Theme of the Day: Supreme Court's tariff ruling adds new uncertainty

Donald Trump deepened uncertainty over global trade by imposing a new 15% tariff following a landmark US Supreme Court ruling that his previous policy was unlawful. The US president responded to Friday’s ruling from America’s top court by announcing a flat-rate tariff on the country’s trading partners, which is set to come into force on Tuesday. The new duty relies on the 1974 Trade Act and will allow Trump to set import restrictions for up to 150 days - after which the president needs approval from Congress. In its ruling, the Supreme Court said that the president had exceeded his authority in using emergency powers to impose his “liberation day” tariffs last year. The president may lean on alternative legislation to try to rebuild his tariff wall, but senior US officials said the defeat won’t unravel previous deals negotiated, as they tried to defend the administration’s assertive trade policies. China, India, and Brazil are the top winners from the court decision, according to Global Trade Alert, with New Delhi postponing a trip to the US aimed at finalizing their interim deal. The UK, meanwhile, risks being the biggest loser. The new tariff regime is all guaranteed to be temporary given the 150-day limit and the coming US midterm elections. The new tariffs slightly reduced the US’s effective tariff rate (from 10% to 9%) compared with prior to the Supreme Court decision. The new headline tariff rate of 15% would reduce the average weighted levy on Asian goods to 17% from 20%, while those on China would decline to 24% from 32%. The biggest fiscal headache is whether tariff refunds are owed, and to whom. Its estimated that the US has pocketed around $175bn in tariffs under the 1977 International Emergency Economic Powers Act, otherwise known as IEEPA — around half of its overall tariff revenue — and, theoretically, has to pay it back. Repayments will increase the fiscal deficit. The Committee for a Responsible Federal Budget estimates that the Scotus decision and refunding of tariffs would increase debt by $2.4tn through the 2036 fiscal year (this forecast was issued before Trump announced his 10% global tariffs). Economic uncertainty has always been the biggest cost of Trump’s trade policies. The Supreme Court ruling does not fix it. The Supreme Court’s verdict was widely expected and priced in. And, more importantly, tariff uncertainty has not fallen. In fact, it has probably got worse. Until there’s more clarity on the new policy baseline and on repayments, stocks, Treasuries, and the USD will continue to face the same headwind they have sailed into since last Apr. The initial market reaction to the decision and the President’s response was muted, probably because both were widely anticipated, at least in a broad sense. While some have called Friday’s Supreme Court decision a significant curtailment of presidential power, in practice it may have little impact if the President continues to invoke one legal authority after another and the courts continue to allow the effects of his actions to remain in place while they consider the issues. The President will still likely push for tariff rebate checks in his State of the Union address on Tuesday. While these payments could negate any budgetary benefit from tariffs this year, they would also boost consumer spending and overall GDP growth when they are paid out and for a few months thereafter.