On Tariffs, the Supremes Have Finally Sung

Editors’ Note: MarketMinder is politically agnostic, preferring no party or any politician. We assess developments for their economic and market implications only.

At long last, after several rumored decision days kept us hangin’ on, we have a Supreme Court ruling on President Donald Trump’s blanket and reciprocal tariffs: The Supremes ruled 6-3 that 1977’s International Emergency Economic Powers Act (IEEPA) didn’t give the president latitude to enact tariffs, rendering them unconstitutional.^[i] (We guess you can’t hurry the law.^[ii]) Stocks didn’t tank on the news, despite the White House warning voiding tariffs would upend the US economy and federal finances. Nor did they soar, despite investors’ broad belief (which we agree with) that tariffs are economically negative. The S&P 500’s 0.7% rise Friday was pretty ho-hum, consistent with a market that has long since priced all of this.^[iii]

From a near-term economic or stock market standpoint, Friday’s ruling isn’t very significant. The Justices declined to address whether tariffs collected thus far must be refunded, which means that issue will probably have to work its way through the courts separately.^[iv] Nor are tariffs going away immediately. The Wall Street Journal reported it could take “days or weeks for Customs and Border Protection to officially tell importers the levies are no longer in force.”^[v] Shipments crossing the border remain tariffed for now, so if you had your eye on a nice Scottish cashmere sweater or some fine Italian linen suiting for summer and were merely waiting for tariffs to vanish, it won’t suddenly be duty-free. In practical terms, the status quo persists.

Plus, not all tariffs are subject to this case. This ruling applied to all the tariffs enacted under IEEPA: the blanket 10% tariff, the reciprocal tariffs targeted at dozens of trading partners at various rates (including those enshrined in various trade deals signed since last April) and the tariffs on certain Chinese and Mexican goods tied to fentanyl trafficking. Those enacted under Section 232 of 1962’s Trade Expansion Act and Section 301 of 1974’s Trade Act, which allow limited tariffs on national security grounds or to address unfair trade practices, respectively, remain. That includes the steel and aluminum tariffs, auto tariffs and potential forthcoming semiconductor tariffs.

And those declared unconstitutional Friday probably won’t be “gone” long. The case was never about whether a president has any authority to enact tariffs unilaterally. It was about the specific and unlimited grounds Trump cited (IEEPA). He can replace them under other legal authority that rests on more solid constitutional ground. In a midday press conference, Trump announced he will apply a 10% blanket tariff via Section 122 of the Trade Act, which lets the president impose tariffs of 15% or less for up to 150 days, after which Congress must pass an extension. He also pledged to use Section 301 to explore and apply additional tariffs on certain countries, which seems like the route to re-imposing country-specific reciprocal tariffs. That process takes a little longer, but the result is the same. Tariffs aren’t dead and gone. Americans didn’t suddenly get a big, lasting tax cut.

None of this is a surprise. Trump and others in the administration said for weeks they would use alternate means of enacting tariffs if the Supremes ruled against them. So while we believe tariffs are negative for the economy (adding costs for consumers and businesses and making the supply chain more inefficient), this negative lacks the surprise power necessary to wallop markets. And tariff rates remain lower than threatened on last April’s “Liberation Day,” so stocks are still living in a reality that qualifies as better than expected. For stocks, which move on the gap between expectations and reality, that is crucial.

Yet there are also some positives. While stocks generally don’t weigh pure sociological matters, a Court ruling in favor of tariffs would have raised questions about the extent of checks and balances. We could see a scenario where markets had to reckon with whether and how future administrations would use longstanding alleged “emergencies” to enact sweeping new taxes. For the sake of argument, consider: Would the “climate emergency” let a future White House enact de-facto carbon taxes by executive order? Would an “income inequality emergency” in our allegedly K-shaped economy let a future president use emergency executive powers to alter income taxes or establish an otherwise unconstitutional wealth tax? By better defining that the letter of IEEPA is the law—and not an interpretation involving things that aren’t explicitly written into it—we get a limiting factor codifying that emergencies don’t justify broadly changing tax policy (and tariffs are a tax, full stop). America’s legal code is built largely on precedent. This limiting precedent, whatever you think of the administration or its policies, is a long-term plus, in our view.

Additional clarity on the trade front also helps. The outstanding legal challenge was a question mark hanging over businesses. Now the Q has an A. And we have clarity on the administration’s response (more tariffs). That likely eases questions over how trade deals would be affected if tariffs were struck down and whether the investment commitments would vanish. It seems not, and Japan made its first three US investments official yesterday (a gas-fired power plant in Ohio, an oil export terminal in Texas and a synthetic diamond manufacturing facility in Georgia). We doubt that would have gone forward if the pending Court ruling were a massive game changer, especially when the Justices had seemingly signaled their view during the oral arguments.

Since the initial tariff shock wore off last spring, businesses have been getting on with it. With a little more clarity, they can keep doing so. To the extent any were waiting to order parts, resources or inventory until the ruling was in, now there is no more waiting. Inventories added a bit to GDP growth in Q4, snapping a two-month slide. Having clarity probably enables businesses to continue rebuilding stockpiles, which filters through the transportation and warehousing industries. Modest tailwinds, to be sure, but worth noting.

Overall, we see this ruling as a very mild positive. It eases uncertainty, which frees up risk-taking. Seeing that disaster doesn’t ensue may also help sentiment among those who believed the administration’s arguments that striking down the tariffs would erase huge chunks of tax revenue and bankrupt the US by canceling the investment deals. Again, this isn’t a massive market driver. But having one less thing to stew over is always nice for stocks.