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February 26, 2026
On February 20, 2026, the U.S. Supreme Court handed down a historic ruling that will significantly impact trade policy in America. In Learning Resources, Inc. v. Trump, the Supreme Court, in a 6-3 majority, held that the President lacks the constitutional power to levy “emergency” taxes on foreign imports. The ruling effectively stated that while the Administration claimed the International Emergency Economic Powers Act (IEEPA) to support high tariffs to counteract drug smuggling and trade imbalances, Congress alone possesses the authority to levy such taxes.
Only two days later, February 22, 2026, President Donald Trump reacted to the blow, declaring a new 15% global tariff in defiance of the Court’s ruling. Last Friday’s Supreme Court decision effectively invalidated the original tariff system, with the justices stressing that the authority to regulate trade is separate from the authority to tax it.
In conclusion, by again holding that trade taxes require Congressional approval, the Supreme Court has reaffirmed the constitutional separation of powers.
Here is a simple breakdown of the ruling and what it means
What was the case about?
Not long after his return to the White House in early 2025, Donald Trump took a dramatic step.
He announced that the United States was facing not one, but two national emergencies.
The first, he said, was a public health crisis caused by the influx of illegal drugs into the country, especially from Canada, Mexico, and China. The second was an economic crisis, which had been caused by huge trade deficits for decades, resulting in the destruction of American manufacturing and its vital supply chains.
To address both issues simultaneously, he relied on a strong statute known as the International Emergency Economic Powers Act, or IEEPA.
This statute gives the president the authority to control economic transactions during a national emergency. The administration based its argument on the fact that the statute states that the president has the authority to “regulate… importation,” which means he also has the authority to levy tariffs, or taxes, on imported goods into the United States.
The First Wave: Drug Trafficking Tariffs
In 2025, the president signed a series of proclamations and executive orders concerning a national emergency regarding the drug crisis.
Soon after, new tariffs were introduced:
25% on most imports from Canada and Mexico
10% on most imports from China
The implication was clear unless other nations took a more active role in stemming the flow of drugs, their products would cost more to sell in the U.S. market.
The Second Wave: Trade Deficit Tariffs
In early 2025, the administration announced another emergency, this time over “large and persistent” trade deficits. Officials argued that America was buying far more from other countries than it was selling to them, and that this imbalance had damaged domestic industry.
To address this, the president imposed what he called “reciprocal tariffs.” At least 10% tariffs were placed on imports from all trading partners, with the idea of matching or exceeding the trade barriers other countries placed on American goods.
Over the next several months, the tariff rates changed rapidly. For example, the tariff on Chinese imports rose from 10% to 20% within a month. By mid-2025, the total effective tariff rate on some Chinese goods had climbed as high as 145%.
The administration described the tariffs as serving these possible purposes:
The president argued that the drug crisis was not just a crime issue, but a national emergency threatening American lives.
He said long-standing trade deficits had weakened American factories and made the country dependent on foreign supply chains.
The administration also claimed the tariffs would bring in massive new government revenue potentially reducing the national deficit by trillions of dollars.
Why did the Court rule against the President?
It all started with small businesses fighting for survival.
When the 2025 "Emergency Tariffs" hit, companies like Learning Resources saw their costs skyrocket overnight.
The case took a unique path:
Small businesses sued in the Court of International Trade (CIT). The CIT ruled that the President cannot use emergency laws to set such massive tariffs.
The government appealed, but the Federal Circuit Court agreed with the businesses, calling the tariffs "unbounded in scope."
Realizing the massive impact potentially $175 billion in collected taxes the Supreme Court fast-tracked the case to settle the law for the entire country.
When the case finally reached the Supreme Court of the United States, the central question wasn’t whether tariffs were smart or harmful,
It was simpler and more fundamental: Who gets to decide?
Writing for the majority, Chief Justice John Roberts explained why the Court ruled against the President.
The Constitution grants Congress, not the President, the “power to lay and collect” taxes. Since tariffs are taxes on imported goods, the President lacks the authority to impose them without congressional approval.
The administration invoked the International Emergency Economic Powers Act, which states that the President has the “authority to regulate” importation in times of emergencies. However, the Court clarified that to “regulate” is to “set rules or control conduct,” not impose taxes. Since tariffs are taxes, and no law that equates regulatory power to taxing power could be found, the Court held that the President lacked authority to impose tariffs through the “regulate… importation” power.
When a president acts comprehensively on an issue that impacts the whole U.S. economy, Congress must explicitly approve of it. Since the law did not explicitly grant the President tariff power, the Court held that the President overstepped.
The "Messy" Weekend Plot Twist
However, in its ruling last Friday, the Supreme Court struck down the original global tariffs because the President used the wrong legal basis. In other words, the Court said: “You can’t use that specific emergency law to impose broad tariffs without Congress’s clearer approval.”
But that’s not the end of the story. Hours after the Supreme Court’s decision, the Administration changed its mind and used another law, which is Section 122 of the Trade Act of 1974. It is a rarely used provision that gives a President the authority to impose tariffs of up to 15% if the U.S. is facing a “large and serious” balance-of-payments deficit. 15% is the legal maximum allowed under this section. The Administration first cited 10%, but then changed its mind and used the full 15%.
They are temporary. Tariffs imposed under Section 122 can only last for 150 days unless Congress extends them. That’s a political deadline.
This is the first time a President has used Section 122 in this manner. So, while the Supreme Court narrowed one legal path, the Administration quickly pursued another.
