What the Court’s Ruling on Trump’s Tariffs Means for U.S. Trade Policy and the Economy

Update as of May 29, 2025: The appeals court has stayed the U.S. Court of International Trade's ruling while it reviews the arguments in the case, including the administration’s request for a longer delay. A day after the court struck down President Donald Trump’s April 2 “Liberation Day” tariffs, the appeals court temporarily reinstated most of them, restoring key elements of the administration’s trade agenda—at least for now. Let’s consider what could happen next, depending on the possible paths forward.

In an unexpected (at least by me) decision with sweeping implications for U.S. trade policy, the Court of International Trade (CIT) unanimously struck down President Donald Trump’s “Liberation Day” tariffs, ruling them unlawful under the International Emergency Economic Powers Act (IEEPA). The decision—delivered by a panel of judges appointed by Presidents Reagan, Obama, and Trump—has already halted the implementation of several key tariff measures and cast fresh uncertainty over the future of U.S. economic statecraft.

These critical questions break down what the court ruled, how this decision affects the broader Trump trade agenda, what it means for markets, and where things are headed next.

Q1: What did the CIT actually decide, and why does it matter for presidential trade power?

A1: The CIT’s decision is a direct rebuke of the administration’s attempt to use IEEPA as a catch-all legal basis for reshaping U.S. trade policy. The court ruled that the Liberation Day tariffs—broad-based duties of 10 percent globally; 25 percent on certain fentanyl-producing countries, including Canada and Mexico; “reciprocal” tariffs on most trading partners based on their trade surplus with the United States; and 30 percent on China (later raised to 145 percent)—exceeded the statutory scope of emergency economic powers.

The CIT provided two arguments regarding “reciprocal” April 2 tariffs and “fentanyl” tariffs, respectively. Regarding the former, the CIT argued that the Liberation Day tariffs are unlawful because the president cannot use IEEPA authorities to address the U.S. trade deficit. On the latter, CIT asserted that tariffs on broad import categories are not sufficiently tailored to deal with the declared threat of fentanyl trade.

In rejecting the argument, the opinion emphasized that Congress has not granted the president “unbound” discretion to redefine emergencies in a way that bypasses democratic accountability.

This ruling halts the most recent tariffs and underscores the judiciary’s growing skepticism toward the use of national security and emergency laws as blanket justifications for economic interventions.

Q2: Are Trump’s other tariffs affected, and what tools remain available to the administration?

A2: The ruling’s impact is both significant and limited. It applies only to tariffs imposed under IEEPA, leaving other trade measures intact, including the following:

• Section 232 tariffs: National security-based tariffs, including steel and aluminum tariffs.
• Section 301 tariffs: Retaliatory measures targeting unfair trade practices, particularly those affecting China—this includes tariffs imposed during this administration and tariffs that were imposed during Trump’s first term, maintained, and in some cases increased, during the Biden administration.
   

However, the decision significantly narrows the administration’s flexibility moving forward. Without IEEPA, the White House loses one of its most expansive legal tools for swiftly imposing new tariffs or resetting baseline rates. As a result, officials may now lean more heavily on Section 232 and Section 301 investigations—including those currently underway in strategic sectors like semiconductors, pharmaceuticals, and critical minerals.

The administration may also explore legislative avenues to restore its ability to use tariffs as a primary tool of industrial and foreign policy. But unless and until Congress acts, this ruling curtails the president’s unilateral power to make sweeping trade changes under emergency pretenses.

Q3: What might be the economic impact of the decision?

A3: While the CIT’s ruling blocks one tranche of tariffs, it does little to resolve the deeper economic issue: persistent policy uncertainty. Rather than ending uncertainty, the decision may fuel it, as the administration pivots to alternative tools—like Sections 232 and 301—to reassert its agenda. International partners, meanwhile, are left questioning whether U.S. trade commitments are stable or simply tactical.

In “The Uncertainty Tax: How Policy Volatility Will Harm the Economy,” Chris Borges and I argued that erratic policymaking imposes a hidden but powerful drag on economic performance. This “uncertainty tax” is not collected like a tariff or income tax. Instead, it suppresses growth by delaying business investment, dampening consumer confidence, and tightening credit. When firms do not know what rules they will face tomorrow, they wait to invest. When households anticipate volatility, they hold back on spending.

