Why a Tariff Ruling Could Mean Consumer Relief

0:00Arunima Sinha:Welcome to Thoughts on the Market. I'm Arunima Sinha from Morgan Stanley's U.S. and global economics teams. Today, how a single Supreme Court ruling could change the tariff math for U.S. consumers. It's Friday, February 13th at 10 a.m. in New York. The U.S. Supreme Court is deciding whether the U.S. president has legal authority to impose sweeping tariffs under AIPAA. That decision could come as soon as next Friday. AIPA, or the International Emergency Economic Powers Act, is the legal backbone for a significant share of today's consumer goods tariffs. If the Supreme Court limits how it can be used, tariffs on many everyday items could fall quickly, affecting prices on the shelf, margins for retailers, and the broader inflation outlook.

0:52Arunima Sinha:As of now, effective tariff rates on consumer goods are running about 15%, and that's based on late 2025 November data. And that's quite a bit higher than the roughly 10 % average, which we're seeing as tariff on all goods. In a post-AIPA scenario, we think that the effective tariff rate on consumer goods could fall to the mid-11 % range. It's not zero, but it is meaningfully lower. An important caveat is that this is not going to be eliminating all tariffs. Other trade tools like Section 232s, which are the national security tariffs, Section 301s, the tariffs that are related to unfair trade practices, would remain in place.

1:38Arunima Sinha:Autos and metals, for example, are largely outside the AIP discussion. The main pressure point, we think, is consumer goods. AIPA has been used for two major sets of tariffs, the fentanyl-related tariffs on Mexico, Canada, and China, and the so-called reciprocal tariffs applied broadly across trading partners. And these often stack on top of the existing tariffs, such as the MFN, the most favored nation rates, and the Section 301 duties on China that were already existing before 2025. The exposure is really concentrated in certain categories of consumer goods. So, for example, in apparel and footwear, about 60 % of the applied tariffs are AIPA-related.

2:24Arunima Sinha:For furniture and home improvement, it's over 70%. For toys, games, and sporting equipment, it's more than 90%. So if the AIPA authority is curtailed, the category-level effects would be meaningful. There are caveats, of course. The court's decision may not be all or nothing, and policymakers could turn to alternative authorities. One example is Section 122, which allows across-the-board tariffs for up to 15 % for 150 days. So tariffs could just reappear under different tools. But in the near term, fully replacing AEPA-based tariffs on consumer goods may not be straightforward, especially given ongoing affordability concerns.

3:11Arunima Sinha:So how does that matter for the real economy? There are two key channels, prices and margins. On prices, we estimate that about 60 % of tariff costs are typically passed through to the consumers over two to three quarters, but it's not instant. Margins, though, could respond faster. If companies get cost relief before they adjust prices downwards, that creates a temporary margin tailwind. That could influence hiring, investment, and earnings across retail and consumer supply chains. Over time, lower tariffs could also reinforce that broader return to core goods disinflation starting in the second quarter of this year.

3:54Arunima Sinha:And because tariff-driven inflation has weighed more heavily on the middle and lower income households, any eventual price relief could disproportionately benefit those grips. At the end of the day, this isn't just a legal story. It is a timing story. If AIPA authority is curtailed, the arithmetic shifts pretty quickly. Margins move first, prices follow later, and the path back to goods disinflation could accelerate. That's why this is one ruling worth watching before the gavel drops. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share our thoughts on the market with a friend or colleague today.

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