Global Markets Adjust to U.S. Tariff Reversal

Investors, executives and government leaders across the globe are assessing the impact of a landmark U.S. Supreme Court decision that struck down President Donald Trump’s trade policy, as well as the subsequent White House response.

On Feb. 20, the Court ruled that the President unlawfully invoked the International Emergency Economic Act (IEEPA) to implement broad tariffs. The majority of Supreme Court justices agreed that tariffs are taxes and, according to the Constitution, only the U.S. Congress has taxing authority, not the executive branch.

U.S. equities gained following the announcement, reflecting expectations that lower effective tariffs could support global growth.

The White House responded swiftly to rebuild one of the main pieces of President Trump’s policy. The next day, the president announced a 15% global tariff by invoking Section 122 of the Trade Act of 1974. This provision allows the president to impose tariffs for up to 150 days. Any extension would need Congress approval.

The ruling effectively halts collection of tariffs previously levied under IEEPA. Given that the Court struck down that authority entirely, continued collections would lack legal basis. 

Policy: Uncertainty in the Near Term

The Supreme Court didn’t clarify whether the Trump administration has to repay tariffs deemed illegally collected, nor when that potential payment would occur. Importers are trying to figure out whether they can ask for billions of dollars in refunds.

“This will likely result in prolonged uncertainty as the decision on refunds will be left to the lower courts,” says Ariana Salvatore, Morgan Stanley’s Head of U.S. Public Policy Research. “In the past, refunds were initially limited only to companies that proactively filed complaints or litigation, which may ultimately limit the scope of reimbursements.”

Looking ahead, Salvatore notes that the ruling may open a path for the administration to soften portions of the existing tariff regime ahead of the midterm elections as a way to address affordability issues.

“We still expect the President to pursue a lighter‑touch tariff policy under the surface—more exceptions, carve‑outs and delays—consistent with recent administrative actions,” she says. “This could benefit countries and products that are more difficult to accuse of trade misconduct.”

A New Tariff Math

Overall tariffs, which peaked at around 16% in late 2025, would fall to 11% from 13% after the latest developments, according to Morgan Stanley Research estimates. If Congress doesn’t approve an extension of the 15% global tariffs under Section 122, the effective level could drop even further, to 6% to 7%.

Effectively, the Supreme Court decision matters more for some trading partners than others. For example, it could benefit consumer goods, especially toys, footwear, furniture and consumer electronics coming from countries like Vietnam, India, Indonesia, Malysia and Thailand. Tariffs on China imports would be lowered by 7%. However, the Trump administration could most likely still use Section 301 tariffs—or trade penalties for unfair trade practices—to keep levies at the current level.

For Mexico and Canada trade, the effective tariff level would fall by less than 1%, while the impact on imports from the European Union, Japan, South Korea and Taiwan remains unclear. 

Limited Economic Impact

Economic activity is likely to see very little impact in the short term, given the Trump administration’s efforts to use other tools to recreate its trade policy, according to Morgan Stanley’s Chief U.S. Economist Michael Gapen.

“Assuming that the current tariff structure will move to different legal authority and remain largely in place, and that refunds will be limited, we do not think business intentions for spending or hiring will change much,” he says.  

That view could change, leading to lower inflation in the second half of this year, if the White House lets the net tariff rate fall from current levels, even with the imposition of new levies.

“Perhaps the most important outcome of the Supreme Court's ruling on IEEPA tariffs is that there is a near-term ceiling for how high the effective tariff rate can go,” Gapen says. “We could see a positive impact on economic activity if a lower effective tariff rate resulted in temporary downward pressure on inflation and delayed the paying of new import levies by the corporate sector into 2027.”

Market Implications: Rates, FX and Investor Positioning

The ruling initially drove Treasury yields higher as investors braced for the possibility of increased issuance to fund tariff refunds. But Morgan Stanley strategists expect this reaction to fade and see refund enforcement as far from a certainty.

“We don’t expect this reaction to be long-lived, as most investors eventually come to understand that the potential issuance increase will be comprised of short-dated T-bills,” says Martin Tobias, of Morgan Stanley’s U.S. Interest Rate Strategy Team. “The more lasting reaction should be renewed focus on downside risks to inflation, which should send yields lower.”

Tobias adds that expectations about the near-term path of the fiscal deficit are unlikely to change as the administration is already leveraging other existing tools to reimpose tariffs.

On the currency front, geopolitical uncertainty and questions around U.S. currency policy are likely to maintain or even expand the USD-negative risk premium, according to Morgan Stanley G10 FX Market Strategist Andrew Watrous.

“And the positive effect of lower tariffs on global growth will likely further weigh on the U.S. dollar,” Watrous adds.