Markets are reacting to a surprise development in the trade war saga. A little-known Federal trade court in Manhattan issued a ruling late on Wednesday that the President doesn’t have the authority to make such large tariff moves. The reaction was hesitant, since the implications weren’t immediately understood.
The chief takeaway seems to be that the ruling makes applying some tariffs more difficult for the Trump Administration. At least while the case winds its way through the courts. On the other hand, it adds another level of uncertainty to what will happen with trade negotiations. Overall, the initial market reaction has been positive, with a surge out of safe havens into more risk assets. But, will this trend continue, particularly after we get more reactions from the White House?
The Big News
The Court of International Trade said that President Donald Trump exceeded his authority under the International Emergency Economic Powers Act (IEEPA) to apply country-level tariffs, and that such tariffs needed to be approved by Congress. That applied a sweeping ban to the tariffs that provided the largest concern to the market: The “reciprocal tariffs” that go up to 54% in some cases, and the 10% “base” tariffs that apply to every country.
What isn’t included in the ruling are other tariffs that weren’t issued under the IEEPA, such tariffs on steel and aluminum, cars, and those covered by the USMCA that includes Canada and Mexico. The court ruled that the White House needed to re-issue the executive orders to reflect the injunction, with the wording not making it clear if the stay affected the tariffs in place immediately or after that period. The Trump Administration immediately said it would appeal the decision.
The Fall Out
The actual impact is likely to be immediately muted, since the “reciprocal” tariffs were almost all suspended pending negotiations with the respective countries. However, it does potentially reduce the amount of leverage the Trump administration can bring to bear as part of a trade negotiation. This could actually mean that reaching trade deals will take longer, as countries await the resolution of the courts.
The Trump Administration is not without tools to apply tariffs, as indicated by the levies not covered under the IEEPA still remaining in effect. Which means that the “reciprocal” tariffs could potentially be reinstated in some way under a different legal framework. But that might take some time to resolve legally.
The Market Reaction
Not surprisingly, gold prices tumbled in the aftermath, as demand for safe havens fell. This left the yen and especially the Swiss franc under pressure. The dollar rallied, as the market has been nervous about the potential economic impact of the tariffs on US economic growth. Crude prices also advanced on expectations of improved demand, as tariffs against China were expected to be significantly lessened.
The pound and Euro seemed to have the most to lose against the dollar in the immediate aftermath, as they had been benefiting from funds flowing out of the US. Commodity currencies had mixed performance. Higher crude prices initially helped the CAD, but no immediate reaction in iron ore prices left the AUD largely unchanged.