Weekly Global Economic Update
US Supreme Court disrupts the global trade regimeGlobal investors recently absorbed three important news items. First, the US Supreme Court ruled that the US tariffs implemented on the basis of a national emergency are unlawful. Second, the US government reported a sharp slowdown in economic growth in the fourth quarter.
And third, the government reported that inflation accelerated in December. Normally, the reports on GDP growth and inflation would have led to a decline in equity prices. But this was overshadowed by the tariff news. Thus, equity prices increased modestly. Still, the tariff news creates an added element of uncertainty. Let’s first look at the ruling by the Supreme Court.
The US Supreme Court, in a six to three ruling, said that the tariffs implemented by the Trump Administration on the basis of the International Emergency Economic Powers Act (IEEPA) are unlawful. IEEPA was passed in 1977 and gives the president authority to restrict economic relations with other countries when there is a national emergency.
The US Supreme Court, in a six to three ruling, said that the tariffs implemented by the Trump Administration on the basis of the International Emergency Economic Powers Act (IEEPA) are unlawful. IEEPA was passed in 1977 and gives the president authority to restrict economic relations with other countries when there is a national emergency.
The law makes no reference to tariffs. The administration implemented multiple tariffs on almost every country in the world in 2025. It was the first time that tariffs were implemented on the basis of IEEPA. In the court hearing, the administration argued that the US trade deficit represents a national emergency and that tariffs are needed to reduce the deficit
The plaintiffs argued that a decades-long persistent trade deficit is not an emergency and that the law was not meant to be used in this manner. The court agreed with the plaintiffs.
Many business groups welcomed the ruling and some expressed expectations that companies might be reimbursed for tariffs already paid. However, the court offered no indication as to whether refunds will be required. Meanwhile, there are already legal proceedings in which some companies are seeking refunds.
Many business groups welcomed the ruling and some expressed expectations that companies might be reimbursed for tariffs already paid. However, the court offered no indication as to whether refunds will be required. Meanwhile, there are already legal proceedings in which some companies are seeking refunds.
This process will likely take a long time and will most likely be done on a case-by-case basis. If a substantial amount of money is refunded, it will add to the government’s fiscal deficit and will have a stimulative impact on the economy. On the other hand, it is likely that the administration may pivot toward other legal tariffs. In that case, the fiscal impact of the ruling could be muted.
During the past year, the administration used tariffs and the prospect of higher tariffs to pressure other countries to make trade deals. In most such agreements, the United States left in place historically high tariff rates, often in the range of 15% to 20%. Yet it refrained from even higher tariffs that had been initially proposed. In exchange, other countries agreed to reduce their tariffs.
During the past year, the administration used tariffs and the prospect of higher tariffs to pressure other countries to make trade deals. In most such agreements, the United States left in place historically high tariff rates, often in the range of 15% to 20%. Yet it refrained from even higher tariffs that had been initially proposed. In exchange, other countries agreed to reduce their tariffs.
More importantly, other countries agreed to boost purchases of US goods and, in some cases, agreed to invest more in the United States.
With the IEEPA tariffs gone, it is not clear what will happen to these agreements. The United States may no longer have the kind of leverage it did, although it is widely expected to pivot to a new set of legal tariffs.
What are the ways in which the United States might implement tariffs to replace the revenue from the IEEPA tariffs? Although the US Constitution gives the US Congress sole authority to impose tariffs during peacetime, the Congress has passed four laws giving the president authority to impose tariffs under limited circumstances. However, two of these laws have remained dormant for 50 and 100 years, respectively. Here are the laws that can be used.
Section 122 of the Trade Act of 1974 gives the president authority to impose tariffs to address a balance of payments deficit. However, the law has never been used. Moreover, the United States does not have a balance of payments deficit. Rather, it has a trade deficit. These are very different things. When a country has a fixed exchange rate, it must intervene in currency markets to maintain the fixed rate.
What are the ways in which the United States might implement tariffs to replace the revenue from the IEEPA tariffs? Although the US Constitution gives the US Congress sole authority to impose tariffs during peacetime, the Congress has passed four laws giving the president authority to impose tariffs under limited circumstances. However, two of these laws have remained dormant for 50 and 100 years, respectively. Here are the laws that can be used.
Section 122 of the Trade Act of 1974 gives the president authority to impose tariffs to address a balance of payments deficit. However, the law has never been used. Moreover, the United States does not have a balance of payments deficit. Rather, it has a trade deficit. These are very different things. When a country has a fixed exchange rate, it must intervene in currency markets to maintain the fixed rate.
This leads to either balance of payments deficits or surpluses. Yet the United States allows the dollar to float, in which case the balance of payments is roughly zero. Meanwhile, section 122 requires that the president determine that there are “fundamental international payments problems” before imposing tariffs. President Trump said he is imposing an across-the-board 10% tariff in accordance with section 122. These tariffs will go away in 150 days unless Congress extends them.
