When Wall Street Bets Against the White House
On November 5, 2025, the Supreme Court heard arguments in what may prove to be one of the most consequential cases of the decade. At stake: the constitutional limits of presidential power, the fate of nearly $90 billion in collected tariffs, and the future architecture of American trade policy.
The justices appeared deeply skeptical of the Trump administration's claim that the 1977 International Emergency Economic Powers Act (IEEPA) grants the president authority to unilaterally impose sweeping tariffs. Yet even as the legal drama unfolded in marble chambers, an extraordinary parallel story was playing out on Wall Street—one that reveals how financial markets have already rendered their verdict.
The Constitutional Question That Markets Are Already Pricing
The central issue before the Court is whether President Trump exceeded his authority by invoking IEEPA to impose tariffs, despite the statute never mentioning the word "tariff" and the Constitution explicitly granting Congress—not the president—the power to levy taxes.
The administration's position is unprecedented. In lower court proceedings, the government conceded this marks the first time in IEEPA's 50-year history that any president has attempted to use the statute to impose tariffs unilaterally. The White House argues that persistent trade deficits and the fentanyl crisis constitute "national emergencies" justifying such action under IEEPA's provision allowing the president to "regulate" international commerce during emergencies.
The Federal Circuit Court of Appeals found these tariffs unlawful by a 7-4 vote, with the majority concluding that IEEPA could not serve as a foundation for tariffs of the breadth and scope imposed by the president. The appellate court described the global trade restrictions—covering nearly all imports with no time limit—as both "unheralded" and "transformative".
The Scale of the Wager:
To date, the government has collected more than $88 billion from the emergency tariffs being challenged. From 2025 through 2034, these tariffs would raise nearly $1.8 trillion in tax revenue while shrinking GDP by 0.4 percent and employment by 428,000 jobs before accounting for retaliation from trading partners.
Justice Amy Coney Barrett, whom President Trump appointed, raised concerns about the administrative complexity of potential refunds during oral arguments, highlighting what legal observers have termed the "refund nightmare" scenario.
The Shadow Market: When Desperation Meets Speculation
While constitutional scholars debate legal theory, a novel financial instrument has emerged from the uncertainty: the tariff refund claim market.
The Mechanics of Asymmetric Betting:
Investment banks including Jefferies Financial Group and Oppenheimer & Co. are brokering deals between hedge funds and importers, with investors typically purchasing refund rights at 20 to 40 cents per dollar of potential claim value. For claims tied to Trump's "reciprocal" tariffs, investors pay approximately 20 cents per dollar, while levies on goods from Canada, Mexico, or China linked to fentanyl trafficking draw lower bids of roughly 5 cents per dollar, as these are seen as more likely to survive legal challenges.
The transaction structure is elegant in its simplicity: cash-strapped importers—particularly small and medium-sized businesses that have absorbed months of tariff costs—receive immediate liquidity. Investors acquire contingent assets that could yield returns of 300-500% if the Supreme Court invalidates the tariffs.
Jefferies Financial Group has facilitated dozens of trades exceeding $100 million tied to reciprocal tariffs imposed under Trump's 2025 emergency powers. Oppenheimer & Co. has arranged over $1.6 billion in refund-rights deals since 2021, with a surge in activity following the 2025 tariff expansion.
The Human Cost:
Kyle Peacock, principal at Peacock Tariff Consulting, reports that businesses purchasing refund stakes have been "aggressive" in their pitches to his clients, over 100 of whom have sold their stakes. "There's a very scary mentality," he notes, with buyers telling importers: "You'll never get this, so take this little bit of money, or you won't get anywhere".
This is not mere financial engineering—it represents the privatization of constitutional uncertainty, where hedge funds effectively purchase stakes in Supreme Court outcomes while struggling businesses trade potential future relief for survival capital today.
The Market Reaction: Fear of Victory, Not Defeat
Conventional wisdom would suggest markets fear a ruling against the administration. The reality proves more nuanced.
