Earlier this week, the U.S. Supreme Court heard a case
challenging the current administration’s tariff policy. Our Head
of Fixed Income Research and Public Policy Research explains the
potential magnitude of the case’s outcome for markets.
Read more insights from Morgan Stanley.
----- Transcript -----
Michael Zezas: Welcome to Thoughts on the
Market. I'm Michael Zezas, Global Head of Fixed Income Research
and Public Policy Strategy.
Today, we discuss the challenge against tariffs at the Supreme
Court and how it might affect markets.
It’s Thursday, Nov 6th at 11am in New York.
This week, the U.S. Supreme Court heard arguments about the
legality of most of the tariffs implemented by the Trump
administration. Investors are paying close attention because if
the Supreme rules against the administration, it could undo much
of the four-five times tariff increase that’s taken place in the
U.S. this year. That would seem to set up this hearing, and
a subsequent ruling which could come as early as this month, as a
clear market catalyst. But, like many policy issues affecting the
economic and markets outlook, the reality is more
complicated.
Here’s what you need to know.
First, there’s ample debate among experts about how the court
will rule. That may seem surprising given the court’s makeup.
Three of the nine judges were appointed by President Trump, and
six of the nine by Republican Presidents. But it's not clear
they’ll agree that the President used his executive power in a
way consistent with the law that granted the executive branch
this particular power. That law is the International Emergency
Economic Powers Act, or IEEPA. And, without getting into too much
detail, the law appears to have been designed to deal with
economic crises and foreign adversaries, which the court might
argue is not evident when considering tariffs levied against
traditional allies.
But, the next important point is that a ruling against the Trump
administration might not actually change much around U.S. tariff
levels. How is that possible? It's because the administration has
other executive tariff powers it can deploy if needed, and ones
that are arguably more durable. For example, Section 301 gives a
President wide latitude to designate a trading partner as
undertaking unfair trade practices. So this authority could be
swapped in for IEEPA. That could take time, as Section 301
requires a study to be submitted, but there are other temporary
authorities that could bridge the gap. So the U.S. can
likely ensure continuity of current tariff levels if it wants –
keeping tariffs more of a constant than a variable in our
outlook.
Of course, we have to consider ways we could be wrong. For
example, the administration could use a ruling against it to
re-focus instead on product specific tariffs through Section 232.
That likely would result in U.S. effective tariff rates drifting
a bit lower, alleviating some of the pressure our economists see
on the consumer and corporate importers, adding more support to
risk assets. But that scenario might come with some
volatility along the way if the administration feels the need to
float larger product specific tariff levels before settling on
more palatable levels – similar to what happened in April.
So bottom line, there’s more tariff policy noise to navigate this
year. It could bring some market volatility, and maybe even a bit
of upside, but the most likely outcome is that we circle back to
the approximate levels we are today. Setting up for 2026, that
means other debates – like how companies respond to tariffs and
capital spending incentives – are probably more important to the
outlook than the level of tariffs themselves. We’re digging in on
all that and will keep you in the loop.
Thanks for listening. If you enjoy Thoughts on the Market, please
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want everyone to listen.
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