Trump's Tariffs Face Legal Risk

President Trump’s tariffs have moderated since his April 2 “Liberation Day” announcement. The level of tariffs has been lowered from $670 billion to about $375 billion today. In our view, this policy is more likely to hurt growth than to stoke inflation. The tariffs also face real legal risk that could lead to more trade uncertainty in the weeks and months ahead.

Trump’s Tariffs Face Legal Risk, But the Administration Has A Back-Up Plan

The president created real economic risk on April 2 by putting nearly $700 billion in tariffs on the table. In our estimation, the effect of leaving the initial tariffs in place would have been to shave several percentage points off GDP and put the US economy into a recession. The strong financial market response, coupled with Trump’s falling approval ratings on the economy, seemed evidence that he was burning his hand on the stove with that policy.

As a result, the level of tariffs was lowered from $670 billion to $270 billion and Congress was given time to mitigate the negative impact of the tariffs by passing the One Big Beautiful Bill Act (which provides tax cuts for consumers and businesses). Recession risk fell, as shown in the chart below, once Congress enacted the tax bill. The bill’s $280 billion of new tax cuts over the next 12 months helped significantly to offset the tariffs.

Since the bill passed, tariffs have increased another $100 billion to about $375 billion.

 Although the president has yet to announce tariffs on semiconductors and pharmaceuticals, those proposals are being watered down with exemptions for companies that manufacture in the US or build with the intent to do so. The effective tariff rate is, therefore, tracking below 15%—despite estimates in the press that the effective tariff rate is closer to 18% or 19%. By our measure, an 18-19% rate would require $560-600 billion in tariff revenue over 12 months, which is far more than is being implemented.

We expect the Court of Appeals for the Federal Circuit to issue its decision shortly as to whether Trump can issue tariffs under the International Emergency Economic Powers Act (IEEPA).

In May, the lower court, the Court of International Trade, ruled that it was not permissable, and the administration appealed (note: only the tariffs imposed under IEEPA are being challenged, not sectoral tariffs on steel, aluminum, autos, copper, etc.). If the administration loses at the Court of Appeals, we expect an appeal to the Supreme Court, which could hear the case in October and possibly rule in January. Removal of the tariffs would be a significant capital market event. The court could also require the tariffs imposed under IEEPA to be rebated, which could amount to $100bn in fiscal stimulus being injected into the economy over a period of time (and a corresponding deficit increase).

Still, even if the tariffs are ruled unconstitutional, the White House has a back-up plan to reimpose the tariffs through other authorities that have a stronger legal footing.

The drawback for the administration is that it would be a less efficient process than declaring a national emergency. Therefore, if the courts rule against the IEEPA tariffs, tariffs would not go away completely, but it would result in significantly more trade uncertainty over the coming months.

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