Section 338 of the Tariff Act of 1930 authorizes the president to use tariffs to retaliate against foreign discrimination against US goods. This authority was part of the Smoot Hawley Tariff Act and has never been used.
Section 338 of the Tariff Act of 1930 authorizes the president to use tariffs to retaliate against foreign discrimination against US goods. This authority was part of the Smoot Hawley Tariff Act and has never been used.
It was meant to deal with countries that treat US goods differently from goods coming from other countries. Given the multilateral trade agreements that have been agreed upon in the past half century, many of which bar discriminatory behavior, this is really a moot point.
Section 232 of the Trade Expansion Act of 1962 authorizes the president to restrict imports of goods when their importation threatens US national security. This authority is currently in use to limit imports of steel, aluminum, and semiconductors, which are deemed vital to US national security.
Section 232 of the Trade Expansion Act of 1962 authorizes the president to restrict imports of goods when their importation threatens US national security. This authority is currently in use to limit imports of steel, aluminum, and semiconductors, which are deemed vital to US national security.
However, it would be difficult to make the case that imports of hundreds or thousands of products should be limited because of national security concerns. Excessive use of section 232 would likely lead to legal challenges.
Finally, section 301 of the Trade Act of 1974 authorizes the US Trade Representative (USTR) to investigate unfair foreign trade practices and recommend tariffs accordingly. This provision has been used extensively, but it is time-consuming. One recent example is the imposition of tariffs on some products from China due to violations of intellectual property protection.
Finally, section 301 of the Trade Act of 1974 authorizes the US Trade Representative (USTR) to investigate unfair foreign trade practices and recommend tariffs accordingly. This provision has been used extensively, but it is time-consuming. One recent example is the imposition of tariffs on some products from China due to violations of intellectual property protection.
If the administration attempts to implement across the board tariffs using section 301, it would likely be met with criticisms that the administration is simply attempting to replace IEEPA tariffs. A legal challenge would be very likely. Meanwhile, the administration said it plans to initiate new investigations related to this law.
Whatever path the administration chooses going forward, its range of options now appear to be more limited than when it used IEEPA. Once new tariffs are introduced, two things are likely. First, the preponderance of tariffs is expected to shift from being country-specific to product-specific.
Whatever path the administration chooses going forward, its range of options now appear to be more limited than when it used IEEPA. Once new tariffs are introduced, two things are likely. First, the preponderance of tariffs is expected to shift from being country-specific to product-specific.
Second, while the new tariffs will likely leave in place a very high average tariff rate, the specific impact on different industries and companies will vary and could be very different than previously. Until this happens, uncertainty is likely to remain.
What was the economic impact of the IEEPA tariffs and what will the impact be of removing them? A tariff is a tax on imports paid by the importer. Often, the importer will pass on the cost of the tariffs to their customers, whether they be consumers or other businesses.
What was the economic impact of the IEEPA tariffs and what will the impact be of removing them? A tariff is a tax on imports paid by the importer. Often, the importer will pass on the cost of the tariffs to their customers, whether they be consumers or other businesses.
When this happens, inflation rises and the real (inflation-adjusted) purchasing power of consumers declines. Moreover, tariffs on globally competitive companies increase their costs of doing business, thereby potentially reducing their competitiveness in global markets.
In the case of the IEEPA tariffs, inflation for traded goods did increase, but not as much as anticipated. In many cases, companies absorbed the cost to maintain market share. They either took a hit to their profits, or they reduced other costs such as labor. Thus, the tariffs were not as impactful as had been anticipated. Further passthrough in 2026 had been anticipated.
In the case of the IEEPA tariffs, inflation for traded goods did increase, but not as much as anticipated. In many cases, companies absorbed the cost to maintain market share. They either took a hit to their profits, or they reduced other costs such as labor. Thus, the tariffs were not as impactful as had been anticipated. Further passthrough in 2026 had been anticipated.
Perhaps the biggest impact of the IEEPA tariffs was uncertainty. That is, the rapid and unpredictable manner in which tariffs were introduced, postponed, and reversed created an uncertain business environment for globally exposed companies. This, in turn, likely caused many companies to postpone investments in their supply chains.
The IEEPA tariffs had a big impact on trade flows. In the past year, US imports from China, Japan, the European Union, and many other countries declined sharply due to tariffs. For US trading partners, this development led to a significant shift in policy. Many countries sought to liberalize trade with countries other than the United States and succeeded in boosting export growth to other countries.
The IEEPA tariffs had a big impact on trade flows. In the past year, US imports from China, Japan, the European Union, and many other countries declined sharply due to tariffs. For US trading partners, this development led to a significant shift in policy. Many countries sought to liberalize trade with countries other than the United States and succeeded in boosting export growth to other countries.
In the case of China, for example, aggressive pricing of exports led to strong growth of exports to non-US countries. In addition, many countries shifted toward efforts to stimulate domestic demand to offset the loss of exports to the United States. This was true of China, Japan, and several European countries. The end of IEEPA tariffs is therefore likely to especially affect China and Brazil, the two countries with the highest tariffs imposed by the current administration.
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