The Supreme Court overturned the Trump administration’s signature economic policy on Friday, ruling by a 6-3 majority that the imposition of tariffs under the International Emergency Economic Powers Act was illegal.
The trade taxes included a minimum tariff of 10% with reciprocal tariffs ranging from 10% to 41% on countries that did not reach trade deals with Washington.
Presumably these tariffs will need to be partially rolled back if the ruling is followed. But the administration is looking to use other measures to preserve those trade taxes.
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President Trump, calling the ruling a “disgrace,” struck a defiant tone. He said he would seek to reinstate the tariffs, using executive orders under a variety of legal authorities. All national security tariffs, for example, would remain under Section 232, and he also said he would use Section 301 to open inquiries into unfair trade practices, which could result in other tariffs.
In addition, he announced a 10% global tariff under another legal path for tariffs, Section 122. Those tariffs would come on top of those already in place. But that approach requires Congress to approve the new levies after 150 days, which could face resistance as midterm elections approach.
Because of this uncertainty, the economic implications of the ruling are, for now, narrow.
Should the ruling be enforced by the administration and the U.S. Treasury set a timetable for trade tax refunds, however, the real economy will receive a significant boost through the trade, financial and currency channels.
There are several economic takeaways from the ruling.
Rule of law
First, the decision affirms that the rule of law governs economic institutions, contracts and pricing and is not subject to change absent the consent of Congress. The ruling should restore a semblance of certainty, removing a creeping sense of ambiguity that undermined businesses’ ability to make hiring, investment and borrowing decisions.
The ruling benefits domestic firms that have become frustrated with the unpredictability of the administration’s policymaking over the past year. The retail and manufacturing industries in general are poised to benefit; footwear and autos, in particular, are enormous potential winners from this ruling.
The refunds question
Second, the court did not clarify eligibility for refunds from the tariffs. Presumably, deciding on refunds will need to be done in lower courts and may take some time. For this reason, reaction across financial markets was muted after the ruling.
A boost for small and midsize firms
Third, the big winners from the ruling are small and medium-sized businesses that have borne much of the burden of adjustment to the tariffs. These firms’ margins were squeezed as they were forced to contend with higher trade taxes that were passed along inside dense and complex supply chains.
In the end, greater than 90% of these costs were passed along to consumers.
Should corporate executives choose to cut prices as refunds are passed along, that move would turbocharge consumption on the back of the large tax cuts currently in train. It would also improve the outlook on inflation, especially when it comes to imported intermediate goods that domestic producers use to finalize products for export and domestic consumption.
How much in refunds?
Fourth, our baseline estimate is that the federal government could have to refund anywhere from $100 billion to $130 billion in tariffs that have been collected. Trade taxes averaged 1.3% of total government revenue before 2025 and grew to 5.2% by January 2026. Any potential tariff refund would be a significant economic event.
To put this amount in perspective, tax cuts this year should inject anywhere between $100 to $150 billion in cash into the economy. Another $130 billion implies close to one quarter of a trillion dollars of effective stimulus, so the economic implications of this are significant. Yale Budget Lab thinks estimates that refunds might be as large at $175 billion.
The Treasury Department collected $269.1 billion in tariff revenues through January 2026, with most of it following the imposition of significantly higher levies in April.
The primary budget impact will be to push up the budget deficit by about one-half of one percent to approximately 6.6% of GDP.
According to our colleagues at the Yale Budget Lab, the average effective tariff stands at 16.9%. If the ruling is implemented that could cut it to 9.1%.
We think that means relief across the integrated North American manufacturing and food supply chains. The effective tariff rate of 5.96% for Canadian trading partners could be cut in half.
To be sure, the Supreme Court ruling does not mean tariffs will be completely rolled back.
The president’s statements following the ruling confirmed what his administration had been signaling in advance of the ruling: That they would pursue tariffs using different legal means.
Then there are the court challenges from businesses and the administration that are sure to follow Friday’s ruling. We expect more of those, not fewer, which may delay any potential corporate refunds.
More questions than answers
There are several questions that need to be answered before we get a sense of how the court ruling will affect the economy and rates.
- Will the Treasury Department facilitate any refunds and on what timetable?
- How would global investors price in such refunds, and will they push rates higher because of its impact on deficit dynamics?
- Will the corporate sector, which will be the primary beneficiaries of such refunds, cut prices, which would provide direct relief to what the public believes is a real affordability crisis?
- Will all the frameworks for agreements that the Trump administration has struck over the past year be declared invalid?
