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Five months ago, President Donald Trump‘s “Liberation Day” tariff announcement put investors on suicide watch. The stock market lost $6.6 trillion in its largest two-day collapse in history, and then the bottom fell out of the bond market as the 30-year Treasury yield posted its biggest three-day jump in nearly half a century.
Now, as the president begs the Supreme Court to hear an emergency appeal to overturn an appellate court’s ruling that much of Trump’s sweeping tariff regime is unconstitutional, investors find themselves in the odd position of wondering, “Can markets learn to live without the tariffs?”
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Upon markets reopening after Labor Day weekend, the Dow Jones stumbled 500 points, but more importantly, bond markets both here and around the world went into a temporary tailspin. The 30-year yield, which rises inversely to the bond’s value and reflects the higher rate of borrowing incurred by the federal government, nearly cracked an all-time high of 5%. In other words, while the alarm among equities was fairly muted, bond markets panicked about the potential that the Supreme Court would overturn the tariff regime that they had gone apoplectic over just five months ago.
It’s not exactly that markets have learned to love tariffs. Rather, thanks to the April bond panic forcing Trump to rein them slightly in, the ramifications for economic growth and inflation have been much milder than immediate post-“Liberation Day” projections. And these costs, according to global investors, are more than worth the very real offset the tariffs provide to the U.S. government’s exploding deficit spending.
Let’s step back a moment and evaluate what the current tariff regime costs to the American consumer and our economic growth, what it nets in federal revenue, and then what’s at stake if the Supreme Court upholds the lower court’s ruling.
After the April blowback to the panoply of tariff rates ranging from 10% to 49% with zero economic rhyme or reason, the White House benched Peter Navarro to allow Treasury Secretary Scott Bessent to spearhead new trade negotiations for a 90-day pause, during which most tariffs outside the United States-Mexico-Canada Agreement and sector specific tariffs — such as the 25% tariffs on steel, aluminum, and auto imports — were held at 10%. The Yale Budget Lab found that the average effective tariff rate on all imports was likely 10% in June and July and, now that the 90-day pause is over and a slew of new country-specific trade deals are in effect, 11.4% in August. This is up from the 2.4% average effective tariff rate enjoyed at the start of the year, and it’s the highest effective tariff rate since at least World War II.
But an 11.4% consumption tax on imports is not nearly the financial Armageddon of the nearly 50% tariff rates initially imposed on major trading partners such as Vietnam and Cambodia. Nearly half a year into Trump’s tariff experiment, it’s true that consumers are finally eating the majority of the costs of the tariffs, but the costs themselves are somewhat mild, with the Yale Budget Lab estimating that core goods prices are 1.9% higher than they would be otherwise and that core services prices are unaffected. The overall labor market has shown some weaknesses, but not markedly so more in tariff-sensitive sectors than in those we’d expect to be immune to the duties. Overall, the macroeconomic cost of the tariffs — if they held stable, as markets were assuming they would after the beginning of August — have been not unnoticeable but mostly mild.
And to what end? The tariffs have utterly failed at the autarkic goals laid out by Navarro and company, but as a deficit salve, they’ve been significant. Uncle Sam has collected more than $183 billion in tariff revenue since the start of 2025 and over $30 billion in August alone. In July, tariff revenue, which was up 252% from July 2024, was actually greater than the amount of corporate tax revenue collected by the Treasury.
It’s not that investors love taxes, though they correctly understand that if we do impose taxes, then consumption taxes are far less harmful to economic growth than personal income taxes, which in turn are less harmful than corporate income taxes. And it’s also not that the tariff revenue collected cracks more than a minor debt in our spending. Consider that $30 billion of tariff revenue collected in one month doesn’t quite pay for half of one month of our Medicaid outlays or a third of our Medicare outlays.
But on a dynamic basis, Trump’s signature One Big Beautiful Bill Act will likely add $3 trillion to the deficit over the decade while significantly unleashing economic growth. The Congressional Budget Office estimates that the current tariff regime, if held in place, would reduce the deficit by $4 trillion without significantly undermining economic growth. This calculus warmed investors up quickly to Trump’s tariffs, while the potential for the court to uphold the lower court’s ruling has them panicked.
The problem for markets is that the court doesn’t care about the deficit if the accounting trickery still runs afoul of the law.
The non-sector-specific tariffs — that is, virtually all of them — were invoked under the International Emergency Economic Powers Act. IEEPA has historically been invoked in response to national security cataclysms, such as embargoing crude oil from Libya in 1982 following the Gulf of Sidra incident and imposing sanctions during the Iran hostage crisis and the Syrian Civil War. Trump’s explicit justification for invoking IEEPA was “the large and persistent trade deficit that is driven by the absence of reciprocity in our trade relationships.” A trade deficit is not a national emergency. In general, a trade deficit is not even a bad thing. And for a country that maintains the world’s reserve currency, a trade deficit, which is another way of saying a current account surplus, is actually a good thing, the reasons for which you can read about in our prior debunking of autarky.
The appellate court that overturned the IEEPA tariffs found that they “exceed any authority granted” by the 1977 law, and frankly, investors understand that the conservatives of the nation’s highest court have no reason to see otherwise. After all, the Constitution explicitly reserves “the power to lay and collect taxes, duties, imposts, and excises” for Congress, not the executive branch. And while Trump’s invocation of Section 232 to impose his sector-specific tariffs may be purely pretextual, steel and aluminum are indeed crucial enough inputs for the American military that the national security justification passes legal muster.
But a trade deficit is simply an accounting identity, not a B-52 bomber. Whereas the court may give the president some deference to onshore specific sectors for the sake of military capabilities, it is less likely to consider a balance of payments ledger a similar national emergency.
The problem for Trump is not just that he may very well lose his tariffs in the future but also that he may have to give back the tariff revenue that has already been spent.
“Delaying a ruling until June 2026 could result in a scenario in which $750 billion-$1 trillion in tariffs have already been collected, and unwinding them could cause significant disruption,” the White House warned in its plea to the court.
Investors can learn to live without the tariffs, and indeed, the court may not give them any choice. But to do so without the bond market collapsing and subsequently seeing the interest charged to the federal government then skyrocket, investors must see some real deficit reduction executed by the Trump administration. If not through tariffs or another form of tax increases, the bond market makes clear that it expects deficit reduction through continued spending cuts more on the magnitude of the One Big Beautiful Bill Act’s Medicaid reforms than the measly slivers by the Department of Government Efficiency.
Otherwise, the U.S. is headed to the unknown world of true fiscal dominance, when everything from global interest rates to inflation is dictated solely by the swelling explosion of Uncle Sam’s profligacy.
