Plan B-2
By Benjamin Picton, senior market strategist at Rabobank
US stocks closed higher on Friday following news that the Supreme Court had ruled 6-3 to uphold a lower court decision that found Trump’s signature tariff policy to be illegal. The court found that Trump acted beyond his authority by imposing tariffs under the International Emergency Economic Powers Act with the majority holding that tariffs are a branch of taxation and that the Constitution grants powers over taxation to Congress, not to the President. Critically, the Court found that IEEPA makes no specific mention of delegating tariff powers to the Executive and that there exists no precedent of IEEPA being used to levy tariffs.
Precious metals are higher in early trade, the DXY is down, US equity futures are pointing lower and Brent crude is down by almost 1%. Aussie yields are now bull-flattening after initially moving higher, but Kiwi yields are holding at higher levels following idiosyncratic strong retail sales data. Aussie stocks have opened weaker, but the Hang Seng, TAIEX and KOSPI are catching a bid, highlighting the winners-and-losers effect of shifts in tariff policy that has just delivered a boost to countries who previously had a comparatively bad deal.
Unsurprisingly, the administration reacted with disappointment to the decision but then moved quickly to impose new baselines tariffs of 10% - later increased to the maximum rate of 15% - using powers granted by Section 122 of the Trade Act. As regular readers would know, we have been pointing out for some time that this and other avenues exist – on firmer legal ground – for the administration to continue to pursue its tariff strategy. Other potential avenues include:
Section 232 of the Trade Expansion Act, which allows the President to impose tariffs of indefinite duration and with no cap if imports threaten national security. This requires a Commerce Department investigation finding that such a threat exists and would typically be applied on a sectoral basis.
Section 201 of the Trade Act, which allows tariffs up to 50% above existing rates for a duration of 4 years if imports cause or threaten serious harm to a domestic industry. This would require an International Trade Commission investigation, public hearings and would also likely be imposed sectorally.
Section 301 of the Trade Act, which authorizes uncapped tariffs in response to unfair foreign trade practices. This requires a US Trade Representative investigation, public hearings and consultation with the affected foreign government.
Section 338 of the Tariff Act allows tariffs of up to 50% on goods from countries imposing unreasonable restrictions on US commerce. The President can make this determination directly, but it has never been applied and could be subject to legal challenge.
Treasury Secretary Scott Bessent has already indicated that the administration is preparing investigations under Section 232 and Section 301 to expand tariff coverage.
That’s not to say that this isn’t a big spanner in the works. The ruling immediately raises the prospect that US importers may seek refunds on the $160-175bn (estimated) paid in tariffs collected under the illegal IEEPA authority. That’s bad news bears for the US fiscal position, which was already in dire straits, and should only add to the pressure on the US Dollar index where the “sell America” meme has once again been a theme this year. Bessent was adamant over the weekend that the combination of Section 122, 232 and 301 tariffs will result in virtually unchanged tariff revenue in 2026, but presumably the 2025 revenues are now a write off. Equity traders will now be pricing in the positive effects of prospective refunds against negative effects of potentially higher term premia.
There are also broader implications. While the Supreme Court ruled that the President cannot use IEEPA to impose taxes (including tariffs), the ruling does not overturn the long-standing interpretation that IEEPA can be used for more direct intervention to impose direct trade restrictions, including import bans, embargoes, asset freezes, restriction of financial transactions and sanctions on individuals or entire sectors. There is more than one way to skin a cat, and the alternative methods may prove more brutal than the one that has just been struck down.
It should also be remembered that the current account (of which the trade balance is a major component) is the inverse of the capital account. Scott Bessent is on a mission to fix external imbalances vis-à-vis China, so capital controls is another lever that exists in the realm of policy tools to tackle the problem. Needless to say, the implications of employing that particular tool for US yields and the role of the dollar in the absence of a compliant Federal Reserve are potentially unacceptable (at least for now). This remains a low-delta trade for the time being, but perhaps the delta rises as the US gains traction with its stablecoin strategy.
US tariff policy will continue to be a source of uncertainty for markets as traders attempt to price in the implications of what is still a movable feast. There is still some fog of war over what happens once the Section 122 tariffs expire in 150 days’ time (can they be momentarily cancelled and then re-applied?), over the implications for the US fiscal position (will the $160bn be refunded? Fully? Partially? When?), over the differing relative impact on trade partners (the first will be last and the last will be first), over whether previous sectoral exemptions will still apply, and over whether bilateral trade deals negotiated to alleviate IEEPA tariffs are still a thing (the US says yes, a cancelled Modi visit says maybe not).
All of this is likely to add cost for businesses who need to understand the new rules, litigate to recover illegal import duties and potentially recalibrate their supply chains (again). Central bank DSGE models will reduce this into an assumption of lower business investment and therefore lower productivity growth, but the experience so far (in the US, at least) has been just the opposite.
US Q4 GDP figures released on Friday were a big miss, printing at 1.4% annualized vs a consensus estimate of double that rate and a much hotter Q3 result of 4.4% annualized. Most of the miss came from a contraction in government spending, which was impacted by government shutdowns and is likely to rebound in Q1 of 2026, while the contribution of fixed investment to growth tripled from Q3. December PCE inflation rose by 0.4% on both the core and headline readings, taking the year-on-year core figure up two-tenths to 3% even as the market remains priced for at least two more Fed cuts this year.
Of course, looming over everything else in markets this week is the extensive US military buildup around the Middle East. The USS Gerald R Ford has now arrived in the region, meaning that there are now two carrier strike groups within striking distance of Iran. A near continuous logistics airbridge has been operating for days and the US has reportedly forward deployed a large share of its AWACS theatre command aircraft and available airpower. Several analysts are noting that this is the most extensive military buildup since the 2003 invasion of Iraq, which would be an awfully expensive negotiating tactic if Trump doesn’t intend to use it.
With tomorrow marking the 4th anniversary of the start of the war in Ukraine, it’s worth recalling how many analysts were saying in late 2021 that the Russian buildup on the Ukrainian border was “probably nothing”. The efficient market hypothesis took a big bath back then as it failed to factor in realpolitik. Surely by now we must realize that if plan A fails, there is always plan B-2.