Court strikes down US tariffs, but trade war uncertainty continues

In an unexpected twist, a three-judge panel of the US Court of International Trade ruled unanimously that President Trump overstepped his power and declared the majority of his tariff hikes to be invalid. And in another twist, the US Court of Appeals, responding to an appeal by the Trump administration, paused that decision until it can hear further legal arguments. The losing party is likely to appeal to the US Supreme Court. 

As a backdrop, Trump declared the US fentanyl crisis and trade deficit to be national emergencies and imposed tariffs under the International Emergency Economic Powers Act (IEEPA). The federal court ruled that Trump lacked the authority to impose fentanyl-related tariffs on Canada, Mexico, and China, as well as tariffs that were announced on “Liberation Day.”

The court ruling doesn’t apply to product-specific tariffs, such as those on steel, aluminum, vehicles, and other products still being discussed, including semiconductors, pharmaceuticals, and aircraft. These have been imposed under a different, standard trade law and are likely to remain in place.

Impact of the ruling

This ruling will certainly impact ongoing trade negotiations between the US and many countries. We are already long in the tooth in the 90-day tariff pause and only a few countries have inked trade deals with the US despite the looming July 8 deadline. We wouldn’t be surprised to see a delay in trade deal announcements as countries take a wait-and-see approach on what the final ruling from a higher court will be.

It could be interpreted that Trump has been handed a losing card from the courts, that his negotiating leverage with other countries has been diminished, and that his administration is more likely to make deals. However, the light at the end of the tariff tunnel could be an oncoming train.

Tariff outlook: More uncertainty

It’s entirely possible that the Supreme Court rules in Trump’s favor, handing him back the power granted under the IEEPA. And even if the final judgement goes against the administration, Trump still has other trade levers to pull to enact his tariffs, specifically under Sections 122, 201, 338, 232, or 301 of US trade acts.

While the recent court ruling may have chipped away at Trump’s negotiating hand, we don’t believe that it reduces any uncertainty related to the ongoing tariff developments. It’s possible that we could see Trump escalate trade tensions further in response to the court’s ruling against him. It’s this uncertainty of not knowing what’s going to happen next that we fret about the most as it’s likely to reduce both business and household sentiment, which could lead to diminished capital expenditures and consumption behavior.

Investment implications

Our base case remains that we continue to be in a market environment punctuated by escalating and de-escalating tariff measures. Markets have recently rallied due to a “tariff de-escalation” narrative, though we continue to be wary of the economic headwinds to both growth and inflation that increased tariffs could bring.

Non-US assets have been increasingly attractive and may be poised for continued outperformance, in our opinion. We view this as an opportunity to diversify portfolios across regions and asset classes as well as to reduce concentrations. This may help weather volatility and also benefit from potential upside surprises.