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Trump Looks Likely to Lose at Supreme Court on Challenge to His Assertion of Emergency Tariff Authority. How Much Damage Would That Do to His Pretenses of Power?

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As many press outlets reported today, the case against Trump making sweeping use of emergency authority as his justification for imposing sweeping, often high, and often capricious tariffs did not go well for Team Trump in oral arguments before the Supreme Court on Wednesday.

Since expert commentary is likely to be forthcoming in the next few days, we’ll limit ourselves to a few big issues if the Administration loses. We think that this would be a very damaging result for Trump on multiple fronts. Supporters who point out that Trump can rely on other tariff powers to implement these levies are technically correct but often substantively misleading by not describing how limiting in scope and duration these other tariff authorities are.

We’ll first provide a brief update on the state of play. Then we will look at some of the big reasons why a Supreme Court defeat would trim Trump’s sails. It would take away his big bludgeon for bulling other nations. Domestically, the loss would throw the Federal budget into chaos. Many have also pointed out that parties that paid deemed-impermissible tariffs would be entitled to refunds. While that would seem obvious, expect the Administration to require those seeking monies back to file cases. And the decisions may not be as fast or tidy as those in the peanut gallery assume. A top Covington & Burling attorney once told me, “Anyone who says that litigation is anything other than a crapshoot is lying.” We’ll look at some potentially complicating factors.

Overview

A May post summarized the plaintiffs’ argument that won in the Court of International Trade:

The lawsuits were filed by US importers of foreign products and some US states, challenging Trump’s use of the International Emergency Economic Powers Act of 1977.

The lawsuits argued the national emergencies cited in imposing the tariffs – the trade deficit and the fentanyl crisis – were not an emergency and not directly addressed by the tariff remedy. The court agreed, and said by imposing tariffs Trump had overstepped his authority.

The ruling said the executive orders used were “declared to be invalid as contrary to law”.

The act states the president is entitled to take economic action in the face of “an unusual and extraordinary threat”. It’s mainly been used to impose sanctions on terrorist groups or freeze assets from Russia. There’s nothing in the act that refers to tariffs.

The decision means all the reciprocal tariffs – including the 10% tariffs on most countries, the 50% tariffs Trump was talking about putting on the EU, and some of the Chinese tariffs – are ruled by the court to be illegal.

The ruling was based on two separate lawsuits. One was brought by a group of small businesses that argued tariffs materially hurt their business. The other was brought by 12 individual states, arguing the tariffs would materially impact their ability to provide public goods.

Oddly, the appeals court ruled that the Trump tariffs had gone beyond his authority under IEEPA but did not suspend or overturn them.

Reuters’ recap of the day’s court action:

On Wednesday during oral arguments, Supreme Court justices cast doubt on Trump’s authority to impose tariffs under the 1977 International Emergency Economic Powers Act (IEEPA), which contains no references to tariffs – only language on regulating imports during national emergencies declared by the U.S. president.

“Based on the questions posed by the justices, the IEEPA tariffs appear to be in jeopardy,” said Damon Pike, a principal with BDO USA’s customs and trade services practice.

He added that all the court’s justices, except Samuel Alito and Clarence Thomas, “seemed skeptical that IEEPA gives President Trump the power to levy unlimited tariffs on every product imported from every country around the world.”

But Pike said if the Trump administration loses, it will simply invoke other trade laws, a view widely shared by trade lawyers, senior Trump administration officials, importing companies and analysts.

Again, this whistling past the graveyard claim that Trump could use other trade powers ignore that they are much more limited. The two main fallbacks are the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962. The former allows the president to impose tariffs unilaterally of up to 15% for up to 150 days to address significant trade imbalances. That’s cold cheer when Trump average tariff now is 17.9% and when he’s imposed some of his tariffs on countries that run deficits with the US, such as Brazil, where Trump’s big reason was personal pique over Brazil’s refusal to cut incarcerated former president Bolsonaro some slack.

Under Section 232, Trump can invoke a national security risk, such as he has for aluminum and steel. But the Administration needs to have the Commerce Department conduct an investigation substantiating that claim in advance.

