For businesses and consumers bracing for a relentless era of global trade wars, Morgan Stanley is offering a striking reality check: Peak tariffs have likely already come and gone.
The bank’s global economic briefing on Monday, the latest in a series of “tariff diaries” by senior economists including Rajeev Sibal and Michael Gapen, found President Donald Trump is very unlikely to draw any greater revenue from tariffs than he already has, following the recent Supreme Court ruling striking down the administration’s use of the International Emergency Economic Powers Act (IEEPA). Although it didn’t cite Treasury Secretary Scott Bessent by name, the note lent credence to his description, before the Supreme Court ruling, of tariffs as a “shrinking ice cube.”
While Trump quickly pivoted to Section 122 of the Trade Act of 1974 as a stopgap measure, Morgan Stanley economists argued any new trade framework will be legally vulnerable and mathematically weaker, and a return to last year’s aggressive “Liberation Day” tariff levels would be “quite complicated.”
The flawed foundation of Section 122
The administration’s fallback plan relies on Section 122, a statute that allows the president to impose an across-the-board temporary import surcharge of up to 15% for 150 days. However, Morgan Stanley warns Section 122 could face legal challenges similar to those versus the IEEPA, especially given that it has never actually been used since its creation.
The act provides the president authority to impose temporary import measures of up to 15%, limited to 150 days unless extended by Congress, with no formal investigative process required. But more important, Gapen writes, the statutory trigger is framed around a “balance of payments disequilibrium” rather than a goods trade deficit.
In the 1970s context in which this law was written, Gapen explains, this had a concrete meaning related to the Bretton Woods regime in place since the end of World War II. In the 1970s era of fixed exchange rates, a payments problem meant severe reserve loss and forced currency adjustments. Today, under a regime of floating exchange rates and monetary sovereignty, Morgan Stanley economists said, “we would not view a persistent trade deficit as constituting a classic balance of payments ‘crisis’ or solvency constraint.“ Because of this mismatch, relying on Section 122 leaves the new tariff framework wide open to inevitable legal challenges.
Beyond this legal fragility, Section 122 mechanically caps the administration’s trade ambitions. Replacing IEEPA with Section 122 would mechanically lower baseline headline tariffs from approximately 13% down to 11%, Morgan Stanley estimates. And if Congress fails to renew these tariffs by roughly August, the bank calculates nominal tariff levels would plummet to the mid-single digits, around 6% to 7%.
The refund question
A major lingering question following the Supreme Court’s decision to strike down the administration’s use of the IEEPA is the status of the tens of billions in tariff revenue already collected. However, because the Supreme Court ruling did not explicitly mandate whether the Treasury must pay back the collected tariff revenue, the path to recovering those funds remains legally ambiguous. Morgan Stanley expects the issue to be heavily litigated in lower courts. The timeline for this process is expected to be extensive, mirroring comments made by Trump, who said during a press briefing: “We’ll end up being in court for the next five years” over the matter.
Given this lack of clarity and the anticipated legal battles, any potential refunds are expected to take a significant amount of time to actually reach the broader economy. When they do arrive, Morgan Stanley forecasts a “midpoint scenario” of partial and delayed refunds totaling approximately $84 billion to $85 billion. Alternatively, a “limited/minimal” scenario projects the refunds could be as low as roughly $56 billion.
Because of the relatively limited size and the extended, complicated timeline, economists predict these refunds will ultimately result in very little change to their broader macroeconomic and supply outlooks. Should the administration eventually need to fund these refund issuances, Morgan Stanley expects it will likely do so using Treasury bills, and any resulting rise in yields is expected to be short-lived.
“Given the lack of clarity by the Supreme Court, refunds are likely to take a while to reach the economy,” the bank wrote—and these refunds would be for companies, not consumers.
The complicated picture
Because of the strict 15% cap, the temporary nature of the authority, and the legally untested “balance of payments” trigger, raising tariffs back to the extreme “risk” scenarios seen around last year’s “Liberation Day” would be “quite complicated,” Morgan Stanley said. To rebuild those sweeping tariff walls, the administration would have to rely on slow-moving, sector-specific Section 232 or Section 301 investigations, which can take months or even years to fully implement.
For the broader U.S. economy, the unraveling of the administration’s primary tariff tool is a distinct positive, and if the Section 122 tariffs ultimately expire after 150 days without a legislative replacement, the macroeconomic picture would brighten further. A material drop in tariff rates in the third quarter of 2026 could provide a significant uplift to domestic demand, supporting corporate margins, labor demand, and household spending. For now, the Supreme Court ruling has effectively installed a strict near-term ceiling on trade barriers, substantially neutralizing the threat of runaway tariff escalation. What’s unknown, of course, is whether Trump will accept it.
For this story, Fortune journalists used generative AI as a research tool. An editor verified the accuracy of the information before publishing.
