Recent/upcoming developments… Assuming the Supreme Court bars the use of the International Emergency Economic Powers Act (IEEPA) to impose broad-based country-specific tariffs, questions arise around whether and how refunds will be available to the firms that have paid them this year (a total estimated at ~$90b at this point), as well as whether and how the administration will seek to replace the IEEPA tariffs using other tariff authorities, and whether Congress would weigh in to give the President new tariff authority.

Our outlook… If the IEEPA tariffs are ultimately blocked by the Supreme Court, we expect businesses would be entitled to proactively seek tariff refunds, as is typically the case when the government loses in tariff litigation, though the scope of the remedy would likely need to be decided by the lower courts (i.e., who is entitled to refunds, in what order, on what timeline, could they automatic, could they be prospective vs. retrospective).  To the degree businesses must affirmatively seek refunds, the process could be lengthy and incomplete, which suggests federal tariff revenue would gradually diminish over time.  Looking beyond IEEPA, in the scenario where the Supreme Court has thrown out the IEEPA tariffs, we expect the administration will impose tariffs via alternative mechanisms, something they have repeatedly threatened for months.  While this is likely to provide sufficient leverage to keep the reciprocal trade deals the administration has reached with other countries intact, the revenue it will yield will only manifest itself over time and is unlikely to be as robust as that of the IEEPA tariffs.

* If the IEEPA tariffs are overturned, the Trump administration has a few options to re-impose tariffs, which numerous Trump administration officials, like Commerce Secretary Lutnick and USTR Greer say is possible.  One option would be to impose Sec. 122 tariffs, which allows the President to impose a 15% tariff to address balance of payment issues for up to 150 days, which Congress could choose to extend.  Trump could also impose Sec. 338 tariffs, which allows the president to impose broad based tariffs if the President determines that a foreign country has imposed an “unreasonable charge” or otherwise disadvantages U.S. goods.  Sec. 338 has never been used before and would likely be subject to legal challenge.  Finally, Trump could impose Sec. 301 tariffs to replace IEEPA tariffs.  Sec. 301 tariffs require an investigation but have proven impervious to legal challenges.  For reference, Trump imposed his first-term China tariffs under Sec. 301 after a one-year investigation.

* The most likely tariff action Trump would take if IEEPA is thrown out is to impose Sec. 301 tariffs on a multitude of countries.  Even if the administration abbreviates the year-long process that its first term Sec. 301 took, it is still likely that the required investigation would mean tariffs are not imposed until Q3/4, and the more cumbersome nature of this process would likely mean tariffs would only be imposed on a subset of the countries currently subject to IEEPA tariffs.  This suggests that tariff revenue would be lower than it is currently and will be delayed.  Many are suggesting that Trump could use Sec. 122 as a “bridge” while the Sec. 301 tariffs are being readied but it will be somewhat cumbersome to initiate two different processes and could require somewhat different justifications, thereby making this bridge scenario more of a possibility than it is a clearly likely course of action.  To the degree the administration uses Sec. 122 as a bridge, tariff revenue could begin flowing more quickly.

* Trump will face a more adverse political environment if he tries to impose a new round of tariffs, which could cause him to move more cautiously and selectively than would otherwise be the case.  His approval rating on the economy is lower than was the case going into the 2018 midterms where Republicans lost 41 House seats (35% now vs. 50% then) and his tariff policies are not popular (61% disapprove vs. 38% approve).  The VA and NJ Democratic gubernatorial candidates won an outsized victory last night (15%/13% margins vs. 6% for VP Harris in those states) and both ran on a message that focused on lowering the cost of living, with specific attacks on Trump’s tariff policies.  Republicans will recognize these dynamics and will either overtly or more quietly try to dissuade Trump from spending the months leading into the midterms imposing new tariffs.  They are highly unlikely support legislation that gives Trump new tariff authority.  Over ten Senate Republicans have expressed concern about Trump’s tariffs this year and four have specifically voted with Democrats to overturn them.

* Our expectation is that the Supreme Court is likely to send the question of how refunds will be made available to the lower courts, and it will take until ~Q1/Q2 for the lower courts to issue a ruling.  It will take more time for the administration to establish an administrative process for the refunds, something for which they will not have an incentive to move quickly, suggesting that firms are unlikely to have the opportunity to apply for refunds until Q2/Q3.  The application and processing of refunds will take some time, which suggests that cash will not flow back to firms/into the economy until Q3/4.  The standard process for firms to seek refunds from tariffs requires that they do so within 180 days of payment, which is impractical in the IEEPA situation, so courts will likely need to require some new process.

* Various amicus briefs and other legal commentators have noted that tariff refunds would be burdensome for the government, but there is precedent for the U.S. refunding tariffs, meaning that refunds are likely if the IEEPA tariffs are overturned.  The U.S. government as recently as 2018 refunded tariffs when a tariff program called the Generalized System of Preferences was renewed after lapsing for ~two months.  In that case, the U.S. refunded duties collected on GSP merchandise (including items that had been liquidated) while the program was lapsed.  There are also examples of more limited refunds.  For example, U.S. Customs and Border Protection will refund 99.9% of an imported good if it is destroyed, re-exported, or used to manufacture a product that is later exported.  Earlier this year after Trump signed an executive order that banned stacking multiple tariffs on certain goods, CBP began processing refunds for those goods.

Watch for these developments… In the wake of Democratic victories in the VA and NJ gubernatorial races, we are watching for growing expressions of concern by Republicans about Trump’s tariffs as part of what will inevitably be their growing focus on reducing the cost of living.  Trump does not need to rely upon Republicans to impose new tariffs to replace his IEEPA actions, but he will likely account for the political environment and potentially take more modest actions as a result.  We are also watching for sentiment from major U.S. trading partners in the wake of the clearly adverse Supreme Court oral arguments on IEEPA.  We expect that they will remain largely committed to the deals they’ve already reached with the Trump administration given the threat of facing a new round of tariffs, but some may be emboldened to resist on marginal issues (e.g., Japan, South Korea, EU compliance with investment/purchasing commitments).