Transcript
A (0:00)
Welcome to Thoughts on the Market. I'm Aruna Masinha from Morgan Stanley's US and Global Economics Teams. Today, How a Single Supreme Court Ruling Could Change the tariff math for U.S. consumers it's Friday, February 13th at 10:00am in New York. The U.S. supreme Court is deciding whether the U.S. president has legal authority to impose sweeping tariffs under IPA. That decision could come as soon as next Friday. IPA or the International Emergency Economic Powers act, is the legal backbone for a significant share of today's consumer goods tariffs. If the Supreme Court limits how it can be used, tariffs on many everyday items could fall quickly, affecting prices on the shelf margins for retailers and the broader inflation outlook. As of now, effective tariff rates on consumer goods are running about 15% and that's based on late 2025 November data. And that's quite a bit higher than the roughly 10% average which we're seeing as tariff on all goods. In a post IPA scenario, we think that the effective tariff rate on consumer goods could fall to the mid 11% range. It's not zero, but it is meaningfully lower. An important caveat is that this is not going to be eliminating all tariffs. Other trade tools like section 232s which are the national security tariffs, section 301s, the tariffs that are related to unfair trade practices would remain in place. Autos and metals, for example, are largely outside the IIPA discussion. The main pressure point would, we think, is consumer goods. IPA has been used for two major sets of the fentanyl related tariffs on Mexico, Canada and China and the so called reciprocal tariffs applied broadly across trading partners. And these often stack on top of the existing tariffs such as the MFN, the most favored nation rates and the section 301 duties on China that were already existing before 2025. The exposure is really concentrated in certain categories of consumer goods. So for example, in apparel and footwear about 60% of the applied tariffs are IIPA related. For furniture and home improvement it's over 70%. For toys, games and sporting equipment it's more than 90%. So if the IIPA authority is curtailed, the category level effects would be meaningful. There are caveats of course. The court's decision may not be all or nothing and policymakers could turn to alternative authorities. One example is section 122 which allows across the board tariffs for up to 15% for 150 days. So tariffs could just reappear under different tools, but in the near term, fully replacing IPA based tariffs are on consumer goods may not be straightforward, especially given ongoing affordability concerns. So how does that matter for the real economy? There are two key channels, prices and margins. On prices, we estimate that about 60% of tariff costs are typically passed through to the consumers over two to three quarters, but it's not instant margins, though. Could could respond faster if companies get cost relief before they adjust prices downwards. That creates a temporary margin tailwind that could influence hiring, investment and earnings across retail and consumer supply chains over time. Lower tariffs could also reinforce that broader return to core goods disinflation starting in the second quarter of this year. And because tariff driven inflation has weighed more heavily on the middle and lower income households, any eventual price relief could disproportionately benefit those grips. At the end of the day, this isn't just a legal story, it is a timing story. If IPA authority is curtailed, the arithmetic shifts pretty quickly. Margins move first, prices follow later, and the path back to goods disinflation could accelerate. That's why this is one ruling, one worth watching before the gavel drops. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.