Following the November 5 Supreme Court hearing, U.S. equities rose on Wednesday as the Court's skeptical questioning about Trump's tariffs raised hopes that some duties may be rolled back. The S&P 500 rose 0.37% to finish at 6,796.29, while the Nasdaq Composite advanced 0.65% to 23,499.80.
The counterintuitive pattern emerges when examining fixed income markets. Short-term Treasury yields fell modestly while long-term yields rose sharply on November 5, with the 10-year and 20-year posting the largest increases. This "steepening" signals fiscal stress concerns among bond investors.
The Fiscal Arithmetic of Refunds:
If the Court orders refunds, the Treasury faces an unprecedented administrative challenge. The government has collected nearly $90 billion as of September 2025, a figure that continues growing until a verdict is announced. By the time a Supreme Court decision arrives (likely before the end of 2025 or early 2026), that bill could exceed $500 billion when including interest compounding at current Treasury rates of approximately 5-6% annually.
This explains the bond market's concern: a ruling against the administration would force substantial unplanned borrowing, increasing supply of Treasury securities and pushing yields higher—precisely the pattern observed.
The Policy Trap: Inflation, Investment, and the Fed's Dilemma
The tariff regime has created what economists term a "policy trilemma"—three objectives that cannot simultaneously be achieved.
Chicago Fed President Austan Goolsbee recently warned that renewed uncertainty from tariffs is causing businesses to stall capital expenditures and investment—a "business freeze" phenomenon. Simultaneously, financial data shows core CPI stuck at 2.9%, with price hikes in durable goods like appliances, footwear, and apparel directly linked to import costs.
The Federal Reserve faces an impossible choice: cutting interest rates to address the business freeze would risk entrenching tariff-driven inflation; maintaining high rates to combat inflation exacerbates the investment drought. The policy creating the freeze is the same policy fueling the inflation.
The Political Economy Addiction:
The IEEPA tariffs collected so far in 2025 make up the biggest portion of a $118 billion increase in net customs receipts in the fiscal year that ended September 30, helping offset rising healthcare, Social Security, interest, and military outlays. As Ernie Tedeschi, senior fellow at the Yale University Budget Lab, notes: "It's a significant political economy risk that we get addicted to tariff revenue," making it harder for any future administration to lower the duties.
The Alternative Arsenal: What Happens If IEEPA Falls
A ruling against the administration would not end presidential tariff authority—it would merely force a strategic pivot.
Treasury Secretary Scott Bessent has stated that if the Supreme Court strikes down the IEEPA-based tariffs, the administration will simply switch to other tariff authorities, including Section 122 of the Trade Act of 1974, which allows broad 15% tariffs for 150 days to address trade imbalances, and Section 301, which allows tariffs as part of unfair trade practices investigations.
President Trump invoked Section 301 authority to impose tariffs on China and the EU during his first administration, and he could use this authority more expansively following an IEEPA defeat. However, Section 301 involves more limited authority and includes procedural requirements such as consultations with foreign countries and public comment periods, which normally take about a year, though a president intent on acting quickly could move faster.
The Next Battlefield: Europe's Carbon Checkmate
While America litigates yesterday's trade war, Europe has constructed tomorrow's trade architecture.
The Carbon Border Adjustment Mechanism (CBAM) entered its transitional phase in October 2023 and will begin its definitive regime in January 2026. Starting in 2026, EU importers must acquire CBAM certificates for greenhouse gas emissions associated with imported goods that are not subject to equivalent carbon pricing in the country of origin.
CBAM initially covers six emission-intensive sectors: aluminum, cement, electricity, fertilizers, hydrogen, and iron and steel. By 2030, all sectors covered by the EU Emissions Trading System will fall under CBAM.
The Strategic Advantage:
OECD analysis indicates that in 2022, CBAM would have covered 171 million tonnes of CO2 equivalent. The mechanism would cover approximately 0.37% of global trade and 3% of EU imports from non-EU countries. If fully implemented with no adjustments for existing carbon prices in partner countries, CBAM would generate approximately €14.7 billion.