Now to some highlights of skepticism from Supreme Court justices:

When you’ve lost the Money Honey:

And the normally restrained Greg Ip of the Wall Street Journal:

Lawyers often stretch the facts to make their case, but even so, this was quite the howler from U.S. Solicitor General John Sauer in defense of President Trump’s tariffs at the Supreme Court on Wednesday: “They are not revenue-raising tariffs.”

Excuse me? Of course they are. Revenue is why Trump loves tariffs. For years he has dreamed of charging other countries for the privilege of selling to the U.S. He has boasted of the cash his tariffs have raised, how they could replace the income tax, finance farmer bailouts and maybe fund tariff rebate checks. Treasury Secretary Scott Bessent, who attended Wednesday’s session, has extolled tariffs’ contribution to deficit reduction.

So why was Sauer arguing otherwise? Because the Constitution assigns authority to raise revenue via tariffs and taxes to Congress. By claiming that Trump’s rationale is quite different from what he has actually said, Sauer hoped to persuade the Supreme Court to let the tariffs stand.

More than these particular tariffs are at stake: So is a bedrock principle of American governance. The framers gave legislators the power of the purse to ensure the president couldn’t acquire the dictatorial powers of a king.

Now to some of the effects if Trump loses. Mind you, this list is not exhaustive.

Emasculation of Trump’s Hyper-Aggressive Foreign Policy

Tariff bullying and gaslighting has been, far and away, the biggest implement Trump has used in making threats and demand of other nations, including repeatedly punishing one-time close allies like Canada and Japan just so show who is boss. Confirming that these tariff threats are much more about shows of dominance than getting anything positive accomplished, former ambassador Chas Freeman has recounted that when other countries show up for the trade talks that Trump has forced on them, the US side has no proposals but demands, Mafia-shakedown-style, what they can offer. Nothing is committed to writing, which means the US side can and has retraded these verbal commitments (see the UK for one of several instances). And the US has also gotten its interlocutors to commit to multi-hundred-billion investment commitments, which (ex maybe the Saudis) are clearly not feasible, and the browbeaten country usually ‘fesses up to that in fairly short order.

But the impact may go beyond the loss of pawer. Trump relished the way he used tariffs to make national leaders grovel. From Politico, shortly after the Liberation Day tariffs were announced:

U.S. President Donald Trump said overnight that global leaders are willing to do anything to make a trade deal with him as American tariffs come into force.

“I am telling you, these countries are calling us up, kissing my ass,” Trump said during a speech at the National Republican Congressional Committee Dinner in Washington,

“They are dying to make a deal. ‘Please, please sir, make a deal. I’ll do anything sir,’” he imitated a begging foreign leader.

In addition, new tariff tortures, like finding an excuse to impose higher rates, was one of the pet ways Trump created headlines to divert attention from domestic discomforts, like Jeffrey Epstein rumors. He may be losing that tool and Trump has so jerked Putin around that the theater of Ukraine negotiations is out of the picture too. So will Trump double down on domestic shows of force, above all ICE raids, to restore his manhood

Blowing a Hole in Trump’s Budget

Trump is already running a large fiscal deficit:

More from the Committee for a Responsible Budget in late October:

Treasury Confirms $1.8 Trillion Deficit in FY 2025

The United States borrowed $1.8 trillion in Fiscal Year (FY) 2025 according to the latest Monthly Treasury Statement from the Treasury Department. This deficit is similar to last year’s, despite an additional $118 billion of tariff revenue and roughly $200 billion of lower deficits from recorded changes in the expected future cost of the student loan portfolio.

The Administration will not be able to recover all the tariff revenue it would lose if the Supreme Court rules against the use of the IEEPA, even before allowing for a time lag in deploying sort-of replacement tariffs. From ABC:

Tariffs issued under the legal authority at question before the Supreme Court have accounted for about $90 billion in tariff revenue, raising a possibility of the funds being returned if the justices deem the tariffs unlawful, the Committee for a Responsible Federal Budget found. The ruling could in turn hold implications for the nation’s federal debt, the group said.

Mind you, the deficits meant the Administration was running the economy hot before the shutdown, yet jobs growth had collapsed and real wage growth stalled. And the latter measurement does not factor in the inflation most are experiencing, which would further reduce real wages.

In theory, the Administration could go hat in hand to Congress to get approval for something approximating the current tariffs, say at current levels but denying Trump the power to change them willy-nilly. But with Trump’s popularity in polls plunging, consumers and small businesses unhappy with the tariffs, and the Republicans getting whacked with high profile and unexpected-in-severity election defeats, Congresscritters will not be kindly disposed towards bailing Trump out.

