Guotai Haitong: Trump's tariffs rejected, how will the situation evolve?

Guotai Haitong released a research report stating that recently, the U.S. Supreme Court ruled that the equivalent tariffs imposed by the Trump administration under the IEEPA were illegal. Subsequently, Trump announced that he will temporarily impose a 10% global import tariff based on Section 122 of the 1974 Trade Act. The bank believes that the risk of further inflation remains high, and the new tax rates and tariff disputes have raised policy uncertainty. The market expects the volatility of the U.S. dollar and U.S. Treasury bonds to temporarily increase, but the magnitude is limited, and attention is focused on how to patch things up. Guotai Haitong's main views are as follows: 1. The equivalent tariffs have been overturned, how to patch things up? On February 20th, the U.S. Supreme Court ruled that the equivalent tariffs imposed by the Trump administration under the IEEPA were illegal. Following this, Trump announced at a press conference that he will temporarily impose a 10% global import tariff based on Section 122 of the 1974 Trade Act. Short-term patch: Section 122 temporary tariff. After the equivalent tariffs were ruled illegal, the effective tariffs in force now are only the 232 and 301 tariffs, reducing the average tariff rate from 17.6% to 9%. In the short term (150 days), Section 122 can be relied upon to maintain the tax rate basically unchanged. Looking at the medium to long-term, the 232 industry tariffs and 301 country tariffs will become the main patches. Medium to long-term patch: 232 and 301 tariffs. By 2025, the 232 tariffs have been applied to industries such as automobiles, steel, aluminum, copper, furniture, and trucks. In early 2025, semiconductors were added to the list (but most have been exempted). Investigations have also been initiated for pharmaceuticals, aircraft, key minerals, drones, wind turbines, Siasun Robot & Automation, industrial machinery, and polysilicon, with most results expected in the first half of 2026. The products related to the 232 investigation account for about 20% of U.S. imports. To fill the gap left by the equivalent tariffs, tariffs will need to be increased by 40%. The main importers of these products include China, Mexico, the EU, Vietnam, and Canada. The actual impact of the 232 tariffs on countries of origin needs to be monitored, as experience from 2025 shows that goods imported from the EU and Canada have a higher efficiency in transmitting inflation. 2. The equivalent tariffs have been overturned, but inflation risk remains high: Firstly, under the expectation of case-by-case review, it is necessary to consider the motivation for businesses to take legal action. If businesses have successfully passed on the tariff costs to consumers, they may not have much motivation to seek refunds, which means that prices of corresponding goods may not decrease. Secondly, exporters have voluntarily borne part of the tariffs (resulting in currency depreciation but no significant change in U.S. import prices), thereby minimizing the impact of tariffs on commodity prices. A reduction in tariffs may allow exporters to increase prices. Lastly, considering that both Trump and Biden have mentioned that alternative tariffs will maintain the original tax rates and levels of revenue, while refunds are uncertain, business plans to pass on tariffs downstream may not be significantly affected. 3. Impact on public finances: Slight increase in pressure Equivalent tariffs account for nearly 60% of U.S. tariff revenue, therefore, the market is concerned about the impact on public finances. In the short term, even if all tariffs are refunded (approximately $170 billion), the nearly $900 billion balance in the treasury account is sufficient to cover it, with limited financing pressure. In the medium to long term, it is necessary to track the specific implementation of the 232 and 301 tariffs. The Build Back Better Act increases the average annual deficit by about $300 billion. With the equivalent tariffs being overturned, assuming no new tariffs are imposed, net bond financing would need to be three times the current level, significantly increasing supply pressure. The bank expects tariffs to eventually decrease slightly by 2-3%, slightly increasing the fiscal deficit rate by about 0.1-0.2%. The impact on the supply pressure of U.S. debt is limited. 4. Asset pricing: Policy uncertainty revisits The market had already anticipated that the U.S. Supreme Court would overturn the equivalent tariffs, and that the White House would seek alternative solutions. The volatility of the U.S. dollar and U.S. Treasury bonds has temporarily increased but to a limited extent. For Trump, the IEEPA provides more negotiation leverage compared to the 232 and 301 tariffs. The market is watching how the patch will be applied, and if the new patch is less effective than the IEEPA, whether it will prompt Trump to seek more aggressive policy tools, thereby reintroducing policy uncertainty and boosting gold performance more favorably. Risk Warning: Uncertainty in Trump administration's tariff policy.