RPT-COLUMN-Tariff challenge thickens market fog and confusion: Mike Dolan

By Mike Dolan

LONDON, Sept 2 (Reuters) - Just five months ago, U.S. tariff barriers were the be-all and end-all for world markets and a potential trigger of global recession ahead. Not only has that proved wide of the mark so far, but no one seemed to bat an eyelid after it was legally challenged once again last week.

Even though Americans were switched off for the Labor Day weekend, the lack of global reaction to Friday's legal curveball into Washington's tariff plans likely shows just how confused markets and businesses have become by the whole trade upheaval.

In a decision delivered after markets closed on Friday, a divided U.S. appeals court ruled most of Donald Trump's tariffs are illegal, undercutting the president's use of the levies as a policy tool.

But the court allowed the tariffs to remain in place through October 14 to give the administration a chance to file an appeal with the U.S. Supreme Court.

Trump lambasted the decision and said if the tariffs were removed, "it would be a total disaster for the country."

"Disaster" seems an extreme view of just returning tariffs to last year's levels, but it could well be a disaster for Trump's economic plan - not least annual federal tariff revenues now targeted at some $300 billion.

To the extent to which Treasuries might be the sharp end of that stick, the absence of U.S. bond trading on Monday's holiday may explain some of the stasis during the day. More broadly, investors around the world likely hesitated on making any conclusions until Wall Street returned to pass judgment first.

But initial readouts from bank strategists suggested three main assumptions underlying the relative nonchalance.

The "reciprocal" tariffs governed by the ruling will likely be waved through by the Supreme Court next year, they reckoned, and many of the tariffs will likely remain in place beyond October 14 once the Supreme Court agrees to hear the case and would stay until that ruling is made - probably in the second quarter of 2026. It's possible the Supreme Court could refuse to hear the case - but that's highly unlikely.

And even if the authority to implement these particular import levies was quashed, tariff revenues could be raised under the auspices of other trade acts and conventions - most likely those targeting specific sectors or using more established justifications such as Section 301 provisions used against China in 2018/19.

What's also true is that legal challenges have been widely expected. At least eight lawsuits have been launched against Trump's tariffs, including one filed by the state of California.

"However the Supreme Court ultimately rules, the president will retain substantial authority to impose tariffs," Goldman Sachs' economics team told clients.

50% OF REVENUE

But while that may explain why the ruling didn't shift the dial in markets on Monday, a whole host of questions about the durability and the targeting of the tariffs were also unearthed.

For U.S. businesses or overseas countries affected, or even for bond markets now relying on revenue math, it's still a horizon of shifting sands.

The 7-4 decision from the U.S. Court of Appeals for the Federal Circuit in Washington related to the legality of the "reciprocal" tariffs imposed in April, as well as a separate set of Fentanyl-related tariffs imposed in February against China, Canada, and Mexico.

It doesn't cover sectoral tariffs on steel and aluminum imports that were issued under other authority, or indeed the 50% Brazil and India tariffs that were leveled after the suit.

Goldman reckons the levies in question account for eight percentage points of an 11-point overall rise in the implemented effective tariff rate. Barclays said they account for 50% of all tariff revenue collected in the fiscal year through the end of this month and would represent an even larger share, as much as 70%, of projected tariff revenue in 2026.

If there was even a small chance that the Supreme Court would rule them illegal, the switch to sectoral tariffs or other authorities would likely have to begin soon to avoid a hiatus and significant revenue shortfall.

To be sure, many say the fact the challenges were widely expected means contingency planning has already been done and that sectorally focused tariffs may be more durable and stable longer-term anyhow.

But whatever the eventual outcome, the "ifs" and "buts" for companies and countries affected seem to just stack up higher.

Jefferies analysts point out that if the Supreme Court did rule against the reciprocal tariffs, then U.S. importers may be able to claim refunds for levies already paid - a potentially chaotic process.

What's more, they reckoned the plethora of informal trade agreements with other countries and regions that were tied to these tariffs may require renegotiation - another potentially long and fraught period of uncertainty just like the one seen this year.

"Because these tariffs are expected to generate fiscal revenue, a ruling against them could reignite questions around U.S. fiscal sustainability," Jefferies added, saying investors should monitor the legal trajectory and the pace of new tariff investigations.

It may well be possible the economy continues to sail on regardless of either the levies or the legal chicanery around them. Right now, the economy is estimated to be cruising at some 3.5% growth in the third quarter. But if trade uncertainty is in any way damaging, then it's not going away any time soon.

The opinions expressed here are those of the author, a columnist for Reuters

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