Is it possible to achieve a "parallel substitute" when equal tariffs are illegal?

The U.S. Supreme Court ruled that Trump’s tariffs based on the IEEPA are illegal. The Trump administration’s attempt to “replace” these measures may cause global tariff expectations to fall back into a phase of uncertainty. For the global market, it is expected that the Trump administration will try various alternative tariff mechanisms and maintain the stable implementation of trade agreements. After the 122 tariffs are enacted, Section 301 investigations may become a key factor. However, due to regulatory constraints, congressional restrictions, and midterm election pressures, we believe it will be challenging to fully replicate the previous reciprocal tariff framework. For China, influenced by the stability of the “ceasefire period” and Trump’s visit to China, we anticipate that overall U.S. tariffs on China may decrease, at least during the low-tariff window, potentially benefiting China’s labor-intensive exports.

Looking ahead in the coming months, U.S. tariff negotiations with various economies may introduce many uncertainties, especially concerning potential game-playing before Trump’s possible visit to China.

▍The U.S. Supreme Court ruled that tariffs imposed by Trump under the IEEPA are illegal. The administration’s attempt to “replace” these measures could reintroduce phase-based confusion in global tariff expectations.

According to Reuters, on February 21, the U.S. Supreme Court ruled that the International Emergency Economic Powers Act (IEEPA) does not authorize the president to impose large-scale tariffs. The ruling states that Congress generally provides clear and strict regulations when authorizing administrative agencies to exercise tariff powers, which are absent in the IEEPA. Chief Justice Roberts noted that the government interpreted the IEEPA as granting the president unilateral authority to impose unlimited tariffs and adjust them at will, exceeding the scope of the law. In an opinion written jointly with Justices Gorsuch and Barrett, Roberts explicitly stated that Trump’s tariffs under the IEEPA violated the “major questions doctrine.”

The “major questions doctrine” has gained increasing importance in recent Supreme Court rulings. It requires that if an administrative agency attempts to implement a policy with significant economic and political impact—an unprecedented policy in history—it must point to a clear and unambiguous authorization from Congress, rather than relying on vague or broad legal interpretations. Given that Trump has multiple alternative mechanisms to push his tariff policies, global financial markets responded positively but with limited enthusiasm. Since last year, as many trade agreements have gradually stabilized tariff expectations, there remains a risk of renewed phase-based confusion. On the day of the ruling, the S&P 500 rose 0.69%, the dollar index fell 0.09% amid more complex rate cut expectations, and the 10-year U.S. Treasury yield increased 0.33%. European stocks also reacted relatively positively.

▍For the global market, it is expected that the Trump administration will attempt various alternative tariff mechanisms and maintain the stability of trade agreements. After the 122 tariffs are implemented, Section 301 investigations may become critical. However, all these tools are subject to congressional restrictions and require time to implement. As the midterm elections approach and domestic pressures increase, we believe it will be difficult for Trump to fully replicate the previous reciprocal tariff framework. Close attention should be paid to changes in congressional attitudes and voter expectations. According to a YouGov poll as of January 21, 69% of American voters believe tariffs have increased prices, and 74% oppose further tariff hikes. The House previously passed a resolution opposing Trump’s tariffs on Canada.

▍For China, influenced by the stability of the “ceasefire period” and Trump’s visit to China, we expect overall U.S. tariffs on China to decrease, at least during the low-tariff window. We believe Chinese labor-intensive exports may benefit relatively.

On one hand, China and the U.S. remain in a “ceasefire” phase of the tariff war. If the U.S. significantly ramps up tariffs through other mechanisms amid legal uncertainties in its policies, it could be viewed as a further escalation of the trade conflict. On the other hand, Reuters reported on February 20 that Trump plans to visit China from March 31 to April 2. A further escalation of tariffs would not be conducive to achieving the goals of this visit.

Therefore, for China, we expect that some of the alternative tariff mechanisms may be implemented to some extent, but overall tariff levels are likely to decline, possibly below pre-judgment levels. If the 15% 122 tariffs are enacted, U.S. tariffs on China could decrease by about 5%, which would benefit China’s overall exports this year. Given the lengthy processes involved in Section 301 investigations and other mechanisms, we judge that the probability of the U.S. imposing additional tariffs on China before Trump’s visit is low. At least during the low-tariff window, Chinese labor-intensive products (toys, shoes, furniture, bags, clothing, etc.) that have high overseas revenue shares and large export exposure to the U.S. could see short-term benefits from tariff reductions, especially as trade frictions are expected to impact these sectors significantly by 2025.

▍Regarding tariff refunds, the process still depends on lower courts’ rulings, which may take several years.

The Supreme Court remanded Trump’s tariffs to the U.S. International Trade Commission (ITC) for refund arrangements. Lower courts may need weeks or months to clarify the scope, procedures, and timelines for refunds.

Refunds will be directly paid to importers, as they are the taxpayers under the IEEPA tariffs, not consumers.

The timing of refunds will only be clear after lower court rulings. Based on the 1998 “US v. US Shoe Corp” case, it took about five months from the court decision to start refunds, with the entire process lasting around three years. Given that the current IEEPA tariffs are much larger in scale, we estimate that the refund process may not start until mid-2026 or later, potentially lasting several years.

As for the scale, U.S. Customs and Border Protection data shows that as of December 14, 2025, approximately $133.5 billion in IEEPA tariffs have been collected. The Tax Foundation estimates that by February 20, 2026, the total revenue could reach about $160 billion. Historical experience indicates that refunds often do not cover the entire amount collected. For example, in the US v. US Shoe Corp case, the Supreme Court ruled that port maintenance taxes did not apply to exports, resulting in about $600 million being refunded, roughly 60% of the total collected. In the 2006 softwood lumber dispute, the U.S. negotiated a refund of about $4 billion out of a total of $5 billion, approximately 80%.

▍Looking ahead over the next few months, tariff negotiations between the U.S. and various economies may introduce many uncertainties, especially regarding potential bargaining before Trump’s visit to China.

For China, if Trump’s visit to China proceeds, investment in U.S. manufacturing may become a key issue, but only if the U.S. reduces investment barriers and improves policy stability. Other topics such as trade balance, technology sanctions, and geopolitical hotspots may also feature prominently. However, the Supreme Court’s ruling will significantly impact Trump’s bargaining leverage. Monitoring the ongoing negotiations in February and March will be crucial to see whether Trump chooses to “create bargaining chips” proactively, which will influence market expectations.

Globally, most economies currently believe that the tariff landscape may continue as is. On one hand, the U.S. might consolidate existing agreements and strengthen institutional arrangements to lock in gains. On the other hand, for economies without agreements or with political disagreements, the U.S. could still exert pressure through tariff alternatives, expanded investment reviews, export controls, or delayed market access, via trade or non-trade measures.

This report is from CITIC Securities Research.

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