If Trump's "reciprocal tariffs" are overturned, how will the market react?

If Trump's "reciprocal tariffs" are overturned, how will the market react?

A legal challenge targeting the Trump administration’s key tariff powers is prompting the market to anticipate potentially significant, albeit possibly short-lived, reversals in trade barriers.

According to Tracer Trading Desk, Citi stated in its latest report that market expectations for the Trump administration to win the tariff case under the International Emergency Economic Powers Act (IEEPA) have cooled notably. The initial signals from the Supreme Court's hearings are unfavorable, causing the prediction market to show the government's odds of winning dropping sharply from around 40% to 27%.

Citi believes that if the court ultimately strikes down the “reciprocal tariffs” imposed under IEEPA, a wave of trading excitement could ensue. Likely short-term market reactions include: lower inflation expectations, a rise in stock markets (especially small caps), and strength in certain emerging market currencies (such as the Mexican Peso and Brazilian Real). However, investors should remain cautious, as the government has other legal means to reimpose tariffs, meaning any market boost from tariff removal may only be temporary.

Citi's report highlights that the initial comments from judges at this week's first hearing on the IEEPA tariff case were perceived as unfavorable to the government. This was quickly reflected in prediction markets. Data shows that on the day of the November 5th hearing, the market's prediction of a government win fell from around 40% before the session to just 27% at close. This indicates that mainstream market sentiment is now leaning toward the Supreme Court overturning the IEEPA-based tariff policy. Progress in this legal challenge is currently a key variable affecting market mood.

Despite setbacks in court, the Trump administration has not exhausted all its options. Citi’s report emphasizes that even if IEEPA tariffs are ruled invalid, the government may still invoke other legal avenues to impose tariffs. Treasury Secretary Bessent, who attended the hearings, stated he remains optimistic about the outcome while revealing that the government is ready to employ other legal authorities.

These alternatives include:

  • Section 122: Allows for broad-based 15% tariffs for up to 150 days.
  • Section 338: Permits tariffs as high as 50% against countries that discriminate against U.S. commerce.
  • “Licensing fees” theory: Repacking tariffs as “licensing fees,” though this idea was challenged by some judges during the hearing.

This means that even if the immediate threat of IEEPA is removed, the shadow of tariffs does not disappear entirely—it’s just the form and timing that may shift.

Short-Term Winners and Losers: Beneficiaries of a Tariff “Window”

If IEEPA tariffs are overturned, who benefits in the short term? Citi’s analysis is as follows:

First, on a macro level, the U.S.’s Effective Tariff Rate (ETR) would drop sharply. The report estimates that the ETR in October rose to 12.5%, and could reach 15.3% if agreements are fully implemented. If IEEPA is struck down, the ETR is expected to retreat to around 9%.

At the country level, the biggest short-term winners would be economies most dependent on trade with the U.S. and most impacted by IEEPA tariffs. Citi’s analysis (considering baseline tariff rate, share of taxable goods, U.S. export dependence, and exports as a share of GDP) finds:

  • Biggest winners: Vietnam and Mexico.
  • Also benefiting: India, as the only major U.S. trading partner without a formal agreement, its tariffs could drop significantly from 50% (though currently reduced to 25% due to Russia oil sanctions).
  • Least benefited: The European Union and the United Kingdom.

Importantly, this “winner” scenario may be short-lived, as the government may quickly use other measures to reimpose tariffs.

Trading Roadmap: Markets Have Rehearsed “IEEPA Overturned” Playbook

For investors, the key question is how to trade this expectation. Citi’s report analyzes asset performance during the hearing day, when market sentiment shifted rapidly. Between 9:30 and 11:30 a.m.—the period when expectations for IEEPA’s survival plunged—market performance was as follows:

  • FX market: The Mexican Peso and Brazilian Real both gained, while the Euro was flat, closely matching the “winner” analysis above.
  • Stock market: Sentiment was positive, with the Russell 2000 small-cap index (more sensitive to tariffs) outperforming the S&P 500.
  • Inflation expectations: 1-year inflation swap rates fell over 5 basis points, reflecting investors quickly pricing in weaker inflation pressures from reduced tariff impact.

Risk Warning and DisclaimerThe market has risks; investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment goals, financial conditions, or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this article is at your own risk.