How would the market react if Trump's "reciprocal tariffs" were overturned?

A legal challenge against the Trump administration's key tariff powers is leading the market to anticipate a significant, albeit possibly temporary, reversal of trade barriers.

According to the Wind Trading Desk, Citigroup's latest report indicates that market expectations for the Trump administration's victory in the International Emergency Economic Powers Act (IEEPA) tariff case have significantly cooled. The preliminary hearing at the Supreme Court has shown unfavorable winds, causing the predicted market probability of government victory to plummet from about 40% to 27%.

Citigroup believes that if the court ultimately overturns the "reciprocal tariffs" imposed under the IEEPA, it could trigger a trading frenzy. The short-term market reactions may include: a decline in inflation expectations, a rise in the stock market (especially small-cap stocks), and a strengthening of certain emerging market currencies (such as the Mexican peso and Brazilian real). However, investors need to remain vigilant, as the government still has other legal avenues to reimpose tariffs, meaning any market boost from tariff cancellations could be short-lived.

Sudden Shift in Court: Legal Foundation of IEEPA Tariffs Shaken

The Citigroup report notes that during the first hearing of the IEEPA tariff case held this week, the judges' preliminary comments were perceived as unfavorable to the government. This signal quickly reflected in the prediction market. Data shows that on the day of the hearing on November 5, the market's prediction of the government's chances of winning the case dropped from about 40% before the meeting to around 27% by the close. This indicates that the mainstream market view is leaning towards the Supreme Court overturning the IEEPA-based tariff policy. The progress of this legal challenge is a key variable currently influencing market sentiment.

Despite setbacks in court, the Trump administration has not exhausted all its tools. The Citigroup report emphasizes that even if the IEEPA tariffs are ruled invalid, the government can still resort to other legal avenues to impose tariffs. Treasury Secretary Bessent, who attended the hearing, expressed optimism about the outcome but also revealed that the government is prepared to activate other legal authorizations.

These alternatives include:

• Section 122: Allows for the imposition of a broad 15% tariff within 150 days.
• Section 338: Allows for tariffs of up to 50% on countries that discriminate against U.S. businesses.
• Licensing fees argument: Repackaging tariffs as "licensing fees," although this idea was questioned by some judges during the hearing.

This means that even if the direct threat of the IEEPA is lifted, the shadow of tariffs will not completely dissipate; only the form and implementation timeline may change.

Short-term Winners and Losers: Beneficiaries of the Tariff "Window"

If the IEEPA tariffs are overturned, who will benefit in the short term? Citigroup analyzes as follows:

First, on a macro level, the effective tariff rate (ETR) in the U.S. will significantly decline. The report estimates that the effective tariff rate in October has risen to 12.5%, while the estimated rate after the full implementation of agreements could reach 15.3%. Once the IEEPA is overturned, this rate is expected to fall back to around 9% At the national level, the biggest winners in the short term will be those economies that are highly dependent on trade with the U.S. and are most affected by IEEPA tariffs. Citigroup's analysis (which takes into account benchmark tariff rates, the proportion of taxable goods, the share of exports to the U.S., and the share of exports in GDP) shows:

• Biggest winners: Vietnam and Mexico.
• Also benefiting: India, as the only major trading partner that has not reached an agreement with the U.S., is expected to see its tariffs significantly reduced from 50% (although it should drop to 25% due to Russian oil sanctions).
• Least benefited: The European Union and the United Kingdom.

It is worth noting that this "winner" situation may be temporary, as the government may come back with other measures later.

Trading Roadmap: The Market Has Already Priced in the "IEEPA Overturned" Scenario

For investors, the key is how to trade this expectation. Citigroup's report analyzes the performance of assets during the hearing day (when market expectations shifted sharply). During the period from 9:30 AM to 11:30 AM, when the probability of IEEPA declined sharply, the market performed as follows:

• Foreign exchange market: The Mexican peso and Brazilian real both rose, while the euro performed flat. This is highly consistent with the aforementioned "winner" analysis.
• Stock market: Market sentiment leaned positive, with the Russell 2000 small-cap index, which is more sensitive to tariffs, outperforming the S&P 500 index.
• Inflation expectations: The one-year inflation swap yield fell by more than 5 basis points, reflecting that investors quickly digested the expectation of reduced inflation pressure from tariffed goods