Will legal challenges end the trade war?
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A U.S. federal trade court has blocked most of President Trump's sweeping tariffs, but the Trump administration is appealing the decision. So how significant will this ruling prove to be? And what impact will it ultimately have on Trump's trade policies? I'm Alison Nathan, and this is Goldman Sachs Exchanges. For today's episode, I'm speaking with my colleague Alec Phillips, chief U.S. political economist in Goldman Sachs Research. Alec, welcome back to the program. Thanks. Thanks for making yourself available on such short notice. Sure.

Another big development, it seems, as we sit here on Thursday. Just to recap, last night there was a court ruling that seemed to upend much of Trump's proposed tariff policies. So first, Alec, set the stage for us. Explain in broad strokes what the court said and why it's important. Right.

Right. So what the court said, and to be clear, this was a three-judge panel on the Court of International Trade, which is like a district court, so it's the lower-level court. What the panel said was that these tariffs are essentially so large and unlimited that it's hard to reconcile that with the idea that

the administration has authority to impose tariffs like that given what's called the non-delegation doctrine. Essentially the idea that Congress has the power to impose tariffs. They can delegate certain powers to the administration but only with intelligible limits.

And since there was no limit seemingly on the administration's power in this case, the tariffs are just so large that it's hard to reconcile those two things. There was a separate piece of the ruling which spoke specifically to what they deemed the trafficking tariffs. But this was essentially the tariffs from February and March related to Canada, China, Mexico on immigration and on fentanyl.

where they essentially said that a different section of the law requires that the tariffs deal with, quote-unquote, the issue at hand, and that it wasn't clear that the tariffs that the administration put on those countries dealt with the issue that they had claimed was the emergency at hand. So in both cases, they blocked those tariffs.

So just to be completely clear, this court ruling relates to this emergency power authority that the president used to impose these tariffs. Yes. So there are many different authorities the president has to impose tariffs. This basically blocked

one of those authorities in this particular case. It's not to say that there wouldn't be other powers or other instances where an emergency could lead to some tariffs, but in these particular cases what this court found was that the emergencies cited did not justify the tariffs that were imposed

given the authority under this law, IEPA, which is a law from 1977. Let me just quickly ask, did anyone see this coming? Because this hit late Wednesday night and it seemed to be a big surprise. So I will say we were definitely highlighting this as a risk that was out there. And I think we knew that the ruling would be coming soon. And so, you know, that was surprising.

That was clear. I think what was less clear was that the court would, number one, rule in this direction, and number two, actually rule on the merits of the case as opposed to just granting or denying an injunction. You know, one of the challenges with these cases on tariffs is

is that it's not a life or death issue. And so there's essentially a higher bar to courts granting an injunction when it's ultimately just a question of money. And if the tariffs are ultimately overturned, you can get a refund. And so it looked like it was maybe going to be a more drawn out process simply because the court might not grant an injunction. They had already rejected a motion for a temporary restraining order, which was sort of the same general test.

And so what ended up happening was they didn't grant the injunction, but they actually just ruled on the case entirely. And so they're essentially now done. You know, I think our general sense going into all of this was that there was a decent chance that this court would rule against the tariffs, but it wasn't the base case. I mean, I probably would have said, you know, maybe it was 40 percent chance or something like that. So I was definitely surprised, number one, that we got

a full ruling quite so quickly. And ultimately, you know, I wasn't shocked, but I was a little surprised that it went in this direction. The question now is, will the federal circuit uphold the ruling? And will ultimately the Supreme Court uphold the ruling? So talk to us a little bit more about how the administration is responding and what that could look like and what the implications of that could be.

they can replace the existing 10% across the board tariff with some new tariff. And so they have authority under what's called Section 122,

of the Trade Act of 1974 to impose up to a 15 percent tariff, but only up to 150 days. So it's an explicitly temporary authority. It was actually, you know, ironically granted to the president after President Nixon had used what essentially is the same authority that President Trump was relying on to

to impose a temporary tariff that also happened to be 10% in 1971 when the U.S. was coming off of the gold standard. And so this is a pretty clear authority that the president has. I would think that if it comes to it, given the choice of letting the 10% tariff expire or switching to this other authority, that they would switch to the other authority. That would then set a 150-day clock ticking.

And at the end of the 150 days, the question would then be, you know, what from there? I think the answer would be that during that 150-day period, the administration would launch a number of Section 301 investigations. This is what was used during the first Trump administration to impose tariffs on China. The problem is they can't launch 100 Section 301 investigations, or they could theoretically launch them, but they certainly can't finish them.

And, you know, I'm not sure how much of a practical challenge that would pose because they could probably still cover most major U.S. trading partners with, you know, a handful of 301 investigations, half dozen or a dozen would cover the vast majority of U.S. imports.

So I'm not sure that this really prevents broad application of tariffs. But I do think if that's the route they go, what you would then see is maybe some smaller trading partners essentially getting out of the situation with no additional tariffs, at least on a country specific basis, because they're sort of too small maybe to have a specific 301 case. But there's no longer an across the board tariff.

