Goldman Sachs suggests that this year’s tariff increases are largely based on legal authority that courts might overturn. The Trump administration might use other tools to maintain its protectionist efforts.
Tariffs under the International Emergency Economic Powers Act (IEEPA) account for 8 out of the 11 percentage point rise in the U.S. tariff rate this year. If courts reject this measure, the administration may use other legal methods.
Legal Alternatives for Tariffs
One possibility is Section 122, allowing tariffs of up to 15% for seven months. Another is Section 301, already used against China in 2018–2019, enabling country-specific levies. Yet, launching 301 investigations for all partners is complex, potentially excluding smaller economies if the Supreme Court nullifies IEEPA-based tariffs.
In such a case, the administration may focus more on sectoral tariffs. Goldman estimates these will mainly drive further tariff increases over the next 18 months, raising the effective tariff rate by about 17 percentage points since the year’s start.
The core issue for us is not *if* tariffs will persist, but *how* they will be applied, creating significant uncertainty. The D.C. Circuit Court’s decision last month to hear expedited arguments on the IEEPA’s use has created a clear event risk for the coming weeks. This legal ambiguity suggests that market volatility is underpriced, and we should prepare for sharp, unpredictable moves.
Given this backdrop, we should consider buying volatility through derivatives rather than taking firm directional bets on broad indices. The CBOE Volatility Index (VIX), which has already crept up from the low teens over the summer to around 21.5 this past week, likely has further to run. Purchasing VIX calls or implementing option spreads on major ETFs can offer a cost-effective hedge against sudden policy shifts or court rulings.
Focus on Sectoral Impacts
The potential pivot to sectoral tariffs means our focus should shift from the overall market to specific industries. We’ve already seen this in the auto and industrial sectors, where futures contracts on inputs like steel have jumped over 8% since the August tariff announcements. We can use derivatives to isolate and trade these pockets of volatility, for instance by buying puts on exposed multinational manufacturers while simultaneously selling puts on domestically-focused companies that may benefit.
Currency markets, particularly those of major U.S. trading partners, will remain a key battleground. Implied volatility on USD/MXN and USD/CNH options for the next quarter has widened significantly, reflecting similar anxieties we saw back in the 2018-2019 period. Establishing positions that profit from sharp currency swings, such as long straddles, could be prudent ahead of any new tariff announcements.
The legal mechanisms themselves, whether Section 122 or Section 301, create distinct timelines and impacts that we must watch closely. The seven-month limit on Section 122, for example, implies a different trading horizon than a more open-ended Section 301 investigation. We should therefore favor shorter-dated options to trade around specific announcement dates or legal deadlines as they become clear.
