America’s Supreme Tariff Trial

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A huge swathe of financial coverage we follow globally turned its attention to the US Supreme Court Wednesday, as the government’s appeal of lower court rulings that invalidate most of President Donald Trump’s tariffs opened. By most accounts we saw (and we read many), it didn’t go well for the administration. Whilst we can’t know how the court will rule (or even when it will rule), there is something positive we see now: More and more coverage highlights the uncertainty the court’s striking down tariffs could bring. Markets pre-price widely known worries, so we suspect this means if the decision goes against the administration, the potential downside of associated unknowns should be fleeting, if it appears at all.

To be clear, we think tariffs are economic negatives and bad for stocks generally, injecting friction into global trade and a near-permanent air of uncertainty. This is especially true when they are enacted, as Trump’s were, outside of legislation, via Executive Order.^[i] Anything enacted with a simple stroke of a pen could be amended (raised, lowered, stricken, watered down) just as easily by this or a subsequent administration. We think this year’s tariffs, as we have written many times, were bad. But we think they have proven to be not as bad as markets initially feared in April tied to deals, exemptions, front-running and workarounds, fuelling a recovery from the global stock market’s correction.^[ii]

But whether tariffs are good, bad or less-bad-than-feared isn’t at issue in the Supreme Court. The case, consolidated from suits brought by several small businesses and US states, is about a legal question: Can the president employ sweeping tariffs on national emergency grounds using the International Emergency Economic Powers Act (IEEPA)?^[iii] This was the basis Trump used to enact the reciprocal tariffs announced on Liberation Day, as well as the fentanyl-and-border-security related ones on China, Canada and Mexico.^[iv]

The act never mentions the word “tariffs,” but it does grant the authority to “regulate trade” in an emergency declared by the president.^[v] Now, we see tariffs as taxes (taxes paid chiefly by American consumers and businesses). The US Constitution is very specific about the authority to tax, and it is limited to Congress or when Congress expressly delegates it to the president.^[vi] There are other laws allowing presidents to employ tariffs, but the key is they expressly use the word “tariffs.”^[vii] The administration’s case, to our read, is that tariffs are justified regulation of international affairs, which courts have long given the president significant latitude in executing. They argued this isn’t a matter of who controls the government’s purse strings.^[viii] It is a matter of diplomacy. So, the question largely rests on this: Are these tariffs a revenue-raising tax or a regulation of international trade?

Lower courts ruled that tariffs are a tax, unjustified under IEEPA, as Congress would have specifically cited that power if it wished to delegate it.^[ix] Whether that ruling is right is the question before the justices now.

Wednesday, many justices seemed sceptical to many onlookers we follow—regardless of party divide. We won’t recount aspects of all the questioning, but several justices from both sides of the ideological divide cited them as a revenue-raising tax. Justice Sonia Sotomayor said early on, “It’s a congressional power, not a presidential power, to tax. And you want to say tariffs are not taxes, but that’s exactly what they are. They’re generating money from American citizens, revenue.”^[x]

Other justices, including Chief Justice John Roberts, noted this seems like the kind of “major policy question” this court has held must be decided by Congress.^[xi] And in a lengthy exchange, Trump-appointed Justice Neil Gorsuch grilled US Solicitor General John Sauer on the separation of powers and later said, “The power to reach into the pockets of the American people is just different and it’s been different since the founding and the navigation acts that were part of the spark of the American Revolution ….”^[xii]

In sum, The Wall Street Journal noted six justices appeared sceptical of tariffs, two were mixed and one (Justice Samuel Alito) appeared supportive of the government’s case, although even he raised some questions.^[xiii] Fox News was more vague, but coverage noted “Congress may want to get started in addressing what [Justice Amy Coney] Barrett described as ‘the mess’ of reimbursement if the tariffs were found to be unlawful.”^[xiv] CNN and Bloomberg both noted the justices’ strong scepticism of the tariffs’ legality in multiple pieces.^[xv] 

Of course, there is no ruling yet. Matters can change upon further deliberation and reconsideration. Maybe these outlets’ interpretations of the justices’ positions proves wrong. Maybe the court comes back and rules unanimously in favour of the tariffs. If so, this would extend the status quo, which isn’t economically ideal in our opinion but is widely known. Therefore, we don’t think it would sway markets much.

But many outlets we monitor increasingly see the court ruling against the government and upending the IEEPA-based tariffs. Headlines Thursday morning were filled with mentions of the uncertainty that could ensue. Several noted the five laws Trump could use to legally enact similar tariffs, although most of them are subject to limitations, like mandated time delays and studies or expirations and maximum rates.^[xvi] Others noted the court could mandate the government refund revenue received under these tariffs, just under $89 billion as of 23 September, the latest figure broken down.^[xvii] With no clear mechanism to do so, the process here raises some questions. And, what of the deals struck to alleviate these tariffs? Trade partners face uncertainty and questions of their own, in our view.

We have long seen these matters as potential sources of uncertainty should the court rule against the administration’s appeal—especially since many market participants and businesses would favour such a ruling, potentially blinding them to unclear effects. That more headlines now air concerns over these matters is a plus for stocks, in our view. Media and headlines don’t dictate market direction, of course, but they can both reflect and influence the ongoing debate amongst investors—and help markets pre-price these opinions, views and forecasts, in our experience. We think they help mitigate surprise! The more common discussion surrounding this appeal weighs all the potential outcomes, the better for stocks, in our view.

So whilst we can’t know how the court will rule, we see positives emerging from the heavy coverage of the case itself. Yes, some uncertainty remains over how this case will go. But with the hearing underway and heavy coverage dissecting possible rulings and outcomes, we think that should fall in time.