Welcome to Thoughts on the Market.
I'm Mariana Salvatore, head of public policy research.
And I'm Arunima Sinha on the U.S. and global economics teams.
Today we'll be talking about the recent Supreme Court decision on tariffs, what it means for existing trade deals and where trade policy is headed from here.
It's Monday, February 23rd at 9 a.m. in New York.
On Friday, the Supreme Court ruled that the president could not use the International Emergency Economic Powers Act, or AIPA, to impose broad-based tariffs.
The ruling didn't give a clear signal on what it could mean for potential refunds, but the Trump administration said it plans to replace the existing tariffs, which is something that we'd long expected, first leveraging Section 122 to impose 15 tariffs for 150 days.
The president is simultaneously going to launch a few new Section 301 investigations to eventually replace those Section 122 tariffs, since they're only allowed to be in place temporarily.
So, Arunima, let's start by breaking down some of this tariff math.
What does this mean for the headline ineffective rate given where we are now versus before?
Before the decision, Ariana, we were at a headline tariff rate of about 13%.
What this decision does is that with the move especially to 15 for other countries, we think that it takes about a percentage point off of the headline tariff rate.
So we would go to about 12%.
And then we have another percentage point coming off just because of the shifts in trade patterns.
And so, instead of a headline tariff rate of about 13, we think that we're going to be at a headline tariff of just about 11.
But that's really just related to the Section 122s.
And as you noted, this is only going to apply for the next 150 days.
So how should we be thinking about trade policy going forward?
I think we should view the 15 as probably a likely ceiling for these rates in the medium term, in particular because this 150-day period expires sometime around the summer, so even closer to the midterm elections.
And as we've been saying, politically speaking, it's unpopular to impose high levels of tariffs.
We've also been saying that the president will continue to lean on trade policy as his real, only way to address the affordability issue for voters, which is something that we've actually seen on the policy side for the past few months with the imposition of exemptions, more trade framework agreements, etc.
So really, I think this is just another way for him to continue leaning on this policy avenue.
But in that vein, let's talk about specific pockets of relief.
What are we thinking about some of their findings on a sector level?
So let's tie this into the affordability aspect that you mentioned Arianna, and specifically using the consumer goods sector.
What we think is that with just in the near term period, with the Section 122s applying for different consumer goods categories, we could see tariff rate differentials go down.
So they could be anywhere between one to four percentage points lower across different categories.
But what we also think could happen is that once we get beyond the 150-day period and there are no additional sector tariffs that go on, so the 232s or the 301s, particularly for this particular sector, we could see some of the largest tariff relief that we're expecting to see.
So, for example, apparel and accessories could see something like a 16 to 17 percentage point tariff drop.
So that particular part, I think, is important, just the upside risks to consumer goods.
But that, of course, brings us to the question of bilateral trade deals and how they come into play.
What do you think about that, Ariana?
Yeah, so I think when it comes to the bilateral deals, as we mentioned, there's some opportunities for relief depending on the sectors and the type of tariff exposure by country.
As you mentioned, the consumer goods are a good example of this.
So, in general, I think that trading partners will have little incentive to abandon the existing deals or framework agreements, just given that the president and the administration have messaged this idea of continuity.
So replacing the IEPA tariffs with a more durable, legitimate legal authority.
But what's notable is that many of our trading partners are actually now facing potentially even lower levels than they were before, even with the increase to 15 on the 122s from 10 over the weekend.
In particular, many countries in Southeast Asia are actually now facing lower tariff levels, since they were somewhere in the range of 20 or maybe even 25 before.
But as I mentioned, the export composition of these countries matters a lot.
So Vietnam, for example, most exports are subject to the 20% tariff because of the IEPA exposure.
This ruling is more meaningful than somewhere like South Korea, where the exports are more exposed to the Section 232 tariffs based on the export composition.
And that's a level, remember, that's not changing as a result of this ruling.
So that's how we're trying to disaggregate the impact here.
Now, my last question to you, Arunima, what does this all mean for the macro outlook?
As we mentioned, refunds weren't addressed in this ruling.
We've sketched out a few different scenarios, most of which lean toward a long lead time to eventually paying back the money, if and when the administration is actually in fact mandated to do that.
But it's safe to say in the near term that we aren't going to see much action on that front.
That probably means status quo.
But why don't you put a finer point on what this means for the macroeconomic outlook?
That's absolutely right, Arianna.
For the very near term, in the second quarter, we don't think we're going to be very different from what our baseline expectation is.
In the third quarter and in the last part of this year.
There could be some upside risks, especially once the timeline on the 122s run out.
They're not extended and the different sector and country investigations take longer to implement.
So there could be some upside risks to demand.
Consumer goods, for example.
If there were to be some sort of an incremental tailwind to corporate margins, that might lead to better labor demand from these companies.
There could be additional goods disinflation at which support just purchasing power.
So both of those things could be some incremental uplift to demand relative to our baseline outlook.
But then the last thing I think just to emphasize from our perspective is that we do think that there is some sort of a near-term ceiling about how high effective tariff rates can go.
We don't think that we're going to be going back to Liberation Day tariff rates in the near term, or even in the latter half of this year.
Because, if history is any guide, many of these investigations are going to take time and that full implementation may not actually occur before early 2027.
Makes sense.
Arunima, thanks for joining.
Thanks so much for having me.
And thank you for listening.
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