So… What Happens If the Supreme Court Rules the Tariffs Illegal?

It’s all in the Supreme Court’s hands now.

The Court will decide, likely soon, whether or not President Trump’s tariff regime is legal.

And it’s a really big deal.

Tens of billions of dollars in tax revenues this year are at stake, as well as trillions of dollars in future tax revenues. Trump’s foreign policy is also at risk. The tariffs have been the focal point of his entire second term, being used as negotiating leverage for everything from drug enforcement to oil sanctions enforcement. And depending on how the ruling goes, we could see a massive impact on the stock and bond markets… as well as the dollar.

So, what’s the story?

And more importantly, how do we position our portfolios for it?

What Say the Courts?

Back in May, the US Court of International Trade unanimously ruled that the Liberation Day tariffs were illegal. Tariffs are a tax that has to be set by Congress, and the International Emergency Economic Powers Act that President Trump used as justification doesn’t give the president carte blanche to set broad trade policy. As its name suggests, it’s designed to give the president room to maneuver during major emergencies like wars.

The US Court of Appeals agreed, ruling 7-4 that the tariffs were illegal… though allowing them to stay in place while the president appeals to the Supreme Court.

So, here we are.

How will the Supreme Court rule?

Your guess is as good as mine. The constitution is pretty clear that the authority to regulate international trade sits with Congress, but the Court has also been reluctant to really pick a fight with the president and tends to shy away from broad, sweeping pronouncements. For what it is worth, Bloomberg Intelligence gives it a 60% chance that the Supremes find the tariffs illegal.

Now What?

Let’s say that happens.

Now what?

The Treasury has collected $142 billion in tariffs this year. Does it have to pay all or most or that back?

What happens to tariff rates? Do they revert to January levels? Does the Court allow the tariffs to remain in place for some length of time to give Trump time to negotiate with Congress? Will Trump simply look for new legal justifications to set tariffs and start the entire song and dance again?

No one knows.

But let’s assume the most extreme case plays out. The Court rules all “reciprocal” and “fentanyl” tariffs illegal and orders the Treasury to refund the tariffs already collected to the American importers.

What happens then?

Winners and Losers

The obvious winners right off the bat would be the American importers who would immediately be $142 billion richer. This would be a massive relief to untold number of small businesses as well as the big boys like Walmart and Home Depot.

It would also effectively be a $142 billion stimulus program, the equivalent of sending every American man, woman and child a $400 check.

That’s a real shot in the arm for the parts of the economy that are struggling right now (which is pretty much everything outside of the tech sector).

There are a lot of moving parts, of course, but it would be broadly positive for the stock market.

It’s the bond market that might not take it so well….

Between now and the end of the year, the Treasury has to roll over about $3.6 trillion in maturing debt… and expects to borrow something in the ballpark of a trillion more.

The Trump tariffs were never going to come close to plugging that hole. But if the Treasury has to refund the money, it blows it $142 billion wider… and reduces future revenues as well.

It’s no coincidence that Treasury yields have been rising. Uncle Sam is a riskier credit than he used to be, and that’s getting priced into bonds. The 30-year bond yield came close to touching 5% just days ago.

It’s also no coincidence that gold is hitting new all-time highs. The yellow metal cracked $3,600 for the first time this week as investors are looking to hedge their dollar risk.

I don’t know how high gold goes. That remains to be seen. But I do know that it makes sense to have at least a little piece of your liquid net worth in an alternative store of value like gold.

Charles Lewis Sizemore, CFA