US Court Strikes Down ‘Liberation Day’ Tariffs

Summary

• The US Court of International Trade has ruled most Trump 2.0 tariffs as illegal.
• However, the Trump administration has appealed and is likely to get a stay of the court decision until the case reaches the Supreme Court, which may not happen until autumn at the earliest.
• Meanwhile, the ruling adds to economic uncertainty and weakens the administration’s leverage in bilateral trade negotiations.
• Even if it loses its appeal, the administration can still implement its tariff policies, though those will have to become more process driven and therefore predictable.

Market Implications

• I still expect two-three 2025 Fed cuts, against markets pricing two.

Court Strikes Down IEEPA Tariffs

The Court of International Trade just ruled that tariffs imposed under the International Economic Emergency Powers Act (IEEPA) are illegal (i.e., reciprocal tariffs imposed on 2 April 2 and the fentanyl-related tariffs on China, Canada, and Mexico, Table 1). But other tariffs imposed under Section 232 of the 1962 Trade Expansion Act (i.e., tariffs on steel, aluminium and automobiles) still stand.

The Court of International Trade is a federal court with nationwide jurisdiction that handles civil cases arising from US customs and international trade laws. The ruling was in response to two cases brought by a group of small business owners and a coalition of Democratic states. The court found for the plaintiffs that the IEEPA did not confer the administration’s tariff discretion.

Tariffs Likely to Remain Until Eventual Supreme Court Ruling

The US Court of International Trade gave the administration 10 days to vacate its tariffs, including the reimbursement of tariffs already collected.

The administration has appealed the decision. The Court of International Trade rulings can be appealed first at the regional circuit Court of Appeal and eventually at the Supreme Court. It is unclear when the Court of Appeal will hear the case. The Supreme Court will not hear any new arguments until the start of its October 2025 term, on 6 October.

Regardless, the administration is also likely to ask the Supreme Court to pause the Court of International Trade’s order, pending appeal. The Supreme Court will most likely grant the pause: It has already done so in the case of the firing of Board members at two independent Federal agencies.

Federal judges had ordered the administration to let the Board members stay in office but the Supreme Court issued an administrative stay, which paused the orders while the case proceeds through the appeals court and eventually the Supreme Court.

Economic Consequences

The ruling more likely delays rather than fundamentally changes the administration’s tariff policy. Short term, it reduces its leverage in bilateral trade negotiations that paradoxically reduces the chances of trade liberalisation. It also introduces additional uncertainty on tariff policies.

Long term, even if the ruling is confirmed on appeal, this will not end the Trump administration’s protectionist policies because it has several options outside of the IEEPA.

It could instead rely on Sections 232 and 301 that are slower and narrower. Imposition of tariffs would have to be preceded by a formal investigation by the Department of Commerce under Section 232 and by the USTR under Section 301. The USTR already has section 301 investigations underway on Chinese targeting chip dominance and dominance in the maritime, logistics and ship building sectors.

The Department of Commerce already has Section 232 investigations underway on copper, timber and lumber as well as chips and chip-making equipment, pharmaceuticals, trucks, critical minerals, and commercial aircraft and jet engines.

Neither law allows the imposition of universal tariffs, but they could target critical sectors, of which many are already under investigation. Targeting specific sectors could help the administration’s industrial policy become more focused.

Alternatively, the administration could seek a broad trade negotiation mandate from Congress. However, this could prove difficult as tariffs have proved unpopular with voters and the Republicans do not have a filibuster-proof majority in the Senate.

Also, should the ruling be confirmed, it would force the administration’s trade policies to be more process-driven, which would reduce their unpredictability.

Market Consequences

As of this writing, 9PM PST, US equity futures are up about 2%, 10yr and 2yr yields up 4bp and 2bp, respectively, and the DXY up 1.3% relative to before the announcement. The Dec 2025 FFR is up 2bp relative to before the announcement.

I think equity markets are overestimating the impact of the ruling.

First, the administration will likely get a stay of the court order until an eventual Supreme Court ruling, (i.e., nothing will change for some time).

Second, weaker US bargaining power in trade negotiations paradoxically could imply less trade liberalisation.

Third, it is unclear how the Supreme Court will rule, which adds to economic uncertainty.

Fourth, the administration will likely find alternative means to impose higher tariffs. Fifth, these could make tariff policy more process-driven and therefore more predictable, but this positive impact will only occur long term.

Therefore, I keep my Fed view of two-three cuts in 2025, against markets pricing 1.7.

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