Goldman Sachs warns that this year’s tariff hikes may not hold up in court. The Trump administration may resort to other methods to keep its protectionist stance. Tariffs imposed under the International Emergency Economic Powers Act (IEEPA) have added 8 of the 11 percentage points to the U.S. tariff rate this year. If the courts strike this down, the administration might turn to other legal options.

Legal Alternatives for Tariffs

One option is Section 122, which permits tariffs of up to 15% for seven months. Another is Section 301, used against China in 2018–2019, allowing tariffs specific to countries. However, starting 301 investigations for all trading partners can be complicated, especially for smaller economies, if the Supreme Court cancels IEEPA-based tariffs. If that happens, the administration may increase sectoral tariffs. Goldman Sachs estimates these tariffs could drive U.S. tariff rates up by about 17 percentage points over the next 18 months. The key question is not if tariffs will continue, but how they will be implemented, leading to significant uncertainty. The D.C. Circuit Court’s recent decision to hear arguments about the use of IEEPA adds more risk in the coming weeks. This legal uncertainty suggests that market volatility is underestimated, prepping us for sharp and unpredictable changes. In this context, buying volatility through derivatives might be smarter than placing strong bets on broad market indices. The CBOE Volatility Index (VIX), which has risen from the low teens to around 21.5 recently, may still climb higher. Buying VIX calls or creating option spreads on major ETFs could be an effective way to guard against sudden policy changes or court decisions.

Focus on Sectoral Impacts

Shifting to sectoral tariffs means we should pay more attention to specific industries rather than the overall market. We’ve already noticed this shift in the auto and industrial sectors, where futures contracts on inputs like steel have surged over 8% since tariff announcements in August. We can use derivatives to target these fluctuations, such as buying puts on affected multinational manufacturers while selling puts on domestic companies that could benefit. Currency markets, especially those of major U.S. trading partners, are crucial battlegrounds. Implied volatility on USD/MXN and USD/CNH options has increased significantly, echoing concerns similar to those seen during 2018-2019. Taking positions that could benefit from large currency swings, like long straddles, may be wise before any new tariff announcements. We must closely monitor the distinct timelines and impacts of each legal mechanism, whether Section 122 or Section 301. The seven-month timeframe of Section 122 suggests shorter trading horizons compared to Section 301 investigations. We should prioritize shorter-dated options around specific announcement dates and legal deadlines as they emerge. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now