What’s next for the tariff regime?

Donald Trump’s tariff regime is fraying. Initially, it appeared that bond and stock market turmoil was tempering the US president’s enthusiasm for tariffs, now it appears that it may be the law courts. At the end of May, the US Court of International Trade ruled that the administration did not have the authority to levy the vast majority of its tariffs, while a second federal judge also ruled that the Trump administration had misused the powers granted to the president by the International Emergency Economic Powers Act (IEEPA).

Both cases concluded that under the US Constitution, it is Congress that regulates commerce with other nations, and this is not superseded by the president's role in safeguarding the country. Another court has allowed the administration to retain the existing tariffs while it appeals the decision, but its free-wheeling approach is clearly under threat.

The administration has called for the cases to be heard by the Supreme Court. This is likely to occur in due course, either following the appeals court ruling, or via the Supreme Court’s “shadow docket”, where the court rules on emergency motions.

The first question is whether the Supreme Court will uphold the view that the administration has over-stepped in its interpretation of IEEPA. The Supreme Court is heavily weighted to Republican-nominated judges (six to three), and the current Supreme Court under Chief Justice Roberts has a history of rulings that uphold relatively strong presidential powers. Nevertheless, it is far from clear how the decision would go.

An alternative route?

A second question is whether the Trump administration would be able to implement tariffs in a different way. The loss of the IEEPA removes all the reciprocal tariffs – i.e. all those introduced on Trump’s Liberation Day chart – plus the 10% global baseline tariff, the fentanyl-related tariffs on Mexico, Canada and China, and the threatened 50% tariff on the EU. However, it would not remove the various steel and aluminium tariffs, which were implemented under different laws. As it stands, this would see the average tariff rate fall to 6.2% and the world’s finance ministers would breathe a sigh of relief.

However, Donald Trump is unlikely to be deterred from the central pillar of his trade strategy so quickly. While the removal of the IEEPA option would limit the implementation and adjustment of tariff rates at relatively short notice, other powers remain intact. For example, Peter Navarro, a key Trump adviser on trade, has suggested using Section 122 of the Trade Act of 1974. This would impose tariffs of 15%, while allowing time for country-specific tariffs to be developed. These would likely be sector-specific and require a consultation period before implementation. Congress would only be required to authorise the continued use of Section 122 tariffs after 150 days.

Other options are to pursue a more aggressive use of Section 301 and Section 232 tariffs. Section 232 tariffs are imposed on imports based on national security concerns, primarily to protect domestic industries from import competition. This is the law under which steel and aluminium tariffs have been introduced. Section 301 tariffs are imposed as retaliation against countries that engage in unfair or discriminatory trade practices that harm US businesses.

If Congress has greater power in setting tariffs it is also unclear whether they will share the President’s enthusiasm. The Republican majority is slim, and the tariffs do not command clear public support, even before the impact starts to show up in inflation figures. Many senators and congressmen will have an eye to their popularity in the midterm elections in 2026.

Likely impact

While markets have largely welcomed the latest news, it is difficult to see this as a win for business. Delays in the court are likely to prolong the agony for many companies, who are desperate for clarity on the final tariff outcome. For many, investment plans are – of necessity – on hold until there is greater certainty. At Aberdeen, our baseline view is that there may be a small further increase in tariffs to a level of around 13% (from 12%), even if IEEPA is struck down and the administration is forced to pivot to a narrower tariff strategy.

There are wider implications for those still in negotiations with the US on trade deals. This news may have strengthened their hand. If they know that the President will have a tougher path to imposing his tariff regime, they may feel less inclined to make significant concessions. Trump likes to talk about who holds the cards. This ruling leaves Trump with fewer cards.

Finally, the legal challenge to the tariffs could limit the additional revenue Trump generates to offset the tax cuts contained in his ‘Big Beautiful Bill’. As it stands, the House drafted bill would increase the deficit by around $3.1 trillion, but it could easily be higher if tax revenues fall short. The US government finances continue to be on a precarious footing.

Overall, tariffs are likely to remain a key feature of Trump’s policy mix. Even if the IEEPA ruling is upheld, the administration will have alternative routes to implement tariffs. But these will be slower and more targeted, and Trump may need to be more nuanced in his approach. However, it will extend the uncertainty for companies around the world and continue to create volatility across financial markets.

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