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The US Supreme Court’s decision to strike down the sweeping tariffs imposed by President Donald Trump under the International Emergency Economic Powers Act of 1977 was a clear victory for those who believe in the rule of law and democratic institutions. But the celebration was short-lived in the United States and abroad, as the Court’s ruling quickly generated even greater uncertainty about US trade policy and foreign relations, including with its historical allies.
For starters, US importers have a legitimate claim to be refunded the illegal duties they paid. Determining when refunds are due, to whom, and in what amount is a bureaucratic nightmare that will take years to resolve. At a time when AI threatens many white-collar jobs, including those held by lawyers and accountants, some may welcome the additional demand for such work. But this outcome is starkly at odds with the current administration’s promise of increased efficiency and minimal government interference in business.
More importantly, the administration’s quest for a new legal justification for tariffs has created a messy patchwork of temporary measures, sectoral probes, bilateral bargaining, and national-security exceptions. The administration has invoked Section 301 of the Trade Act of 1974 to launch new investigations into unfair trade practices, with a focus on China, the European Union, and several other US partners. But it has also signaled that it will continue to rely on other legal instruments, such as temporary tariffs under Section 122 and sector-specific measures under Section 232 of the Trade Expansion Act of 1962, to preserve the substance of its trade strategy.
The legal basis for tariffs may change, but the policy direction will not, and tariff rates are expected to remain roughly the same as in 2025. But this is no longer just about tariffs’ direct economic cost, which has fortunately been modest so far, mainly owing to inconsistent implementation. There will now be three additional costs.
First and foremost, the new investigations and ensuing negotiations and bargaining will further increase uncertainty. Even with – or perhaps because of – the inevitable legal challenges, firms and governments will continue to face changing policy measures, probes, and threats, with negative effects on investment and long-term supply-chain decisions.
Economic research has shown that uncertainty over future trade barriers can suppress entry, investment, and export activity. The reason is straightforward: firms base their decisions not only on current costs, but also on expectations about future market access. When those expectations become unstable, firms delay or scale back long-term commitments.
This is especially true for global value chains. Modern manufacturing depends on relationships that are costly to build and difficult to reconfigure quickly. A firm deciding where to source components, where to place a new plant, or which market to serve from a particular production location does not respond only to the tariff of the day. It responds to the credibility of the rules governing cross-border exchange.
When those rules are replaced by threats, investigations, temporary exemptions, and abrupt reversals, even firms that are not directly targeted have an incentive to adopt more defensive strategies. They invest less, diversify inefficiently, or simply wait. The impact may not show up immediately in import prices or growth statistics, but the adverse effects on the economy do eventually appear.
Second, the tariff war is morphing into a global competition over subsidies, location decisions, and market access, as governments seek to accommodate US demands on a bilateral basis. That puts the global trading system under “unsustainable” pressure, as the British government recently warned. South Korea has passed legislation allowing major investment in strategic US industries under an earlier trade framework, while current debates in Europe are similarly shifting beyond tariffs toward broader industrial strategies.
These examples underscore the third, and perhaps most significant, additional cost associated with US trade policy: the shift from a rules-based trading system to a power-based one. Discretionary tariffs encourage bargaining under duress, invite retaliation, weaken the credibility of trade agreements, and undermine valuable long-term alliances.
In this sense, the current US approach is pushing the world into a particularly bad institutional equilibrium. Allies that should be coordinating on common challenges – from supply-chain resilience to climate change – are instead drawn into constant bilateral negotiations with the US, leading to political frictions. And smaller or poorer countries with little to no negotiating power are at the mercy of the major economic powers.
This may seem like a second-order issue as a new Middle East war rages, with potentially severe economic repercussions. But trade policy has often been a harbinger of broader geopolitical shifts and conflicts. The belief that global primacy requires sinking the rest of the world, which underpinned the US turn to protectionism in 2018 and has since defined US policy toward allies and non-allies alike, is not so different from Iran’s mindset as it precipitates a global energy crisis in the name of survival. When the world’s largest economy sets the example, others tend to follow.
The Supreme Court may have limited one policy instrument, but it did not resolve the underlying problem: the increasing use of discretionary trade policy. Unless that trend is reversed, the world will confront a new reality of permanent uncertainty, which may prove even more damaging than tariffs.
