

Alternative means to the same end

What would a ruling against the IEEPA tariffs mean in practice? Firstly, tariff uncertainty would rise again for businesses. Secondly, US importers who paid duties in 2025 would potentially be able to claim refunds. We expect they would have to proactively do so, rather than receiving an automatic refund. In contrast, we think the very few foreign exporters who lowered their prices to maintain their US market share would have little redress. If all IEEPA tariffs were declared illegal and repaid, we estimate that refunds from the US Treasury for 2025 could total around USD 100 billion.

US importers who paid duties in 2025 would potentially be able to claim refunds

Crucially, we would also expect the Trump administration to quickly impose the same tariffs by alternative means, drawing on other provisions in US trade law. A probable first step would be to use Section 122 of the 1974 Trade Act to impose a blanket 15% tariff on all countries for a maximum of 150 days. One complication here is that these tariffs may also ultimately be challenged by courts, though we would judge this probability to be lower than with IEEPA. A challenge could arise since, like IEEPA, Section 122 has never before been used to impose tariffs and might be considered a stretch of the President’s powers under US law. But given the long delays between the courts potentially challenging tariffs under Section 122 and the Supreme Court adjudicating the case, we think the administration would be likely to proceed regardless.

After an initial recourse to Section 122, the administration could then use Section 301 of the same Trade Act to impose tariffs after those from Section 122 expire. Section 301 allows action against “unfair trade practices” and was used against China during the first Trump administration. Unlike Section 122, it would allow different tariff rates on a country-by-country basis. Section 301 requires evidence of a discriminatory policy against US goods through an investigation conducted by the US Trade Representative, but we believe many countries’ industrial policies could give sufficient grounds to proceed.

Alternatively, Section 232 of the 1962 Trade Expansion Act could allow the administration to impose specific sector tariffs on the grounds of national security. It has already been used this year for steel and aluminium tariffs, among many other sectors.

Ultimately, the risk of both IEEPA and any potential Section 122 tariffs being ruled illegal means tariff revenues for the US Treasury for 2025 and 2026 may eventually be lower than markets currently anticipate. Up to half may be forfeit. We would, however, expect all tariff revenues to flow again by mid-2026 on stable legal grounds, via Sections 301 and 232, as described above. These would not be subject to refund risks.

Our base case is that the current level of tariffs will ultimately remain broadly in place

Our base case is therefore that the current level of tariffs will ultimately remain broadly in place. While a ruling against the IEEPA tariffs could increase uncertainty, we had already factored this in as a key constraint to our macroeconomic outlook. We thus keep our current US growth and inflation forecasts unchanged; for 2026, we expect below-potential US growth of 1.7%, and inflation to remain above target at 2.8% on average, with the impact of tariffs on prices being increasingly felt early in the year, before being fully absorbed during the second half.

Limited market impacts, transitory rise in US Treasury yields

We would also expect a Supreme Court ruling against the application of IEEPA to have minimal market impacts, given the potential alternative means of imposing tariffs. Any such ruling could, however, be more positive for countries or regions paying high duties, such as some emerging markets. It would be less positive for the UK, where the effective tariff rate is currently below the 15% that could be imposed under Section 122.

We would expect European and Swiss equities to remain largely unaffected; Switzerland’s recently-secured framework deal with the US lowers tariffs from 39% to 15%. However, sector-specific tariff risks remain, including for pharmaceuticals, a major component of the Swiss stock index. 

For US Treasuries, the ruling may introduce some transitory upward pressure on yields if macroeconomic data point in the same direction. While the US administration can be expected to re-impose tariffs through other means, these will not be retroactive and therefore the refunds of tariff revenues deemed illegal will not be covered. That could influence Treasury issuance and temporarily impact US Treasuries. We expect the US yield curve to steepen, in other words we expect the difference between short and long-term yields to widen on such a ruling.

We still expect the dollar to weaken, and the Federal Reserve to lower interest rates to 3% by the end of 2026.