And so, you know, that's probably the most obvious option. There are some other authorities they could use. There's something called Section 338, which is a...

provision of law that was from 1930 from Smoot-Hawley that has never been used, which allows up to a 50% tariff and does not have a set time limit on it. The challenge with that one is that it requires at least a claim, although no real investigation doesn't have a lot of procedural limitations around it.

but some claim that a country discriminates specifically against the U.S. relative to other countries. So it's not just we think that a trade practice is unfair, it's

that trade practice is more unfair for the U.S. versus the EU versus some other country. And that might be a harder test for, you know, a broad tariff. But you could see maybe that sort of thing used to implement some specific tariffs on specific trading partners maybe more quickly. So is the key takeaway from all of this that this comes down to what authority the administration is using? And ultimately, there are many

that they can use. And so those who are looking at this court ruling as, you know, suggesting that these tariffs aren't going to take place should, you know, should be dissuaded from that view of whether where there's a will, there seems to be a way for the administration to impose this tariff policy. I think that's right. I mean, I think

Following the ruling, you saw some commentary along the lines of this is an off ramp for the Trump administration to get away from a policy that maybe they don't really want to pursue after all. I'm not at all convinced that that's where we are, though. I think that the 10 percent tariff, if they had wanted to get away from that tariff, they could have easily done that, for example, by getting rid of that 10 percent as part of the UK trade deal. But they didn't do that.

So I think that they are pretty intent on having some kind of across the board tariff and would like, you know, would like to get back to that if it is struck down as a result of this ruling. With that said, you

You know, I do think it probably puts the emphasis on other forms of tariffs. So maybe instead of an across-the-board tariff, maybe it means that you have somewhat, you know, more restrictive tariffs on certain trading partners, and maybe it puts an emphasis more on some of the sectoral tariffs that the president has talked about but had seemed to not get as much attention recently. So I don't think, you know, four months into this new administration,

in a four-year term, I don't think that this is the end of the tariff discussion. And one could argue that if this decision had come down a couple of months ago, I think markets would have responded really positively.

I think right now, because markets had already started to sort of move past the tariff issue to some extent and maybe on to the fiscal questions and other things, in some ways this actually is maybe not as constructive for risk assets because now we're back to uncertainty around tariffs.

People are debating, OK, it was a 10 percent across the board tariff, but will it become a 15 percent across the board tariff now? And, you know, the EU looked like maybe they were going to try to work something out with the Trump administration. But will they launch a Section 301 case now and ultimately impose higher tariffs? We don't know the answers to those things, but it feels like the uncertainty today is a lot higher than it was yesterday.

Talk to us a little bit more about how trading partners might respond to these developments, because as you just mentioned, we are in the middle of some big negotiations reportedly with some of our key trading partners. So what implications will this have on those negotiations? I think even before this ruling happened,

The administration probably had a challenge in getting trading partners to agree to deals that actually resulted in big policy changes because it wasn't clear what was, you know, what their interest was in doing that. Meaning the 10% tariff seemed likely to stay essentially no matter what. The UK deal sort of demonstrated that.

And at the same time, you know, at least until last week, it didn't seem likely that the Liberation Day rates, those country-specific rates, would end up actually hitting. I mean, certainly, you know, I don't think many people in financial markets were expecting that. I don't think many people in the trade policy community were expecting that.

And so that sort of then left the question, like, what are we talking about here? Right. And so now we have a different version of that same issue, which is that if the president's power to impose tariffs unilaterally is constrained, then what's the point of making these deals, at least until we see how all of this plays out?

That was an issue beforehand. I think there were some trading partners who probably wanted to see how these legal challenges played out before they really made any concessions. But it's probably more of an obstacle now. So I would think.

that you would see a lot of trading partners continue to talk, continue to negotiate, go at a slow pace, knowing that maybe there's not really an obvious deadline now to conclude those negotiations. But at the same time, you know, there's no reason to expect retaliation right now. And there's no reason to expect people to call off those talks entirely because the price for just continuing to talk is not very high.

And you just mentioned the other issue that has been front and center in markets, which is the fiscal issues. Do these tariff developments have any implications for the fiscal package that's working its way through Congress? You know, should we be thinking about it through that lens? What are your thoughts? So, you know, I think it was an easier explanation a week ago to say that the fiscal package increases the deficit

but that the tariffs will decrease the deficit by even more than that so that the net impact of all of this together is a wash in the near term, if not actually slight deficit reduction. And that's what our numbers currently show. If you look at our deficit projections now compared to the beginning of the year, before we knew what the tariffs were going to look like, before we knew what the fiscal package was going to look like,

Our deficit projections right now for the next few years are actually a little bit lower than they were before. But a lot of that is because we're assuming more tariffs than we were assuming before. And so if you take this roughly, you know, almost seven percentage point tariff increase away and it stays like that, then that's probably worth, you know, in the range of $200 billion a year of revenue that will not show up.

I mean, right now, I think the best assumption is that a lot of that revenue does still show up because they figure out other ways to impose similar tariffs. But if but if it turns out that that revenue disappears, then what that probably means is that the combination of this plus the fiscal package is, you know, at best a wash and maybe does actually increase the deficit a little bit versus what we have right now.

I mean, I would say bigger picture, I don't really think there's a reason to imagine that Congress is going to change their approach to fiscal policy very much simply because these tariffs have been overruled. And that means that we're basically still looking at a greater than 6% of GDP fiscal deficit, you know, I mean, essentially as far as the eye can see. That probably was more or less the case before.

You know, but removing the tariff revenue is kind of one strike against the fiscal outlook, even though it does help the growth. I mean, potentially helps the growth outlook a little bit. The final point to make is just that I think markets have always assumed that at some point,

policymakers would step in and do something about the deficit. And so on this fiscal package, putting aside the tariffs, I think the real question is, are markets comfortable now with the idea that after the major fiscal package that we're likely to see for the next few years, it's not clear what the next opportunity for reform is.

that the deficit ends up coming out of this process about the same way that it went into it. So the fiscal issue is a topic for another day. Alec, thank you so much for your insights on tariffs. Thanks for having me. This episode of Goldman Sachs Exchanges was recorded on Thursday, May 29th, 2025. I'm Alison Nathan. Thanks for listening.