U.S. Supreme Court overturns "reciprocal tariffs," what will happen next?

U.S. Supreme Court overturns "reciprocal tariffs," what will happen next?

After the Supreme Court overturned the legal basis of IEEPA tariffs, market focus shifted from “are tariffs still in place” to “will refunds be issued, how to change the legal provisions, and are trade framework agreements still valid.”

According to CCTV News reports, on February 20 local time, the U.S. Supreme Court ruled that the Trump administration’s tariffs on U.S. imports under the International Emergency Economic Powers Act (IEEPA) were “illegal.” At a subsequent press conference, Trump responded that he would sign an executive order that day to implement a “10% unified global tariff” under Section 122 of the Trade Act of 1974, and announced the start of multiple so-called 301 investigations.

Not all tariffs are affected

According to news from Chase Trading Desk, HSBC’s latest research report quoted key points of the ruling, noting that the Supreme Court determined that IEEPA does not authorize the President to impose general tariffs on imports on the grounds of an “emergency.” UBS added in its interpretation that Chief Justice John Roberts, writing for the majority, said: “IEEPA does not authorize the President to levy tariffs.”

This means that the tariff system built by the Trump administration using IEEPA in 2025—first imposing tariffs on Canada and Mexico, then expanding the “reciprocal/equal tariffs” to nearly all trading partners on April 2, 2025—has lost its core legal pillar.

But not all tariffs are affected. HSBC emphasized that this ruling does not impact:

  • Section 232 (national security, industry tariffs)
  • Section 301
  • Section 201 (safeguards, such as 2018 solar panels)

Tariff restructuring, not overturning

UBS believes most IEEPA tariffs can be reconstructed using other trade authorizations, as several U.S. government officials have recently mentioned.

Option One: No alternative sought. The administration could choose not to replace the overturned tariffs. In this scenario, the current estimated weighted average tariff rate (WATR) of 12.9% would drop to 7.2%. If this relatively lower tariff level persists (which UBS finds unlikely), the bank estimates that real GDP growth this year would increase by about 0.2 percentage points, and PCE inflation would decrease by about 30 basis points. In 2027, this would boost growth by about 0.1 points and reduce PCE inflation by about 20 basis points.

Option Two: Plan B However, as the bank previously noted, given the importance placed on tariffs as a key policy agenda (including recent investment deals linked to trade policy), a “Plan B” is expected. The administration has other options.

  • The government can use the so-called Section 122 to implement a 15% comprehensive tariff within 150 days.
  • They may use existing Section 301 investigation results.

A 10% global tariff is just transitional; is the 301 investigation the next card?

HSBC’s latest report also shows that Trump has announced that he will impose a 10% “across the board” tariff on all countries on the basis of Section 122, and will initiate multiple 301 investigations.

The bank explained that Section 122 can be used to address balance of payments issues. Features include: imposing temporary tariffs of up to 15% on all imported goods without consultation periods, but lasting no longer than 150 days.

  • No need for lengthy consultations like industry tariffs;
  • But the highest can only be temporarily implemented for up to 150 days;
  • “Uniform application to all countries” also means it’s less suitable as a negotiation lever targeting a single country.

HSBC’s core judgment: Section 122 is more like a “transitional plan.” Because it is “universally applicable,” it’s difficult to use it for “adjustable/threatenable” negotiations like IEEPA. The more likely path is: use Section 122 to hold the time window, push for the completion of 301 investigations, and then switch to a differentiated tariff system.

Will refunds come? Why could this drag into “years of litigation”

The market is most sensitive not to “nominal tariff rates,” but to whether already collected tariffs need to be returned, how much, and how.

HSBC cites estimates that by the end of 2025, IEEPA tariffs had generated about $133 billion in revenue; if this revenue is retroactively denied, the potential scale that might need to be refunded could reach $175 billion.

In dissenting opinions among Supreme Court justices, Justice Kavanaugh pointed out: “The U.S. might need to refund tens of billions of dollars to importers who paid IEEPA tariffs.” He also criticized the court for “not providing an operational path”: “The court today said nothing about whether and how the government should return the billions of dollars already collected.”

At the press conference, Trump sought to downplay the short-term impact: “The ruling didn’t discuss refunds.” He said the related issue “may likely take more than two years of litigation,” implying that the government has no immediate plans for large-scale refunds.

UBS further mentioned that Bloomberg reported that nearly 1,000 businesses had filed related cases in the Court of International Trade (CIT) to secure refund eligibility; CIT previously noted that even if tariffs have been settled, the court may order refunds through reliquidation. But the key is: eligibility, scope, and pace of refunds still need to be determined through further legal proceedings.

Do last year’s “bilateral framework agreements” still count?

HSBC points out: The Supreme Court ruling itself did not explicitly address various arrangements reached in the past year with the UK, EU, Japan, etc. In his dissent, Kavanaugh only reminded that the ruling “may bring uncertainty to these trade arrangements.”

More problematic is that these are mostly “framework agreements” rather than full trade agreements, presidents have no unilateral statutory authority to implement complete trade deals, and framework agreements themselves may not be strongly binding. HSBC cites an example: the “reduction to 15%” rate in the Japan framework agreement, according to their understanding of the executive order, still belongs under the IEEPA system—if IEEPA tariffs are ruled illegal, these “reduced post-IEEPA rates” may also become invalid.

Trump’s statement: Section 122 will apply “uniformly,” but “some agreements will remain, some will not.” HSBC’s interpretation: IEEPA rates in framework agreements may be replaced by the 10% unified tariff; parts involving Section 232 caps, etc., may continue—provided trading partners keep their commitments. But if the “higher IEEPA tariff threat” disappears, some countries may reassess their commitments.

What does this mean for the market: Four lines—fiscal, rates, dollar, risk appetite

1) Fiscal: After a surge in tariff revenues, “recapture risk” may emerge.

U.S. Treasury data show 2025 tariff revenues total $264 billion (about 0.9% of nominal GDP), significantly higher than 2024’s $79 billion (0.3%). HSBC says if IEEPA-related revenues are overturned retroactively, theoretically around $175 billion could “come into dispute.” But U.S. Treasury Secretary Bessent said at a Dallas event that as the administration switches to other legal tools, 2026 tariff revenue is expected to “hardly change.”

2) Rates: The core issue is the marginal increase in deficit and debt issuance needs.

HSBC believes potential refunds and future income declines will add pressure to the already high deficit, making the yield curve steeper, tightening swap spreads; but short-term volatility may be offset by “refund uncertainty + new tariff paths,” so directional movement may be relatively limited.

3) Dollar: Policy noise increases, soft bias strengthens.

HSBC says the ruling reinforces its “soft dollar” outlook. Though not entirely unexpected, U.S. policy uncertainty may help keep the dollar relatively weak.

4) Risk assets: HSBC’s “risk appetite view unchanged,” even a marginal positive.

HSBC believes the ruling has little impact on its “constructive” multi-asset view, and since alternative tools are less flexible than IEEPA, it may reduce “on-off” tariff volatility, providing a marginal improvement for the corporate decision environment.

 

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