Bridgewater Associates is the world’s largest hedge fund. Every weekday, it sends out a note to its clients entitled “Bridgewater Daily Observations.” Every so often, the firm allows us to republish, in part or in full, individual editions of its “Daily Observations”.
Last Tuesday, “Daily Observations” addressed the following question: What Happens If President Trump’s Tariffs Are Struck Down? I found the Bridgewater analysis (below) carefully researched, clearly written and typically smart. I suspect you will as well.
Bridgewater Daily Observations.
Authors: Will Barnes, David Trinh, Rory Schacter, Hayden Welty.
Most of the tariffs that President Trump has imposed since returning to office have been authorized under the International Emergency Economic Powers Act of 1977 (IEEPA), which, before this administration, had not been used for tariffs. The novel use of this power is now under review by the courts, which will decide if Trump exceeded the limits of his authority. The IEEPA tariffs have already been struck down by the Court of International Trade, and on Friday, the Court of Appeals for the Federal Circuit agreed—though they remain in place through at least October, pending appeal.
(Ed Note: The administration has appealed, filing a petition with the Supreme Court and requesting an expedited review of the case).
While it is likely to be months before we get a resolution, we have been wrestling with what the consequences would be if the IEEPA tariffs do get struck down. Although Trump would lose his most flexible lever for imposing tariffs, we would still expect him to march forward with a substantial rewriting of US trade policy. In brief:
IEEPA is important because it is the power that has been used to impose the bulk of Trump’s tariffs thus far. The IEEPA tariffs amount to a 10% or so increase in the US effective tariff, while sectoral tariffs under Section 232 contribute an additional 4.5%.
Significantly, IEEPA has given Trump an expansive and fast-acting tool to impose tariffs without “procedurally time-consuming” investigations. As Secretary Howard Lutnick testified, Trump’s better-established trade authorities “do not allow for immediate action,” whereas “IEEPA is different.” This is particularly relevant for the use of tariffs as a cudgel in fast-moving geopolitical conflicts (e.g., with Brazil, India).
Nonetheless, Trump is very unlikely to relent in his desire to keep the tariffs, and the administration has other levers to deliver them going forward. These include Section 122, which allows temporary 15% tariffs, country-specific Section 301 tariffs after investigation, and further Section 232 tariffs on targeted sectors. Section 338 (which allows tariffs of up to 50% for countries that have “discriminatory” trade practices) is another potential alternative, though this has never been used despite being nearly a century old—which gives some experts doubts about whether it is enforceable. Using these other powers could be more complex and time-consuming, but we see the largest tariffs in over a century as here to stay.
The trade deals reached so far are likely to be durable even if IEEPA is struck down. While these have all involved trading partners accepting tariffs that were imposed using IEEPA, there seems to be little incentive to reopen the negotiations (though Trump would have to reimpose the tariffs using different authority). Indeed, Section 232 tariffs are of comparable concern for several trading partners, such as autos for Japan, Korea, and Europe. Defense considerations were also a backdrop to negotiations (e.g., Ukraine for Europe and the UK), giving Trump another pressure point if they were to seek a new agreement.
If the administration does lose in court, we would expect them to have to refund the revenues collected under these tariffs prior to the defeat (which will likely be at least 0.5% of GDP). This would temporarily expand the deficit and provide a positive fiscal impulse even if the administration immediately replaces the tariffs, but we would expect it to take months to play out, which would mute the impact.
A Supreme Court decision striking down the IEEPA tariffs, and Trump’s response to that, would also be significant from the perspective of US institutions and the rule of law. Thus far, the court has largely accommodated Trump and his effort to expand presidential power (which has many facets beyond trade policy). Ruling against the administration on tariffs, a flagship element of its agenda, would be the most substantial instance to date of the other branches pushing back.
Trump sees the IEEPA tariffs as an integral part of his trade policy and is set to appeal the Federal Circuit’s decision. On Friday, he reiterated: “If these Tariffs ever went away, it would be a total disaster for the country. It would make us financially weak, and we have to be strong…With the help of the United States Supreme Court, we will use them to the benefit of our nation, and make America rich, strong, and powerful again.”