The Economic Policy Uncertainty Index has surged to record highs in 2025, reflecting not only frequent announcements—like April’s Liberation Day tariffs—but also inconsistent execution and shifting objectives. This kind of volatility is particularly damaging when it originates within the government itself. Investors are not just reacting to risks—they are questioning the reliability of U.S. policymaking.

Even if courts strike down tariffs or deals are eventually reached, the damage from uncertainty endures. Supply chains rerouted due to perceived risk will not quickly revert. Investment decisions missed this quarter often do not return next quarter. Over time, this erosion of credibility could weaken demand for U.S. assets as global investors look elsewhere for stability.

The broader point is this: If the administration wants to encourage domestic investment and enhance its global economic leverage, it must reduce—not amplify—policy uncertainty. Credibility and coherence are not optional. They are preconditions for sustained economic strength.

Q4: Have the tariffs already hurt the economy, and can those effects be reversed?

A4: Yes. The economic damage from the Liberation Day tariffs has already started; some may be reversible, but the extent to which this is possible remains to be seen. These effects will not simply disappear with court rulings or policy reversals. They require deliberate, consistent policy to restore stability and confidence.

• GDP and Growth: The U.S. economy contracted by 0.3 percent in the first quarter of 2025, due in part to heightened uncertainty, supply chain disruptions, and inventory distortions caused by erratic tariff announcements. Yale’s Budget Lab further estimates that the tariffs, if left in place, would reduce real GDP growth by 0.9 percentage points in 2025 and project a sustained long-term reduction of 0.6 percent, translating to an annual loss of $180 billion in 2024 dollars.
• Consumer Prices and Inflation: Major retailers like Macy’s, Walmart, Shein, and Ford have already raised prices to offset increased operational costs from tariffs. According to Yale’s analysis, consumer prices overall rose by 2.4 percent, with apparel prices jumping 17.0 percent, and food prices increasing 2.6 percent, including a 5.4 percent spike in fresh produce costs. The Organisation for Economic Co-operation and Development projects inflation will climb to 2.8 percent by the end of 2025, reversing prior gains in controlling price growth.
• Financial Market Volatility: The S&P 500 experienced notable declines early in 2025 as markets reacted to tariff announcements and uncertainty over trade policy direction. This volatility reflects investor concerns about rising costs, disrupted supply chains, and policy unpredictability. This volatility is not just a simple wealth transfer; it can create financial distress via margin calls that amplify swings. A stark example is the August 2024 yen carry trade blowup: After a modest Bank of Japan rate hike to 0.25 percent, Japanese equity markets plunged 12 percent in one day, triggering liquidations of an estimated JPY 40 trillion (USD 250 billion) in yen-funded carry trades. The VIX volatility index soared, and the yen jumped 7 percent against the dollar, causing sharp drops across Asian markets. Though markets recovered quickly, this episode highlights how global investors remain highly sensitive to volatility and policy shifts. The rebound also exposed market dependence on central bank interventions rather than fundamentals.
   

All told, the economic repercussions of the 2025 tariffs are clear: slowed growth, higher consumer prices, job losses, and market volatility. Legal decisions such as the CIT’s ruling on the Liberation Day tariffs pause further emergency tariff actions but do not undo existing damage. As noted in an earlier piece from the CSIS Economics Program, supply chains and investor confidence take time to heal, and sustained, coherent economic policymaking will be critical to reversing these trends and restoring credibility in U.S. trade policy.

Q5: What’s next?

A5: The administration has already appealed the CIT decision and may seek a stay to preserve its authority while the case progresses toward the Supreme Court. Meanwhile, pressure is building ahead of the G7 Summit in mid-June, where leaders had hoped for clarity on U.S. trade direction. That hope now seems premature.

Rather than backing down, the administration may respond to this setback by “going bigger” under other statutes—especially in ongoing Section 301 and 232 cases. Alternatively, it may attempt to legislate new tariff powers through Congress, though the political feasibility of that route is uncertain.

Internationally, U.S. trading partners may lose faith in the credibility of U.S. commitments and become more reluctant to engage in negotiations. Domestically, uncertainty will continue to drag on investment, consumption, and growth.

The real challenge now is not just legal—it is strategic. If the United States wants to wield economic tools effectively in pursuit of national goals, it must do so with a clear, consistent, and credible framework. Without that, the costs of uncertainty will keep rising—and the benefits of U.S. economic leadership will remain at risk.

Philip A. Luck is director of the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.