The price of CBAM certificates follows the price of emissions allowances in the EU ETS, creating a level playing field between foreign and EU producers. The mechanism gradually replaces EU ETS free emissions allowances through a nine-year phase-out from 2026 to 2034.
This fundamentally transforms the trade game. Traditional tariffs are binary: they either apply or they don't. CBAM creates a graduated system where the competitive position of imports depends on production methods rather than origin. A Chinese steel producer using clean energy faces lower CBAM charges than a domestic producer using coal—regardless of nationality.
The implications extend beyond trade economics. For exporting countries, developing domestic carbon pricing mechanisms can reduce CBAM charges, as any carbon price already paid in the country of origin can be deducted from the CBAM levy. This incentivizes global decarbonization through trade policy rather than international agreements—a form of regulatory arbitrage in reverse.
The Administrative Labyrinth: What "Winning" Actually Means
A favorable Supreme Court ruling for importers would trigger administrative complexity unprecedented in modern American trade history.
In a 1998 Supreme Court decision on harbor maintenance fees that resulted in tariff refunds, it took two years for $730 million to be returned to importers—a figure that represents less than 1% of the current potential refund amount.
The Importer-of-Record Problem:
Refunds are issued only to the legal "importer of record," creating challenges for companies that rely on commercial carriers such as FedEx and UPS to clear shipments. Many small businesses outsource customs clearance to freight forwarders, meaning the legal importer may not be the economic entity that bore the tariff cost.
Trade attorney Thomas Beline notes that businesses outside the five parties that attorney Neal Katyal represents in the Supreme Court case may not necessarily be eligible for automatic refunds. Instead, they may have to file separate appeals with lower courts for the chance at a refund.
For companies that have already sold their refund rights to hedge funds, legal experts warn of complex litigation over assignment rights, documentation standards, and the timing of refund eligibility.
Moreover, the accounting implications extend beyond simple cash transactions. Many importers spent years re-engineering global supply chains, changing sourcing locations, shifting factory production, and fundamentally rewriting transfer pricing structures—how they book costs between international subsidiaries. A sudden refund would require unwinding years of financial decisions, potentially triggering tax consequences, accounting restatements, and renegotiated supply contracts.
Conclusion: The Precedent Beyond the Verdict
Whatever the Supreme Court decides, the case has already revealed fundamental tensions in modern trade governance.
The emergence of a secondary market in tariff refund claims demonstrates how constitutional uncertainty becomes an asset class. The divergent reactions in equity and bond markets show that "winning" and "losing" carry complex, non-obvious implications for different economic actors.
As Brookings Institution scholars note, the economic effects of the Supreme Court's decision about IEEPA may prove marginal at most, depending on how far the administration pursues tariffs under alternative statutory authorities. What will matter most is the legal precedent and the Court's rationale—the scope of authority the Court reads into IEEPA, the degree of deference it gives to presidential fact-finding, and anything it might say about the future of the nondelegation doctrine.
The case ultimately asks: In an era of global supply chains and instantaneous capital flows, who decides trade policy—Congress through legislation, the executive through emergency powers, or markets through pricing mechanisms?
As America awaits the Court's answer, Europe has already moved to the next question: not where goods are made, but how they are made. That may prove the more durable framework.
Sources
- CNN Politics, "Trump administration faced deeply skeptical Supreme Court in tariff arguments," November 5, 2025
- ABC News, "What's at stake in high-profile Supreme Court case on tariffs," November 5, 2025
- NPR, "Supreme Court enters the lion's den on Trump tariffs," November 5, 2025
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- Tax Foundation, "What You Should Know About the Trump Tariffs Being Challenged at the Supreme Court," November 2025
- Brookings Institution, "Legal and economic aspects of the Supreme Court's upcoming tariff decisions," November 2025
- CBC News, "Win or lose at the Supreme Court, Trump has other tariff tools," November 4, 2025
- Peacock Tariff Consulting, "Tariff Refund Gold Rush: How Wall Street Is Monetizing Trade Law Uncertainty," November 2025
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- World Bank, "How developing countries can measure exposure to the EU's carbon border adjustment mechanism," September 2025