Tariffs "halted," how much good news?

Trump is paying the price for his earlier "stubbornness." After a hundred days of new policies, trade negotiations have not gone smoothly, the Russia-Ukraine talks have frequently backfired, and the pressure on U.S. debt remains high. Today, the U.S. International Trade Court has delivered another "stab in the back," demanding the repeal of tariffs imposed under the abuse of the International Emergency Economic Powers Act (IEEPA). In response, we will answer a few questions:

What is the effectiveness?

The legal judgment is not low in specification. The U.S. International Trade Court is part of the U.S. federal court system, with judges appointed by the president and confirmed by Congress. This court was established under Article III of the U.S. Constitution, located in New York City, and has nationwide jurisdiction. It primarily hears disputes related to tariffs, import duties, trade barriers, and reviews administrative decisions related to trade regulations.

It rises to the level of constitutional and separation of powers. Using the macro narrative and "national foundation" issues that MAGA is good at to counter Trump is indeed precise and effective: the power of taxation belongs to Congress, which is one of the important institutional foundations of Western democratic countries; the president's "autocratic" power over trade tariffs is too great, threatening the tradition of separation of powers in the U.S.

In fact, the U.S. Congress has already taken some action this year. In April, the Senate proposed a bipartisan bill, the "2025 Trade Review Act," aimed at limiting the president's unilateral power to impose tariffs, but due to the Republican majority advantage and Trump's unparalleled influence, it failed to pass.

Which tariffs?

If implemented, Trump's tariffs this year would essentially be "in vain." Aside from the reciprocal tariffs announced on April 2, the tariffs previously imposed on China, Canada, and Mexico regarding the fentanyl issue through IEEPA would also need to be canceled. The industry tariffs based on investigations such as Section 301 and Section 232 can still remain in effect.

What to do next?

Delay and appeal. According to U.S. media reports, the agreement requires the White House to abolish the relevant tariff executive orders within 10 days. If the White House cannot seek a delay from the federal court within the corresponding time, it will have to suspend the relevant tariffs first.

The appeal process is relatively long and will severely impact Trump's policy layout. Trump can appeal the ruling to the Federal Circuit Court of Appeals or directly submit it to the Supreme Court, but this process is lengthy and will significantly affect the imminent trade negotiations.

Moreover, even if he appeals to the Supreme Court, there is no guarantee of victory. Currently, among the nine justices of the U.S. Supreme Court (including the Chief Justice), Trump nominated three, while Obama and Biden also nominated three. Even though the conservatives have an overall advantage, Trump's actions have long since departed from the traditional conservative framework. For Trump, delaying the effectiveness of the ruling may be the more reasonable and feasible option.

What is the impact?

The biggest impact on Trump is undoubtedly that trade negotiations will become more difficult and passive. If tariffs are likely to be canceled internally, then U.S. trade rivals have no motivation to actively seek compromise and negotiationJapan, India, the European Union, and other major powers can completely exchange time for space.

Secondly, this may be a "watershed" moment for Trump's power. The actions of the U.S. International Trade Court may set a precedent, leading to an increasing number of lawsuits affecting the advancement of Trump's policies regarding other policy issues. Moreover, the debate over congressional and presidential powers may become more frequent. Since 1934, at the request of the Roosevelt administration, Congress enacted the Reciprocal Trade Agreements Act, gradually placing the White House in a dominant position in trade policy, a pattern that may gradually be reversed.

For China, the best-case scenario is the complete cancellation of the 20%+ reciprocal tariffs imposed this year (though the probability is low). If tariffs are fully alleviated, how much will it boost exports? Based on the current situation of "retaining 30% tariffs," China's exports and nominal GDP may still be dragged down by 5.5 and 1 percentage points, respectively. If tariffs are completely eliminated later, the negative impact on domestic exports and the economy is expected to be significantly reduced.

However, considering that in recent months, concerns over tariffs have led to "export rushes" and "transshipment rushes," some demand has been brought forward. During the process of export "mean reversion," the subsequent growth center will also decline. In an optimistic scenario of full tariff cancellation, it is expected that annual exports may achieve around 4% growth year-on-year.

For the market, the most important question is whether the passive easing is truly easing. In our previous reports, we introduced our "Tariff - Tax Reduction" analytical framework. The court's suspension of tariffs can be seen as a temporary easing of tariffs: if this decision can be sustained, the performance of assets will shift towards the area of "tax reduction ⬆, tariff reduction ⬇." U.S. Treasury bonds may remain high due to declining tariff revenues and rising fiscal burdens, but this is favorable for the U.S. dollar and U.S. stocks; however, Trump is not a "law-abiding" person, and the anger of betrayal may still be vented outward, leading to stalled trade negotiations and a return to a situation where U.S. stocks, bonds, and currencies all suffer.

Authors: Shao Xiang, Zhang Yunjie, Source: Chuan Yue Global Macro, Original Title: "Tariff 'Suspension', How Much Benefit?"

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