- The U.S. Supreme Court has struck down the administration’s most lucrative tariff instrument—but not the entire new tariff system.
A ruling against using the International Emergency Economic Powers Act (IEEPA) to impose “Liberation Day” tariffs invalidates duties worth roughly USD 60bn, as well as additional USD 40bn in tariffs imposed on China, Mexico and Canada under the fentanyl-related emergency.
While this halves the effective U.S. tariff rate to around 5%,
about half of the 2025 tariffs remain in force under Section 301 (covering industrial machinery, electrical equipment, etc.) and Section 232 (covering primarily steel and aluminum products). - Schrödinger’s tariffs: for businesses, the Supreme Court decision brings back trade uncertainty, as “stop-and-go” policy is likely to remain the dominant mode. That complicates inventory management and overall trade strategy, and the relief from removing part of the tariffs will probably be temporary.
- A renewed inventory build cycle is likely to keep the U.S. working-capital requirement (WCR) at the record-high level seen in 2025 (>60 days, up by +35 days in 2025), mainly driven by automakers and household-appliance manufacturers—two sectors most exposed to tariff escalation and supply-chain front-loading—along with retail and chemicals, reflecting precautionary stockpiling and longer sourcing cycles.
So far, only about half of tariff costs had been passed through to consumers by December 2025, and the peak impact is expected in Q1 2027 (+1 pp to CPI), assuming an average tariff rate of 10% by then under Section 122, with sector exemptions.
Plans to introduce a 10% minimum tariff rate have been reaffirmed. Section 122 allows tariffs of up to 15% for 150 days, alongside expanded investigations under Section 301 and the theoretical use of Section 338 (tariffs up to 50%).
- Interestingly, the biggest winners so far appear to be Global South economies and China.
Reactions from around the world show that countries that have signed partnership agreements (or are in the process of implementing them) are demanding clarification and predictability, including with regard to recently negotiated trade deals.
Tariff relief resulting from the ruling is concentrated in large exporting economies such as Indonesia (-18 pp), Brazil (-17 pp), China (-15 pp) and Vietnam (-15 pp), as well as South Africa, Turkey and India.
The biggest winners under a Section 122 system with sectoral exemptions also tend to be high-exposure developing economies—led by Brazil (-17 pp) and China—while developed markets see more limited relief (EU and the UK -3 pp, Japan -1 pp). A handful of partners such as Saudi Arabia and Mexico would face marginal tariff increases (+2 pp). - The fiscal and market effects are significant, but in the near term disinflation dominates.
Tariffs imposed under IEEPA alone generated nearly 60% of incremental revenue (USD 180bn out of USD 240bn in 2025).
Refund liabilities could reach USD 120bn (~0.5% of GDP), pushing the fiscal deficit toward 7.5% of GDP—although repayments would likely occur slowly through customs disputes.
Macroeconomic effects tilt toward mild disinflation (-0.1 pp to 2.5% U.S. inflation in 2026).
U.S. 10-year Treasury yields could fall by 10–20 bps and remain below the 4% threshold for longer. However, fiscal-dominance risk and the risk of oil-price inflation should limit a larger decline.
EUR/USD is likely to remain broadly stable, anchored around 1.19.
Removing tariffs could add +0.5 pp to growth and ~+1% to earnings—small relative to the ~16% EPS growth expected in 2026 and elevated valuations—limiting equity upside and keeping volatility high if tariffs return via other tools.
For private equity and private credit funds, trade-policy uncertainty creates material risk at a critical moment for a recovery in distributions and for credit valuations.
The U.S. Supreme Court has overturned the administration’s most lucrative tariff instrument, which had accounted for 60% of all U.S. tariff revenue to date.
In a 6–3 ruling issued on 20 February, the Court held that the International Emergency Economic Powers Act (IEEPA) does not provide legal grounds for imposing reciprocal tariffs announced on “Liberation Day,” worth USD 60bn in tariff revenues.
