Tariffs on Trial

Editors’ Note: MarketMinder favors no politician or political party, assessing matters solely for their potential market and/or economic effects. Our opinions are limited to the policy in question and should not be interpreted as endorsement or rejection of a party, administration or individual politician.

Seemingly the entire world’s attention turned to the Supreme Court Wednesday, as the US government’s appeal of lower court rulings that invalidate most of President Donald Trump’s tariffs opened. By most accounts (and we read many), it didn’t go well for the administration. While 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 shooting 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. Anything enacted with a simple stroke of a pen could be amended (raised, lowered, stricken, watered down) just as easily. This year’s tariffs, as we have written many times, were bad. But not as bad as markets initially feared in April tied to deals, exemptions, front-running and workarounds, fueling a recovery from the correction.

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)? 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.

The act never mentions the word “tariffs,” but it does grant the authority to “regulate trade” in an emergency declared by the president. Now, a tariff is a tax (one paid by American consumers and businesses). The Constitution is very specific about the authority to tax, and it is limited to Congress or when Congress expressly delegates it to the president. There are other laws allowing presidents to employ tariffs. But the key is they expressly use the word “tariffs.” The administration’s case, to put it basically, is that tariffs are justified regulation of international affairs, which courts have long given the president significant latitude in executing. In the administration’s view, this isn’t a matter of who controls the government’s purse strings. It is a matter of diplomacy. So, the question largely rests on this: Are these tariffs a revenue-raising tax or a regulation of foreign 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. Whether that ruling is right is the question before the justices now.

Tuesday, many justices seemed skeptical—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.”^[i]

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. 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 ….”^[ii]

In sum, The Wall Street Journal noted six justices appeared skeptical of tariffs, two were mixed and one (Justice Samuel Alito) appeared supportive of the government’s case, although even he raised some questions.^[iii] 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.”^[iv] CNN and Bloomberg both noted the justices’ strong skepticism of the tariffs’ legality in multiple pieces.^[v] 

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 favor of the tariffs. If so, this would extend the status quo, which isn’t economically ideal in our opinion but is widely known. Therefore, it likely wouldn’t sway markets much.

But many outlets increasingly see the court ruling against the government and upending the IEEPA-based tariffs. Headlines Thursday morning were filled with mentions over 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. Others noted the court could mandate the government refund revenue received under these tariffs, just under $89 billion as of September 23, the latest figure broken down.^[vi] 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.

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 favor such a ruling. That more headlines now air concerns over these matters is a plus for stocks. Media and headlines don’t dictate market direction, of course, but they can both reflect and influence the ongoing debate among investors—and help markets pre-price these opinions, views and forecasts. They help mitigate surprise! The more common discussion surrounding this appeal weighs all the potential outcomes, the better for stocks.

So while we can’t know how the court will rule, there are 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, that should fall in time.