What does this mean for trade deals the US has already signed with countries around the world?
The Supreme Court didn’t only strike down a law; it inadvertently turned the “Winners and Losers” game board of international trade upside down. By imposing a flat 15% tariff under Section 122, the U.S. has introduced a new and very ironic reality.
India: With an effective tariff rate previously ranging between 18% and 25%, India’s new rate has now been reduced to the 15% ceiling. While this represents a clear numerical reduction on paper, the broader commercial impact will depend on how long the measure remains in place and whether additional trade adjustments follow.
China: The most affected country has seen its 32% “fentanyl-linked” tariffs eliminated. China now pays the same 15% as all other countries, giving them a staggering 17-point tariff relief in a single night.
The UK & Australia: These countries had to fight tooth and nail for a “special” 10% tariff rate last year. But with the new 15% flat tariff rate, their bills have actually increased by 50%.
Japan & South Korea: After promising the U.S. billions of dollars in investments to get a 15% tariff rate, they’ve lost their “competitive advantage” because all countries now have the same 15% tariff rate.
What This Means for Businesses
For businesses, this is not a clean outcome, but a reset on a different set of rules.
The tariff pressure is still there in the short term.
The legal basis is different, but the business effect is the same.
There is now a 150-day period of uncertainty while Congress decides whether to extend the provisions.
In other words, the Court has ruled on the process, not the overall trade policy. Tariffs are still very much part of the trade policy toolkit.
For businesses that have to think about supply chains, pricing models, and international contracts, the important thing to remember is that relief may be temporary, and uncertainty continues. The next few months will be crucial in determining whether this is a temporary move or the start of something new.
What happens next?
Trade Deals: Over the past year, the U.S. has utilized high tariffs as leverage, or what can be described as a “negotiation tool,” in order to secure large trade commitments from nations such as China, Japan, and the United Kingdom. The implication was simple: “Agree to new trade terms or face higher import taxes.”
However, now that the Court has invalidated the legal basis for higher tariffs, this leverage has been diminished. The “stick” used in trade negotiations is no longer as potent or certain.
Therefore, some nations are taking a step back. The European Union, for instance, has temporarily halted some of its trade talks and is seeking clarification. The concern here is that while negotiated country-specific tariff rates are exchanged for a “blanket” 15% “emergency” tariff, the terms of trade have shifted.
In essence, the legal change in Washington is now having a ripple effect in international trade relationships.
The 150-Day "Section 122" Countdown - By moving over to Section 122, the President has essentially passed the buck back to Congress. These 15% tariffs are only temporary they will automatically expire in 150 days (about July 2026) unless Congress decides to extend them. Essentially, the tariffs are now on a timer. In the coming months, Congress will have to determine whether to allow them to expire, modify them, or make them permanent.
This is a very uncertain time for businesses. Companies must now plan for the potential expiration, continuation, or even overhaul of the tariffs based on the political debate that ensues.
Takeaways
No More Shortcuts: The Court has effectively brought an end to the "Tariff-by-Proclamation" era. By holding that "Regulate is not Tax," the Judiciary has essentially pushed trade policy into the more deliberative legislative process. For businesses, this means that you can expect more warning time, but less flexibility from the White House in reacting to world events.
Process over Policy: It is important to note that the Court did not state that tariffs are bad or illegal but only that the process of carrying out the tariffs was in error. The “Trade War” is not finished, but the “Trade Procedure” has merely been remedied. The President’s quick turn to Section 122 of the law proves that the administration’s intentions have not changed, even if the paperwork must be repapered.
The 150-Day Waiting Game: The shift to Section 122 presents a “ticking clock” situation. Companies are now operating in 150-day periods of certainty. This presents a challenge in long-term supply chain planning and multi-year pricing agreements, as the “clock” on the current 15% rate may tick out—or be extended—by a divided Congress this summer.
Less Bargaining Power, More Global Friction: The U.S. has lost its strongest "bargaining chip." With the shift to a flat rate of 15%, the administration has inadvertently punished allies (the UK) while rewarding some rivals (China). The "Global Reshuffle" means that companies must be prepared for the possibility of retaliation from allies who feel betrayed by the loss of their "special" lower rates.
Here is how Water and Shark can help address and mitigate this ongoing volatility:
Diversifying and stress-testing your supply chain, aligning your inventory planning with important legal windows to minimize tariff risk.
Enhancing supplier agreements with tariff contingency provisions and risk-sharing arrangements to shield your margins.
Tracking legislative and regulatory updates to offer early warnings and real-time impact analyses of trade policy changes.
Evaluation of minimizing the tax impact and tariff expense by exploiting duty drawback schemes, Foreign Trade Zones (FTZs), and effective pricing to shield your margins.
FAQs - Frequently Asked Questions
No. The Court did not say tariffs are illegal. It only ruled that President Trump cannot impose broad emergency tariffs without clear approval from Congress.
Because tariffs are taxes, and under the Constitution, only Congress has the power to impose taxes. The Court said the emergency law used by the President did not clearly give him that authority.
For now, yes. They are based on a different law (Section 122 of the Trade Act of 1974). But they can only last 150 days unless Congress extends them.
No. Tariffs are still being used. The legal path has changed, but trade tensions and negotiations are very much ongoing.
Businesses should prepare for uncertainty. That means reviewing supply chains, checking contracts for tariff clauses, and being ready for changes if the 15% rate expires or increases.