The ruling also invalidates IEEPA-based tariffs imposed on China, Mexico and Canada in connection with the fentanyl emergency. While smaller than the reciprocal tariffs, these country-specific measures amount to USD 40bn.
What remains in force? First, Section 301, which imposes 25% tariffs on core industrial and technology products imported by the United States—mostly from China—introduced during the first Trump administration.
This regime covers goods worth more than USD 370bn, or roughly half of current U.S. imports from China, and focuses more on industrial supply chains than on basic consumer goods.
Exposed categories include industrial machinery (machine tools, pumps, robotics), electrical equipment (transformers, motors, switchgear) and electronic components such as printed circuit boards, networking gear and storage components.
Auto parts—including engines and drivetrains—along with chemicals, plastics and metal products form another key group, reflecting their role in downstream U.S. industrial processing.
Lower tariff rates apply to consumer goods—especially furniture, lighting, tools and selected appliances—although key electronics such as smartphones and many laptops have been structurally excluded or will be phased in with a delay.
Higher tariffs on strategic sectors targeted by the Biden administration are also retained, including tariffs on electric vehicles, lithium-ion batteries, solar cells, semiconductors and critical minerals.
Second, tariffs imposed under Section 232 over the past 12 months continue to focus on industrial inputs deemed critical to national security.
This system is anchored in steel (50% tariffs on flat-rolled products, pipes and structural sections) and aluminum (50% on unwrought and semi-finished products), plus expanded derivative products such as fasteners, stamped parts and prefabricated metal components, designed to prevent circumvention.
Although Section 232 investigations into cars and auto parts authorize tariffs of up to 25%, broad-based auto tariffs have largely been avoided through negotiated arrangements with key partners, including the EU, Japan, the UK, South Korea, Canada and Mexico—making autos more conditional than a systemic pillar of the Section 232 framework. By contrast, lumber and trucks remain subject to Section 232 tariffs.
The Supreme Court ruling removes the legal basis for recent U.S. tariff arrangements, but it does not invalidate existing trade agreements.
By striking down IEEPA-based tariffs, the Court neutralizes the instrument underpinning the reciprocal tariff system affecting partners such as Europe, Japan and the UK—effectively depriving tariff concessions and exemptions of their operational enforcement mechanism.
However, formal trade agreements and sector frameworks negotiated under separate legal authorities—including quota arrangements and tariff provisions embedded in other statutes—remain fully in force, leaving the broader trade architecture intact even as its built-in tariff leverage has been significantly weakened.
The overall average U.S. tariff rate has halved to 5%, but this relief will be temporary.
The CPI goods index (most exposed to tariffs, since services were not tariffed) rose from -0.1% year-on-year in January 2025 to +1.4% in December 2025.
The fastest price increases were recorded for non-electric cookware and tableware, dinnerware and cutlery, and photographic equipment.
Allianz Trade estimates that by December 2025 only about half of the incremental tariff costs had been passed through to final consumer prices, lifting the contribution of tariffs to overall U.S. inflation from 0 pp to +0.3 pp.
This implies that the peak impact of a 10% average U.S. tariff rate remains ahead—likely in Q1 2027 (+1 pp).
Following the Supreme Court ruling, President Trump reaffirmed a political commitment to a 10% minimum import tariff.
A likely substitute is Section 122 of the Trade Act of 1974, which allows tariffs of up to 15% for 150 days without Congressional extension, provided the measure is justified by a large and serious balance-of-payments deficit and applied on a non-discriminatory basis.
In addition, expanded sector investigations under Section 301 are expected, and the theoretically available Section 338 of the Tariff Act of 1930 would allow the White House to raise tariffs to 50% on countries that persistently discriminate against U.S. trade.
While Section 338 tariffs have no explicit time limit, their legal basis appears more questionable than Section 122.
