The Trade Tariffs Are Illegal: What Happens Next?

The U.S. Supreme Court ("SCOTUS") ruled that the tariffs imposed by the U.S. government were unconstitutional.

In its 6-3 ruling to strike down the tariffs, the Court applied two doctrines. The first, "textualism," holds that judges must focus on the precise wording of statutes when interpreting them — meaning the text of the law, as written by the legislature, is determinative, and judges should not substitute different words to reach a preferred outcome.

The second is the "major questions doctrine," under which the executive branch must have clear and unambiguous congressional authorization before taking actions of major economic significance. In the ruling, the Chief Justice emphasized that such authorization cannot be implied.

The law relied upon by the U.S. government to impose tariffs — the International Emergency Economic Powers Act (IEEPA) — was drafted for situations of war or for cases where the United States wished to take economic action against terrorist states. It was not designed to govern commercial trade disputes. Setting tariffs is the exclusive competency of the U.S. Congress. The application of the major questions doctrine was therefore sufficient for some justices to hold that tariffs imposed under IEEPA were unconstitutional. Other justices applied the textualist doctrine, writing that while IEEPA does permit the President to "regulate" transactions, the word "regulate" does not confer the power to impose tariffs; had Congress intended to grant that power, it would have said so explicitly.

While the Trump administration announced 15% trade tariffs following the SCOTUS decision, the reality is that these tariffs cannot remain in force beyond 150 days without an extension by the U.S. Congress. We view it as highly unlikely that Congress will grant such an extension, as some Republicans oppose the tariffs and the administration does not have the votes required for an extension to pass.

While the administration wishes to maintain trade tariffs, it will be limited to the following two legal instruments:

Section 232 of the U.S. Trade Expansion Act of 1962: limits imports that pose a threat to national security, insofar as such imports threaten the ability of U.S. companies to produce essential goods for defence and other critical industries.

Section 301 of the U.S. Trade Act of 1974: allows the U.S. to impose tariffs in response to unfair trade practices.

Section 232 will allow for tariffs in areas such as copper, aluminium, lumber, automobiles and automotive parts, and electronic devices.

Section 301 will permit tariffs in the following specific cases:

(a) Non-reciprocity in trade tariffs (e.g., foreign countries maintain higher import tariffs on U.S. goods than the U.S. applies to theirs).

(b) Foreign companies benefit from government subsidies (e.g., Chinese electric vehicles).

(c) Foreign countries impose unfair trade barriers or restrictions (e.g., European restrictions on U.S. meat products due to the use of hormones).

Economists estimate that U.S. effective tariff rates will ultimately fall below 10% once the current 15% tariffs expire and only Sections 232 and 301 measures remain in force. This will be positive news for U.S. consumers and companies worldwide and will help reduce inflationary pressure.

While uncertainty remains around how affected companies will be compensated for previously paid tariffs, this is a domestic U.S. administrative matter and should not be a concern for investors or financial markets. We expect that the bilateral tariff agreements negotiated between the United States and its trading partners will be quietly wound down, as countries will prefer not to provoke the current American administration publicly.