The Federal Circuit stayed its own decision, giving the parties until October 14 to petition the Supreme Court for review. Given the significance, the Supreme Court is seen as likely to agree to hear the appeal. In terms of the process and timeline from here:
We expect it to be months before we get a conclusive outcome. The government is unlikely to file until close to the October deadline; assuming the Court agrees to hear the appeal, it will then require briefing, oral arguments (which could provide some clues as to the outcome), and time to deliberate. It’s plausible that the court could hear the case on an expedited basis and announce a decision by the end of the year, but it could also stretch into 2026. If the Supreme Court does uphold the Federal Circuit’s decision, the case would likely return to the Court of International Trade for further proceedings on the appropriate scope of relief.
Prediction markets suggest that the probability of court-ordered tariff refunds this year is on the order of 15% to 20%. That said, these markets aren’t that liquid, and it’s very plausible that timing-wise the tariffs could be struck down without a refund being ordered this calendar year.
In the meantime, the tariffs will remain in place. We are therefore likely to see their effects continue to flow through, with the government collecting roughly 1% GDP annualized in tariff revenues from importers. (At the margin, the possibility that tariffs paid today could later be refunded might weigh against increasing prices and passing on costs to downstream consumers until there is more clarity.)
It is far from clear how the Supreme Court will rule on the merits, which implicate important separation-of-powers questions. The Federal Circuit was divided after hearing the case with the full 11-judge en banc court. A majority of seven judges (six of whom were appointed by Democratic presidents) held that the specific tariffs imposed by the challenged executive orders are not “authorized by IEEPA.” They did not decide “whether IEEPA authorizes any tariffs at all,” though four of them would have held that it did not. The other four judges dissented from the conclusion that the IEEPA tariffs were unlawful; two of these were appointed by President George W. Bush and two by President Obama.
While we have greater clarity on US trade policy than we did prior to the trade deals and August executive orders, the tariff regime remains far from settled—whatever the outcome of the IEEPA litigation is. The key sources of continued uncertainty include:
There is still significant implementation risk around some aspects of the trade deals. In most cases, no written agreement has been published at all (while only framework agreements have been announced for the EU and the UK). Negotiations over implementation details are still ongoing, with the parties having divergent understandings of some key elements of what was agreed upon (e.g., Japan insists that the 15% tariff should be inclusive of the pre-Trump baseline tariffs).
No lasting, substantive deals have been reached with three of the US’s largest trading partners: China, Canada, and Mexico. Together, these three countries account for over one-third of US imports. Deals have also not been reached with India, Brazil, or Switzerland, all of which currently face relatively high tariff rates.
Meanwhile, USMCA renegotiations are likely to kick off soon (in advance of the mandatory joint review that is coming up next July); in May, Mexico’s Secretary of Economy Marcelo Ebrard indicated that this could get underway this year.
There is a fairly wide cone of potential outcomes for US-China trade relations, with the latest agreement (which suspends higher tariff rates) set to expire on November 10 unless the deadline is pushed back again or the parties reach a more durable agreement. Negotiations are ongoing in preparation for a potential meeting between President Xi and Trump in the fall, but a breakdown in talks also cannot be ruled out. The US remains concerned over ensuring the adequate continued flow of Chinese rare earth and critical mineral exports, while China is seeking further reduction of tariff levels (especially from the blanket 20% fentanyl tariffs) ahead of a meeting. Additionally, US export restrictions on semiconductor technologies that are key to the most cutting-edge AI models are also a highly salient issue.
The administration has yet to announce Section 232 sectoral tariffs on key sectors—most notably semiconductors, electronics, and pharmaceuticals. The potential size and scope of country and product exemptions remain highly uncertain.
These excerpts from Bridgewater Daily Observations (9/2/2025) were republished with permission from Bridgewater Associates. Permission to republish requires that we post the following “Important Disclosures and Other Information”:
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