Table 1: Alternative legal tools for tariffs
| Instrument | Policy objective | Who conducts the investigation | Maximum tariff rate | Duration | Prior use |
| Section 301 (Trade Act of 1974) | Address unfair trade practices / IP violations | USTR (investigation required) | No statutory cap | Typically 4 years (renewable) | Used since 2018 (tariffs on China, still in force) |
| Section 232 (Trade Expansion Act of 1962) | Protect national security / industrial base | Department of Commerce (270-day review) | No statutory cap | Indefinite unless modified | Frequently used (steel, aluminum, autos investigations) |
| Section 201 (Trade Act of 1974) | Temporary relief in case of an import surge | USITC (120–150 days) | Limited (cannot exceed 50% increase vs existing tariff) | Up to 4 years (extendable to 8) | Used in 2018 (solar panels) |
| Section 122 (Trade Act of 1974) | Correct large balance-of-payments deficits | Presidential action (no investigation) | 15 | 150 days | Never used for tariffs |
| Section 338 (Tariff Act of 1930) | Counter discrimination against U.S. trade | Presidential proclamation | Up to 50 | No explicit time limit | Never used |
Sources: various; Allianz Trade Research
Who benefits most from the removal of IEEPA tariffs?
The biggest beneficiaries are Bangladesh (-20 pp to 15%), Pakistan (-19 pp to 10%), Indonesia (-18 pp to 6%), Brazil (-17 pp to 8%) and Cambodia (-16 pp to 7%), as well as China (-15 pp to 14%) and Vietnam (-15 pp to 5%).
South Africa (-15 pp to 6%), Turkey (-12 pp to 7%) and India (-12 pp to 5%) also benefit from lower tariffs, reinforcing an overall easing in parts of Asia, Latin America and selected EMEA exporters.
Developed markets benefit too, though to a smaller extent: Canada (-11 pp to 4%) and the EU (-8 pp to 5%) see sizeable declines, while Japan (-3 pp to 10%) and South Korea (-4 pp to 9%) experience much smaller relief.
Table 2: U.S. import tariffs for major trading partners
Sources: various; Allianz Research
A system in which Section 122 replaces IEEPA tariffs would most benefit Brazil, Bangladesh, India, China, Pakistan, Switzerland, South Africa, Vietnam and Indonesia.
Allianz Trade estimates that exporters from these markets could see the average U.S. tariff rate reduced by at least 10 percentage points relative to the current level (especially if the same sectoral exemptions remain in place as under IEEPA reciprocal tariffs).
Because Section 122 is, by definition, temporary (Congressional approval is required after 150 days), shipments from these markets would likely be accelerated ahead of potential further tariff increases under other authorities.
By contrast, under Section 122 Saudi Arabia, Mexico and Ecuador could face higher tariffs than at present, as could Taiwan, Norway, South Korea or the EU if no sector exemptions are introduced.
A new window is opening for U.S. companies to build precautionary inventories, pushing working-capital requirements (WCR) to new cyclical highs.
Accelerated deliveries lifted U.S. real GDP by about 0.4–0.6 percentage points in the peak quarter immediately after the reciprocal tariff system was announced in 2025.
In terms of trade flows, goods imports temporarily surged, with some monthly readings 10–15% above baseline in the most intense phases of front-loading.
This effect was particularly visible in container freight, electronics, machinery and durables—sectors where pass-through risk is highest and inventory carrying costs are manageable.
In Q3 2025, the U.S. WCR indicator rose by more than 35 days year-on-year to above 60 days,
mainly driven by automakers and appliance manufacturers—two sectors most exposed to tariff escalation and supply-chain front-loading.
A strong rise was also recorded in retail and chemicals, reflecting precautionary stockpiling and longer raw-material sourcing cycles.
By contrast, upstream suppliers of inputs and components show a mirror effect: auto suppliers, metals producers, and machinery and equipment makers saw shorter WCR cycles, pointing to lower inventories and weaker downstream ordering.
Electronics and pharmaceuticals recorded only a slight increase, suggesting more balanced inventory dynamics.
Tariffs became a fiscal pillar. Refund risk is real, but operationally slow.
