Trump tariffs face Supreme Court test: Will he refund billions or pivot to ‘Plan B’ if policy falls?

US President Donald Trump - File Photo

The future of President Donald Trump’s wide-ranging tariff policy is now in the hands of the US Supreme Court. The justices will decide whether the administration can keep using emergency powers to tax imports or if Washington must return hundreds of billions of dollars in disputed duties to businesses.

At issue is one of Trump’s key second-term policies, which imposed unusually high tariffs on almost all major US trading partners to promote “reciprocity” and domestic manufacturing. If the court strikes it down, the federal government could lose a major source of revenue and have to issue huge refunds.

How the tariffs were imposed

In April, Trump declared a national emergency to justify imposing new duties under the 1977 International Emergency Economic Powers Act (IEEPA). The law grants special economic powers during crises that threaten national security. The administration argued that decades of trade deficits had undermined American industries and now posed a national security risk.

Using these powers, the White House introduced tariffs at levels not seen in modern US trade policy. India and Brazil were hit with rates of up to 50 per cent, while China faced duties as high as 145 per cent. Close allies including Japan, South Korea, the United Kingdom and the European Union were also subjected to steep charges.

Officials framed the duties as “reciprocal,” saying they were designed to match or exceed tariffs imposed on American goods abroad. Trump’s team maintained the aggressive stance was necessary to force countries to negotiate fairer bilateral deals.

According to White House estimates, the tariff regime was projected to generate between 300 and 400 billion dollars annually, making it a major source of federal revenue after large tax cuts. The Congressional Budget Office later calculated that the tariffs would help reduce the federal budget deficit by trillions over the coming years.

Legal challenges and court rulings

Almost immediately after the new tariffs were announced, American businesses and trade groups sued, arguing that Trump had overstepped his constitutional authority.

In May, the Court of International Trade in New York ruled that IEEPA could not be used to impose such sweeping measures. On August 29, the US Court of Appeals for the Federal Circuit upheld that view in a 7-4 decision. “We discern no clear congressional authorisation by IEEPA for tariffs of the magnitude of the Reciprocal Tariffs and Trafficking Tariffs,” the court said.

The judges found that imposing tariffs is a “core Congressional power” that cannot be assumed by the executive branch without explicit legislative approval. The ruling covers both the “reciprocal” tariffs introduced in April and the February tariffs on China, Canada and Mexico linked to the fight against fentanyl. Other duties imposed under different legal bases, such as the 2018 steel and aluminium tariffs, were not affected.

Although the decision was a major setback for the administration, the appeals court delayed its order until October 14. This pause allowed time for the White House to appeal to the Supreme Court and keep the tariffs temporarily in place. In an urgent filing, US Solicitor General John Sauer warned that a prolonged delay could create chaos if the tariffs were overturned after being collected for months. He wrote, “The stakes in this case could not be higher.” According to the filing, the government could end up holding between 750 billion and 1 trillion dollars in tariffs by mid-2026 that might later need to be refunded.

Trump told reporters his administration was preparing an appeal and urging the Supreme Court to act quickly to prevent the tariffs from being struck down.

The refund question

Treasury Secretary Scott Bessent addressed the potential fallout directly in an appearance on NBC’s Meet the Press. “We would have to give a refund on about half of the tariffs, which would be terrible for the Treasury,” he said. “If the court says it, we’d have to do it.”

Bessent did not offer detailed plans for how refunds would be administered but suggested there were “numerous other avenues” for maintaining tariffs even if the current legal basis was struck down. He acknowledged, however, that using alternative tools would “diminish President Trump’s negotiating position” in ongoing trade talks.

As of August 24, US businesses had already paid more than 210 billion dollars in tariffs that courts have since deemed unlawful. This year alone, the government has collected 158 billion dollars in total tariff revenue, including both the disputed IEEPA tariffs and others imposed under different authorities. Customs and Border Protection reported collecting 81.5 billion dollars from Trump’s tariffs since their introduction earlier this year. These funds currently sit in the Treasury’s general accounts and have been used to reduce government borrowing.

Economic impact

Economists warn that refunding hundreds of billions of dollars could dramatically alter Washington’s fiscal position. Without the tariff revenue, the government would have to increase borrowing to cover its obligations. To attract investors for this additional debt, Treasury bonds might have to carry higher yields, raising borrowing costs across the economy.

The yield on the 30-year Treasury bond briefly touched 5 per cent in recent days, its highest point since July, reflecting investor unease about the potential for more debt issuance.

Businesses are also feeling the pinch. Major retailers and manufacturers including Nike, Hasbro and Walmart have cautioned that the tariffs are pushing up prices for everyday products. The administration has maintained that companies should “eat” the additional costs, arguing that the duties are necessary to strengthen domestic industries.

The August jobs report from the Bureau of Labour Statistics showed that the US economy added only 22,000 jobs while the unemployment rate rose to 4.3 per cent, the highest in nearly four years. Industries most exposed to international trade have seen the steepest job losses since the tariffs were enacted.

If the IEEPA tariffs were eliminated and not replaced, some analysts believe there could be a short-term boost to economic activity. Bessent himself noted that ending the tariffs could provide a “200 billion dollar net stimulus effect” as reduced import costs filter through to businesses and consumers. He also suggested that inflationary pressures might ease if tariffs were rolled back.

Trump’s contingency plans

Bessent has been firm in defending the use of IEEPA. “I’m confident the Supreme Court will uphold it – will uphold the president’s authority to use IEEPA. And there are lots of other authorities that can be used – not as efficient, not as powerful,” he told Reuters during an interview at a diner near Washington. He argued that years of trade deficits have put the US economy in a risky position and that the fentanyl crisis represents an extraordinary emergency. “We’ve had these trade deficits for years, but they keep getting bigger and bigger,” he explained. “We are approaching a tipping point … so preventing a calamity is an emergency.”

Yet the administration is not relying solely on IEEPA. Bessent and Kevin Hassett, Director of the National Economic Council, have cited a range of other US trade laws that could be used to impose tariffs if the Supreme Court rules against them.

Among the options: Section 338 of the Smoot-Hawley Tariff Act of 1930 allows tariffs of up to 50 per cent for five months on imports from countries that discriminate against US goods. Section 232 of the Trade Expansion Act of 1962 lets the president impose tariffs if imports threaten national security. Section 201 of the Trade Act of 1974 allows duties when imports cause or threaten “serious injury” to US producers. Section 301 of the same act targets unfair trade practices or agreement violations. Section 122 allows temporary tariffs of up to 15 per cent for 150 days to address balance-of-payments deficits.

Together, these tools form what Bessent has called a “Plan B” for maintaining tariffs even if the IEEPA option fails.