On July 31, a federal appeals court heard arguments in a case challenging the tariffs’ legal basis under the International Emergency Economic Powers Act (IEEPA), and the judges expressed deep skepticism about the administration’s side.

In a note this past week, James Lucier at Capital Alpha Partners said a decision is expected by the end of September, but could come as soon as late August. A unanimous or near-unanimous ruling could give the Supreme Court cover to avoid taking the case immediately and reject the administration’s request to issue a stay that would keep the tariffs in place in the meantime.

The dire warnings also represent “a remarkable change in tune by the administration, which until now has always insisted that it had legal authority to get the deals done one way or another even if the IEEPA tariffs were struck down,” Lucier added. 

Trump’s “Liberation Day” tariffs helped leverage a series of trade deals, including an agreement with the European Union, which pledged to invest $600 billion in the U.S. and buy $750 billion worth of U.S. energy products, with “vast amounts” of American weapons in the mix. Similarly, the U.S.-Japan trade deal entails $550 billion in investments from Tokyo.

‘Financial ruin’

The U.S. hasn’t received immediate cash transfers in those amounts. Still, in a letter to the U.S. Court of Appeals for the Federal Circuit on Monday, Justice Department officials suggested the government would suddenly owe everyone money—leading to catastrophe.

“The President believes that our country would not be able to pay back the trillions of dollars that other countries have already committed to pay, which could lead to financial ruin,” wrote Solicitor General D. John Sauer and Assistant Attorney General Brett Shumate.

They also warned that unwinding the trade deals would lead to a “1929-style result.” That echoed a post from Trump on Truth Social days earlier, when he predicted another Great Depression would hit America if the court rules against his tariffs.

Sauer and Shumate turned up the volume even higher in their subsequent letter, elaborating further on the depression warning.

“In such a scenario, people would be forced from their homes, millions of jobs would be eliminated, hardworking Americans would lose their savings, and even Social Security and Medicare could be threatened,” they wrote. “In short, the economic consequences would be ruinous, instead of unprecedented success.”

‘The president is in a jam’

To be sure, the government has generated significant tariff revenue since April, and importers who paid the reciprocal duties could seek reimbursement if they are struck down.

But that’s only about $100 billion and also includes revenue from sectoral tariffs that were imposed under a separate legal basis that’s not at risk.

“The real problem, the letter implies, is that Trump does not have legal authority to replicate the IEEPA tariffs under other tariff statutes if the court strikes the IEEPA tariffs down,” Lucier explained. “In other words, the president is in a jam because if the court strikes down the IEEPA tariffs, his trade deals have no legal basis.”

A note from Yardeni Research on Wednesday also pointed out that the administration is becoming increasingly concerned about losing the court case.

The letter from the Justice Department officials appears to anticipate that they will lose the case, as they are asking for a stay if the court goes against them.

There will be “messy” consequences if reciprocal tariffs are struck down, according to Yardeni, as Trump needs the revenue from tariffs to reduce the budget deficit and help to lower bond yields.

“If he loses in court, these yields might move higher. Stock prices might decline on this news initially, due to a new round of policy uncertainty,” the note said. “So the dire tone in the letter is understandable, even though it is a wee bit over the top.”