Since “Liberation Day,” U.S. tariffs rose to USD 240bn—about USD 180bn more than in the same period of 2024.
In effective terms, tariff rates rose to 10% in December 2025 from just 2.5% a year earlier.
Around 9 percentage points of that increase came directly from IEEPA-related measures, including reciprocal tariffs and country-targeted duties aimed at Brazil, Canada, China, India and Mexico.
In fact, IEEPA accounted for nearly 60% of incremental tariff revenue under the post-2 April regime.
If tariffs are deemed unlawful retroactively, refund liabilities could reach USD 120bn (0.5% of GDP), pushing the U.S. fiscal deficit to -7.5% of GDP.
However, implementation would likely not be immediate.
The Court may leave refund questions to lower courts, and importers would likely have to file claims through customs procedures—implying a lengthy, complex administrative refund process that could take several years.
Chart 1: Total tax revenues from higher average U.S. import tariffs in 2025 (USD bn)
Sources: various; Allianz Trade Research
Inflation and interest-rate dynamics tilt slightly toward disinflation.
In essence, removing IEEPA tariffs matters given their large share in total U.S. customs duties and—crucially—their concentration in consumer goods.
This makes them more directly sensitive to CPI inflation than other sector tariffs imposed under Section 232 (excluding autos).
The extent to which the ruling translates into actual price declines or higher corporate margins remains to be seen.
All things considered, the decision creates downside risk for year-on-year CPI and a “bearish” factor supportive of lower real short-term yields.
We see a risk that Treasury yields could fall by 10–20 bps in the near term as the deflationary impulse dominates concerns over fiscal supply.
However, political uncertainty around alternative tariff instruments and the risk of renewed trade weaponization could revive de-dollarization pressures and push yields higher, partly offsetting the initial bond rally.
Chart 2: The impact of U.S. tariffs on GDP growth
Sources: various; Allianz Trade Research
EUR/USD is unlikely to move materially despite rising uncertainty.
Delays or changes in the EU–U.S. trade agreement are unlikely to trigger major swings, as the currency pair is not at the center of the “tariff storm.”
In U.S. rates markets, the disinflation narrative should strengthen.
Combined with some safe-haven flows linked to developments in Iran, this could push 10-year Treasury yields below 4%.
However, modest U.S. growth, fiscal risks tied to tariffs, and inflation risks from a potential oil-price shock should prevent a significant drop far below that level.
We expect the 10-year/2-year Treasury spread to remain around 60 bps, with the long end hovering near 4% and the data-sensitive short end continuing to price the Fed’s reaction rather than recession risk.
To date, the Fed’s approach to tariffs has been to look through the one-off price impact and focus on underlying demand-dampening forces.
If the tariff effect is now less pronounced and unemployment remains low, some FOMC members may be less inclined to cut rates in coming months.
The biggest risk is liquidity: if the Treasury must increase issuance to cover refunds and offset lost tariff revenues, market liquidity could deteriorate further given already limited dealer balance-sheet capacity—making the market more vulnerable to short-term rate volatility that can spill into risk assets.
Risk assets reacted in a measured way, which seems reasonable.
A short-term rally could quickly give way to declines driven by uncertainty until lower rates or visibly stronger U.S. growth provide support.
Over the medium term, reinstating similar tariff levels would substantially recreate prior conditions—above all raising volatility.
The S&P 500 rose 0.7%, with technology posting the strongest gains, and the direct impact of the tariff rejection appeared modest.
Europe rose about 0.9% after the decision, but sentiment in Asia turned more negative by Monday morning, with the Nikkei and CSI down about 1.1%.
Markets largely anticipated that the Trump administration would introduce alternative measures to restore tariffs, effectively maintaining the status quo.
In the near term, any growth boost from disinflation, lower rates and higher U.S. growth may be dampened by uncertainty around establishing a stable tariff framework that would influence capex.
