Tariffs After IEEPA: The Instant Dial Is Gone, Not the Regime

In our January outlook, we argued the era of peak tariffs was behind us, both from the perspective of U.S. consumer affordability and policy constraints on the U.S. administration from the courts. The Supreme Court’s decision to strike down tariffs implemented under the IEEPA statute is a prime example of a check on the U.S. administration’s power, and while it doesn’t outright end tariff risk, it clips the extreme tail by removing the fastest route to broad, open-ended tariff escalation. In that sense, the Supreme Court’s decision reinforces our view that peak tariff rates are likely behind us.  This doesn’t mean that tariffs won’t remain a structural feature of the policy landscape, especially given the U.S. administration’s other constraint of how a widening fiscal deficit will impact borrowing costs.

A key nuance of the Supreme Court decision last Friday is that it only applies to tariffs imposed under the International Emergency Economic Powers Act (IEEPA). It does not unwind the broader tariff stack like those applied to steel, aluminum, and copper under Section 232 pertaining to national security.  So while the Supreme Court  removed the “instant dial” IEEPA tariffs, durable parts of the tariff regime, especially those tied to national security, are still very much in play.

While Section 232 tariffs are still active, an important consideration is that it’s actively being revisited as a policy lever due to affordability issues. Recent reporting suggests the administration has explored whether portions of the steel and aluminum tariff stack, particularly downstream and derivative aluminum products, could be narrowed or clarified to ease input costs for U.S. manufacturers and small businesses. Officials have been careful in public messaging, emphasizing that any changes would be at the President’s discretion and likely framed as “clarifications” rather than a wholesale rollback, but the discussion itself reinforces the point that even when trade policy remains hawkish in spirit, it is increasingly shaped by the constraints of politics and the economy.

As we mentioned in our November note, even if the Supreme Court overruled the IEEPA tariffs the U.S. administration has other avenues they can use as a bridge.  As expected, after the Supreme Court overturned IEEPA tariffs last Friday, the administration moved swiftly to re-impose global tariffs under Section 122 at flat rate of 15%, though it does incorporate many of the same exemptions and carveouts as under the IEEPA framework.

Even with the U.S. administration imposing 15% tariffs under the Section 122 framework, the effective tariff rate borne by U.S. companies is lower than it was under IEEPA.  Yale’s Budget Lab estimated that under the IEEPA tariff framework U.S. consumers faced an average effective tariff rate of 16.0%, which now comes down to 13.7% with the Section 122 tariffs.  An important part of the Section 122 tariffs is that they can only stay in place for 150 days until they need to be extended by Congress, and so when the Section 122 tariffs expire, the effective tariff rate would fall to 9.1%.  While there are other avenues outside of Section 122 that the administration can use to replace the lost IEEPA tariff revenue, our expectation would be the effective tariff rate will ultimately settle lower than what companies faced under IEEPA.  The major takeaway for financial markets and corporations is that the Courts overruling IEEPA means that the new tariff regime will likely be more procedural, and removes the risk of rapid tariff escalation, usually conveyed via tweet-storm, which should help with stability and business confidence.

While Section 122 can replace some lost tariff revenue in the short-term, it will also likely face legal scrutiny.  Section 122 is a time-limited ‘balance-of-payments’ authority that allows the President to impose tariffs of up to 15% for 150 days in the instance when the U.S. faces a ‘fundamental international payments problems.’  The crux of the matter is that the U.S. doesn’t face a traditional balance of payments deficit as the current account deficit is balanced by a capital account surplus, which is generally what happens in advanced economies with floating exchange rates. The U.S. current account deficit is financed through global demand for U.S. assets, which is not the classic profile of an acute balance-of-payments emergency which typically happens in emerging markets on fixed exchange rates as foreign reserves get drawn down. That being said, given the litigation timeline of IEEPA, it is unlikely that the litigation over the meaning of a fundamental balance of payments deficit will be decided in 150 days.  Therefore, the most likely path is that the administration will use this bridge period to explore different procedural avenues with more legal teeth to re-establish its tariff regime.

As we’ve discussed, Section 232 remains the most durable channel because it maps cleanly onto strategic supply chains and is the pathway the U.S. favours in order to try and incentivize re-shoring of U.S. manufacturing.  The most likely “next lever” for broadening tariffs is the unfair practices Section 301, however it requires an investigation from the Office of the United States Trade Representative and public process, making it slower, more negotiable, and more litigable than IEEPA, even if the end result can still be significant. We believe the post-IEEPA tariff landscape becomes slower and more process driven. While it doesn’t fully remove policy risk, it should make it easier for markets to price.

For U.S. corporates and consumers, shifting from the IEEPA tariff landscape to a more bounded toolkit will be constructive for corporate balance sheets.  Not only will less policy whiplash and fewer abrupt cost shocks tend to support planning, inventory decisions, and cash-flow stability, but refunds from the Treasury will help to bolster balance sheets. And even partial relief or clarification on downstream aluminum inputs that are part of Section 232 tariffs can matter disproportionately for broad swaths of U.S. manufacturing, where tariff incidence often shows up as margin compression rather than headline CPI.

The flip side of the tariff relief is U.S. government bond yields. The substantial IEEPA-related tariff revenues collected in 2025 will be subject to a messy refund process, creating uncertainty around the timing and magnitude of Treasury outflows. Refunds and structurally lower tariff receipts are incrementally negative for the deficit trajectory, a modest headwind for duration, particularly at the long end, where deficits tend to express themselves through sticky term premium even when the front end may be supported by easier monetary policy.

This development reinforces a broader theme we’ve been emphasizing recently. Investors shouldn’t be solely focused on policy ambition, instead viewing plausible scenarios through a constraints-based framework understanding any limits on how far and how fast policy can move. For investors, the takeaway is not that tariff risk vanishes, but that it becomes more bounded and ultimately easier to navigate. The Supreme Court ruling on IEEPA tariffs reinforces our constructive view towards equity as uncertainty fades and corporate planning visibility improves, but late-cycle conditions still favor selectivity, quality discipline, and international diversification to avoid concentration risk.  Our mixed view towards fixed income remains, where we feel the front-end will be supported by a start-stop easing cycle, while the long end will continue to be challenged by global deficits and investors should keep duration tactical.

On a net basis, peak tariff tail risk is likely behind us, even if tariffs persist as a structural policy tool and a quasi-consumption tax in a more fragmented world.

Happy investing!

Scott Smith

Chief Investment Officer