• The dust continues to settle on another episode of US tariff volatility. Ultimately, we don’t see the SCOTUS ruling as changing much from a European perspective. The US administration is likely to find other ways to preserve the broad IEEPA-based equilibrium. The fact that Trump is more constrained by the ruling reinforces our sense that we are past ‘peak tariff’. Meanwhile, market participants, corporates and policymakers have learnt to look through US trade policy announcements and hence headwinds for sentiment are likely to be limited.
• The euro area economy has continued to show signs of a moderate cyclical upswing at the start of the year which will also help to cushion against tariff-related uncertainty. In terms of escalation risks, we doubt the EU would want to jeopardise the outlook while the economy seems to be turning a corner.
• For the ECB, the ‘good place’ mantra remains valid. Indeed, the reduction in US tariff rates on China and other EM economies decreases the risk that trade diversion will push inflation further below target.

More US trade policy volatility – but not a whole load has changed

We are probably past 'peak tariff' 

The last year has taught us not to overreact to US tariff developments. As the dust settles on the SCOTUS ruling we think that approach remains valid from a European macro perspective. Uncertainty is never ideal, but the bottom line is that not a whole load has changed.  

A quick recap: last Friday, the US Supreme Court struck down the administration’s use of the International Emergency Economic Powers Act (IEEPA) to impose sweeping import tariffs. The ruling was not a surprise and the White House swiftly pivoted to Section 122 of the Trade Act (1974). That permits a global baseline tariff of up to 15% to address “fundamental international payments problems”, for as long as 150 days, without approval from Congress. It was initially announced that the US would set these tariffs at 10%. That was swiftly boosted to 15% by Trump, but then actually imposed at 10% when the new framework became effective.

These replacement tariffs are time limited and will expire on 24 July. We assume Congress will not support an extension – the Trump administration will look at alternative options to preserve tariffs. That will probably involve investigations to justify using Section 232 to permit higher tariffs on national security grounds.

In the meantime, sector-specific existing tariffs under Section 232 (e.g. on steel, aluminium, copper, cars & parts, lumber, semiconductors) will remain in place, but will not be stacked with the 10% baseline. USMCA-compliant goods also remain exempt, as do exclusions from the previous IEEPA framework (e.g. energy, pharmaceuticals, aerospace products, passenger vehicles – official list here).

Putting it all together, this leaves the overall average US rate below the IEEPA-based level, according to the Yale Budget Lab. That would remain the case if the baseline were to be raised to 15%. Several economies, such as Brazil and China, have emerged with reduced average effective tariff rates (see here). In Europe, the difference is more modest: the average rate on EU imports falls marginally below its previous rate, but it would increase slightly above it if the baseline is raised to 15%.

Stronger German growth supported the euro area in Q4

Better manufacturing sentiment at the start of 2026

The euro area economy is better positioned to navigate tariff uncertainty

This all reinforces our sense that we have passed ‘peak tariff’. The US Supreme Court ruling has left Trump more constrained. At any rate, we suspect there would be some reluctance to increase average tariff rates beyond current levels. We think the aim will be to broadly maintain the previous IEEPA-based equilibrium with US policy goals ultimately remaining unchanged.

There is still uncertainty – e.g. around what will happen on 24 July when these tariffs expire. The risk of moving to a higher 15% baseline will also remain, but we stress that the European economy is better placed to handle tariff volatility. We wrote last month that the euro area was starting the year on a decent footing, despite the range of obvious geopolitical risks. Since then, the general improvement across various European survey indicators has continued. This week’s German ifo survey reinforced the sense that there is a cyclical improvement in manufacturing, boosted by greater defence spending and wider fiscal support. The breakdown of German Q4 GDP data, released today, already shows signs of support from government spending as well as a more confident consumer backdrop. It looks like a solid, domestically-orientated platform for growth this year.

With this resilience in mind, we doubt that this shift in the legal basis of US tariffs will weigh much on sentiment on this side of the Atlantic. There were always question marks around the stability of the previous tariff equilibrium (see e.g. here) so the development is no surprise, while little changes in terms of average effective rates.

There is some risk that things could get bumpy if previously agreed deals are reopened, but we see it as relatively small. The European Commission requested “clarity” and stated it wants a “stable, predictable transatlantic trading environment”. As far as the EU saw it, that was essentially the deal agreed last summer: an acceptance of unbalanced tariffs in order to prioritise certainty and reduce downside risks (see our initial take on the deal here).

The European Parliament has for now suspended its ratification of the deal. There are valid concerns. In cases where there are no exemptions, the new US 10% baseline tariff will be stacked on top of existing MFN rates. That will raise US tariffs on some goods above the 15% ceiling set out in last summer’s agreement. There will also be grumbles that the EU’s competitive advantage has been reduced with US exemptions on certain products such as aircraft parts now applied to all US trade partners.

It’s an awkward position for the EU. Uncertainty has increased and the previous deal has been eroded. But it faces a very similar average US tariff rate, even if the 10% baseline is raised to 15%. Is it worth risking escalation just when the economy seems to be turning a corner? The domestic macro backdrop looks more resilient but the arguments for swallowing the unbalanced deal in the first place remain valid. We think there’s likely to be reluctance to jeopardise what increasingly seems to be a cyclical recovery in European industry and that officials will continue to push for ratification.

From an ECB perspective, we don’t see a huge challenge to the ‘good place’ narrative – provided that escalation is avoided and the effect on sentiment is limited, as we expect. If anything, the risk of trade diversion pushing inflation further below target has been reduced now that various economies including China have seen a reduction in average US tariff rates. Trade diversion has been one of the factors behind our view that an ECB cut is more likely than a hike this year (see e.g. here).

While we fully expect US trade policy volatility during the transition away from IEEPA-based tariffs, the bottom line is that policymakers and market participants alike are well used to this now and will feel more comfortable looking past the noise.