Allianz Trade estimates that +0.5% growth could temporarily lift corporate profits by about 1%, but against a 2026 consensus of +16% EPS growth for the S&P 500 and elevated P/E ratios, the implied equity upside is limited.
At high valuations, bond yields would need to fall meaningfully to produce a stronger equity rally.
On the other hand, uncertainty can hit markets materially, as seen on “Liberation Day,” and volatility could return depending on the policy path.
Because growth and valuations are far more dependent on AI-driven macro impulses, investor conviction in tech may matter more for equity markets.
Among risk assets, investment-grade corporate bonds appear better positioned to cope, offering both credit-spread exposure and rate sensitivity; while spreads remain tight, the asset class is relatively well suited to current conditions.
Emerging-market equities may show increased volatility given their tariff sensitivity and strong year-to-date performance—supporting a more selective approach, for example tilting toward tech with lower pricing sensitivity.
For private equity, the Supreme Court’s constitutional review of tariffs introduces material uncertainty for portfolio management and exit timing at a critical moment for a recovery in investor distributions.
Our base case assumes distributions rise by 5% in 2026 and 1% in 2027, assuming easing trade tensions and stable political conditions.
However, the environment facing PE sponsors is particularly complex for portfolios concentrated in software, where proposed tariffs would add to existing AI-driven business-model transformation challenges.
For assets bought at high revenue multiples—such as 2020–21 vintages—the intersection of trade-policy volatility and technological disruption creates difficult strategic decisions.
Margin forecasts, competitive positioning and cost-structure assumptions now face simultaneous risk of significant revision.
In that spirit, as highlighted in recent Allianz Trade research, trade-policy uncertainty has become a key factor shaping exit-market conditions and buyer willingness to deploy capital.
Under adverse scenarios involving escalation into a lasting trade conflict—potentially ending in fiscal-dominance dynamics—distribution growth could shrink to -3% in 2026, followed by +1% in 2027.
That would turn the expected rebound into a decline and keep financing costs structurally elevated precisely when sponsors need better conditions to monetize portfolios, deliver cash returns to Limited Partners, and position for fundraising based on demonstrated distribution discipline.
Chart 3: Distribution changes of U.S. private equity funds year-on-year (Z-score)
Sources: Pitchbook; LSEG Datastream; Allianz Trade Research
For private credit, the tariff review introduces material uncertainty precisely as spreads of 450–550 bps may be underpricing emerging risks across portfolio segments.
Introducing tariffs would directly compress margins for companies with significant production exposure, cross-border supply chains, or dependence on foreign sourcing.
This affects a large share of private-credit portfolios, where around 40% of borrowers already show negative free cash flow and have limited buffers to absorb additional cost shocks.
An additional concern is the potential for fiscal-dominance dynamics, implying persistently higher financing costs regardless of near-term policy moves, and undermining refinancing relief that current spread levels appear to assume.
This risk is most visible where tariff exposure intersects business-model uncertainty—especially in software portfolios, the largest sector concentration in BDCs (Business Development Companies) at around 17%.
AI disruption leaves firms facing a triple uncertainty: revenue durability, margin sustainability and refinancing conditions.
Fragility in current valuations became evident during “Liberation Day” in April 2025, when the leveraged-loan distressed ratio jumped to 3.90% from 3.51% before stabilizing over the summer.
This shows how quickly credit stress responds to trade-policy volatility.
Allianz Trade’s base case still assumes spreads remain in a 450–550 bps range as markets digest moderate tariff implementation and stable credit conditions.
But a lasting trade conflict or a fiscal-dominance shock could quickly push spreads back above 600 bps, materially tightening credit availability and renewing pressure on covenants and net asset value (NAV) marks.
Chart 4: Morningstar LSTA LL index – distressed loan indicators
Sources: Pitchbook; Allianz Research
Chart 5: Trade-policy uncertainty vs listed private equity funds and BDCs
Sources: LSEG Datastream; Allianz Research
Source: https://ceo.com.pl/cla-trumpa-czesciowo-zniesione-zmiennosc-pozostaje-59264
