Supreme Court Kills IEEPA Tariffs, Trump Fires Back with Section 122, and Markets Close February in the Red

The Court Says No, Trump Says "Watch Me"

On February 20, the Supreme Court delivered a landmark 6-3 ruling in Learning Resources Inc. v. Trump, declaring that the International Emergency Economic Powers Act does not give the president authority to impose tariffs. Chief Justice Roberts, joined by an unusual coalition of Gorsuch, Barrett, Sotomayor, Kagan, and Jackson, held that the power to tax imports belongs to Congress under Article I of the Constitution. The IEEPA tariffs had raised more than $160 billion and were projected to bring in $1.4 trillion through 2035. The ruling called them a "systemic redesign of the U.S. economy" that required an explicit congressional mandate.

Within hours, Trump fired back. He signed a new executive order imposing a 10% "temporary import surcharge" on virtually all imports, this time under Section 122 of the Trade Act of 1974. The new tariffs took effect on February 24. The message was clear: the president lost the legal battle but wasn't done fighting the trade war.

What Section 122 Actually Allows

Section 122 is an obscure provision that most trade lawyers had probably forgotten existed. It allows the president to impose temporary tariffs of up to 15% for 150 days to address balance-of-payments deficits. It has never been used at anything close to this scale.

The new 10% surcharge applies to approximately $1.2 trillion in annual imports, about 34% of total U.S. imports. There are notable exemptions: critical minerals, pharmaceuticals, electronics, passenger vehicles, aerospace products, and goods from Canada and Mexico that comply with USMCA. Trump has already threatened to raise the rate to 15%.

The key limitation is the 150-day clock. Without congressional action, these tariffs expire on July 24, 2026. That creates yet another economic cliff for businesses to worry about, and a legislative battle in Congress that could get very messy.

The Math on What It Means for You

The shift from IEEPA tariffs to Section 122 actually reduced the effective U.S. tariff rate from about 17% (the highest since the early 1930s) to roughly 13.7%. That's still extraordinarily high by modern standards, but it's a meaningful decrease.

Still, the Yale Budget Lab estimates the remaining tariffs will push consumer prices up by about 0.6%, costing the average household roughly $800 in 2025 dollars. Unemployment is expected to rise by 0.3 percentage points by year-end. And with PCE inflation already running at 3.0% and a January PPI report that came in scorching hot (core PPI at 0.8% month-over-month, nearly triple expectations), any additional tariff-driven price pressure is the last thing the economy needs.

Markets Close February in Pain

February 2026 was rough for investors. The S&P 500 fell 0.86% for the month, closing at 6,878.88. The Nasdaq dropped 3.3%, closing at 22,668.21. Both posted their worst monthly losses since March 2025. The Dow shed 521 points (1.05%) on the final trading day alone, closing at 48,977.92.

The pain was concentrated in tech. Communication Services, Technology, and Consumer Discretionary sectors all declined 2-4%. Meanwhile, defensive sectors surged as investors sought safety: Utilities gained about 10% and Consumer Staples rose roughly 8%. The 10-year Treasury yield settled at 4.26%.

Three forces converged to drive the selloff. The tariff chaos from the SCOTUS ruling and Section 122 replacement created massive policy uncertainty. The January PPI inflation data came in much hotter than expected, complicating the Fed's path to rate cuts. And the ongoing AI valuation reckoning (Nvidia fell 5.5% despite blowing out earnings with $68.1 billion in Q4 revenue) suggested that even stellar fundamentals couldn't overcome market anxiety about tech valuations.

The $175 Billion Refund Question

One of the most consequential loose ends from the SCOTUS ruling is what happens to the $133 billion to $175 billion in IEEPA tariff revenue already collected. The Court struck down the legal basis for these tariffs, which means thousands of importers are now filing for refunds. But the ruling didn't explicitly address the refund question, creating an enormous legal gray area.

If the government has to return that money, it blows a significant hole in federal finances. If it doesn't, importers who paid duties under an unconstitutional program have a strong legal argument. This is going to generate years of litigation and could itself become a major fiscal event.

The Political Endgame

The real drama starts now. Section 122 tariffs expire on July 24 unless Congress acts. If Republicans want to maintain tariffs beyond that date, they'll need to pass actual legislation, which forces politically difficult votes. Democrats may try to use the issue as leverage on other priorities.

The Supreme Court decision was a landmark reassertion of congressional authority over trade. The bipartisan nature of the 6-3 coalition (with conservative justices Gorsuch and Barrett joining the liberal bloc plus Roberts) suggests a strong institutional consensus that tariff power belongs to Congress. But whether Congress will actually exercise that power, or continue to defer to the executive branch as it has for decades, is the open question.

What to Watch

The July 24 expiration date is the next major deadline. Watch for whether Trump pushes the rate up to 15% before then, and whether congressional Republicans introduce legislation to codify the tariffs permanently. The refund litigation over previously collected IEEPA duties will also be a slow-burning but massive story. And with the Fed watching inflation data closely, any upward price pressure from tariffs makes a June rate cut less likely, which would add another headwind for markets already struggling to find their footing.