Now a deficit uptick would add some juice to a recessionary economy. But would the Administration instead inflict more torture-by-DOGE? Try to impose some surtaxes? Bessent will presumably get questions soon. His tap dancing will be revealing.

Refund Chaos

This is speculative but I have gotten some input from a top tax expert. Many assume that impermissible taxes would be refunded. However, being potentially subject to a refund and being returned are two different matters.

The maven believes the Supreme Court will authorize refunds only for parties to the case.1 However, another lawyer says that class action lawyers would file suits immediately. But Orrick suggests the process may be ugly:

The Supreme Court may hold that some, all or none of the IEEPA tariffs are unlawful. If the government is forced to refund tariffs, it is unclear what the mechanics and timing would be. There is no statutorily provided process or timeline that would govern how a tariff refund program would be administered. The courts could dictate the eligibility requirements and deadlines for refunding tariff payments. Or they may simply allow importers to rely on conventional, ad hoc administrative refund processes.

The tax maven expects that the Administration will fight refunds, if nothing else to draw the process out. I doubt that this line of argument would hold water (but it could still serve to cause delay) is that Treasury could contend that tariff-payers are entitled to refunds only to the extent that they did not pass the cost on to customers. One high-quality academic study estimated that 20% of tariff costs were eventually paid by consumers. Tariff-payers could also have shifted some or all of the burden to wholesale buyers.2

Not only would beating an argument like that back take time, but if it were to get any traction, it would have multiple effects. One would be to hobble a lot of class certifications, since members of a class have to be deemed to be similarly situated. Class action suits might have to be reworked with many small classes rather than a few ginormous classes. Second of course is that success with an argument along these lines could be used to impose a big burden on refund-seekers, of demonstrating that how little of the tariffs they passed on. One can imagine extensive discovery requests for correspondence with customers.

The refund elephant in the room was a reason a lot of commentators had seemed to lean towards the Supremes holding fire on deeming the IEEPA tariffs to be an overreach. But even this Supreme Court’s body language is that it takes separation of powers too seriously to let the Trump Administration creating a monster mess to serve as a pretext for then letting it off the hook. As Greg Ip put it:

But even for this court, allowing any president to impose the largest tax increase since 1982 ($3.9 trillion over a decade, Trump’s own budget office estimates) without any input from Congress may be a bridge too far.

_____

1 At least before the oral arguments, some took the view that the Supreme Court had a lot of ways to skin the cat. From Lloyd’s List:

[Scott] Lincicome [vice president of general economics at the Cato Institut] believes the outcome is a “coin toss”.

“Even if, on the legal merits, they might want to decide for the plaintiffs, maybe they’ll find a way not to,” he said, adding that the ruling might not be a simple “yes” or “no”.

“There are an almost infinite number of ways the court could ‘half the baby’ here. Maybe the fentanyl tariffs are okay, but the global reciprocal tariffs, which aren’t even reciprocal, are not. This may not be the nice, clean ruling we’d all like to see.”

2 This is a sheer guess, but even if courts felt compelled to consider this line of argument (are there any precedents?) they could probably restrict its application to instances where the tariff charges were separate line items in invoices or bills.

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2 comments

  1. BrianH

    The most important part of this case is power of the executive, power of the legislature and legitimacy of the courts. We have a SCt majority that largely relies on textualism and has used that theory to limit the powers of the Biden presidency in recent cases. Now we have the IEEPA which would clearly require a ruling against Trump on the bare text of the statute. In order to retain some semblance of legitimacy, the Court is going to have to rule against Trump, but find a way to throw him a bone as both a nod to their recent textual interpretations of statutes and their desire to support his efforts. So I expect, like the footnote above, a complicated split ruling allowing the fentanyl related tariffs but overruling the others. Then we’ll see a huge effort by Trump to squeeze even more tariffs through that fentanyl type exception. And I’m guessing the legislature will continue to sit on their hands and watch their powers diminish.

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  2. JD

    My gut tells me that if the SC rules against tariffs, this will blow a hole in the budget and the markets will respond by taking a dive. Not sure how big a dive, but a dive no less.

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