Inside Tariffs’ Appellate Court Strikedown

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This year’s tariff saga took another turn late last Friday, as the US Court of Appeals for the Federal Circuit upheld the Court of International Trade’s May ruling declaring many of President Donald Trump’s tariffs illegally exceeded his presidential powers. The Court of Appeals, however, allowed the tariffs to stand through October 14 to give the US Supreme Court (SCOTUS) time to hear the case.

Unsurprisingly, pundits have already begun speculating around the potential decision, with prediction markets even launching contracts. None of this will help you know how the Supremes will rule, which defies forecasting. But we can explore the potential effects of both outcomes—an affirmation of the lower courts’ rulings and an overturning.

As a refresher, back in May, the US Court of International Trade (CIT) ruled Trump’s tariffs overstepped the presidential authority outlined in the International Emergency Economic Powers Act (IEEPA). Responding to a challenge from a small business (VOS Selections, later combined with several states), the CIT emphasized the Constitution grants Congress—not the president—power to impose tariffs unless it specifically delegated that authority. The Court said IEEPA didn’t do so. It also ruled the Trump administration’s justification for tariffs, like the stated goal of cracking down on fentanyl flowing into the US, didn’t directly address the declared emergency. This too, they ruled, was inconsistent with IEEPA.

The CIT’s decision issued a permanent injunction blocking enforcement of Trump’s tariffs. But the administration immediately appealed. The US Court of Appeals issued a stay pending said appeal, keeping tariffs in place, and hearings opened on July 31.

Fast forward to last week, and the US appellate court upheld the CIT’s ruling in a 7 – 4 decision. This ruling invalidates President Trump’s Executive Orders establishing baseline 10% universal tariffs, his Liberation Day “reciprocal” tariffs and those he imposed on China, Canada and Mexico aimed at combating fentanyl. Here again, the majority ruled nothing in the IEEPA grants US presidents unilateral tariff power on emergency grounds, noting the word “tariffs” is never cited in the legislation and deeming it unlikely Congress intended to implicitly cede its tariff authority. The Trump administration will appeal this ruling too, likely sending the case to the Supreme Court, with tariffs remaining in the interim.

So for now, the status quo persists, and we won’t know the outcome until the Supremes rule. But we can explore both possible scenarios.

What if the Supreme Court affirms the lower court rulings?

Here, we set aside entirely the political ramifications and focus on the market- and economic-related aspects. On paper, affirming the lower court rulings would eliminate the vast majority of Trump’s tariffs, which we think would clear some uncertainty hanging over stocks—particularly US stocks—and ease the heavy burden on every American business and consumer that consumes imported components or finished goods. We think this would ease the negative economic effects, both seen and unseen, of US tariffs.

But “on paper” isn’t always “in the real world” and may not be in this case, as Trump and administration officials have alluded for months to finding other policy levers to preserve tariffs if the courts strike these down. These include Sections 232, 301 or 338 of the Trade Act of 1974, which allow product-line or nation-specific tariffs on national security grounds.^[i] The procedure is much more cumbersome than IEEPA and these, too, could be challenged. But setting aside questions of legality, that would extend uncertainty and headaches for US businesses and households.

Trump and several administration officials have warned of significant economic fallout if the tariffs are confirmed to be illegal. For example, Trump said Wednesday the move may force the White House to begin unwinding this year’s international trade deals, warning America could “suffer greatly.”^[ii] He said similar things on social media after the oral arguments didn’t appear to go the administration’s way, and US Solicitor General D. John Sauer and Assistant Attorney General Brett Shumate—the administration's lawyers on the case—backed that up in a formal letter to the US Court of Appeals last month. In it, they argue, “If the United States were forced to pay back the trillions of dollars committed to us, America could go from strength to failure the moment such an incorrect decision took effect”, and “If the United States were forced to unwind these historic agreements, the President believes that a forced dissolution of the agreements could lead to a 1929-style result,” with dire consequences for the economy, markets and even programs like Social Security.

This seems exceedingly unlikely. While this outcome would force America to repay revenues collected from the overturned tariffs, this figure was at most around $90 billion as of July’s end.^[iii] A large number to the average person, yes. But this is roughly what the US government spent on health programs in July.^[iv] Plus, the bureaucratic process necessary to execute these payouts is likely very slow-moving—helping soften the burden. Some suggest these revenues are key in offsetting America’s budget deficit, which the recently enacted budget bill widened. But tariff revenue is coming in far short of expectations and unlikely to plug a projected $1.9 trillion (with a TR) deficit this year.^[v] Not that we even think it needs plugging, but still.

As for the implication that zapping the tariffs would upend Trump’s trade deals and their supposed investment commitments, those are hardly set in stone as it is, and basically none of the funds have been deployed under the investment commitments. There is little to nothing to repay on this front.

Lastly, as to that 1929 comparison, the severe economic contraction that followed this crash was chiefly caused by the Federal Reserve slashing money supply by nearly a third between 1929 and 1932, exacerbated by the imposition of sweeping Smoot-Hawley tariffs. Not their removal, as floated here, but their application. We struggle to see how avoiding a sweeping tax hike, which is what tariffs are, is an economic calamity.

What if SCOTUS allows the tariffs to remain?

Preserving extant tariffs would largely maintain the status quo for markets. And while we don’t think tariffs are economically good, they are known. Surprise tends to move markets most, and more than five months after Liberation Day, there isn’t much left. Stocks priced them and moved on.

So, the patchwork of “deals” likely continues governing trade. Those reached with the UK, EU, Japan and elsewhere leave tariffs higher than before, and some aren’t even close to the finish line, but they are generally known quantities. Investment provisions remain a big question mark, but we doubt those are some massive positive anyway. At this point, it remains unclear whether these are binding agreements, how much of the headline figures will actually be invested, which entities would direct them and where they would go. But we doubt this is a big deal either way—markets are used to spending packages with big dollar values fizzling out over years.

That said, we think this ruling would raise questions about the extent of presidential powers to govern trade. If the Supreme Court doesn’t check executive power in this case, then where are the checks as it pertains to international trade? And what are the long-term ramifications of broadening the executive branch’s economic reach? Markets may take some time to weigh the downstream consequences, which makes them worth thinking through.

But we aren’t there yet. So stay tuned, grab your popcorn if you enjoy oral arguments, and we will continue sharing our thoughts on the market implications. But as it stands, this saga looks highly unlikely to knock this bull market off course—regardless of the Supreme Court’s decision.