GEOPOLITICAL UPDATE
We lead with perhaps the most consequential U.S. military decision since Pearl Harbor. Since 1979, U.S. policy towards Iran has been a largely cyclical diplomatic strategy of deterrence, avoidance, sanctions, appeasement, and negotiations. Not until last summer’s military strike on Iranian nuclear facilities had the U.S. taken direct military interventionist action at scale.
Fast-forward to this weekend: the U.S. military strike to decapitate the Iranian regime is nothing short of seismic. The days ahead will show just how effective the combined U.S.-Israeli campaign has been, and to what degree remnants of the totalitarian Shia government remain. Success of the Iranian people’s ability to stand up a democratic government that realigns with the West will be measured over months and years.
But for today it is most helpful to view the attack through the prism of the Trump Administration’s macro foreign and trade policy agenda-strategic decoupling from the People’s Republic of China (PRC) while attempting to reset the global order to its former post-World War II status: an industrialized and self-sufficient superpower that again controls global commerce and influences foreign nations to align themselves with American prosperity and democratic ideals.
With the capture of Nicolas Maduro and the ongoing attempted regime change in Iran, China risks losing direct access to nearly 20 percent of its imported foreign oil. The ripple effects of sanctions, the U.S. and its allies’ pursuit of the “shadow fleet,” and the implementation of the Donroe Doctrine, tests the durability of an alliance that includes China, Cuba, Iran, Russia, Venezuela, and North Korea. To this point, this illicit diplomatic shell alliance had succeeded in propping up otherwise isolated and struggling economies via the relatively free flow of oil, foreign investment, and military assurances. The events of the past two months put those all in question.
Thus, the Iran attack must be viewed more broadly in the global order. A realignment is underway that will very much forecast the winners of this millennium on the most transformative economic question of our lifetimes: artificial intelligence and robotics.
The upcoming March 31-April 2 visit between President Donald Trump and President Xi Jinping has heretofore been framed in a pro-CCP narrative-framing an American president with poor economic polling numbers as having decreased leverage courtesy of the U.S. Supreme Court. This analysis is short-sighted.
While China does benefit from an immediate lowered tariff rate in the wake of the Court’s decision, this is likely to be short-lived. Any advantage China gains in tariff arbitrage vis-à-vis Southeast Asian nations will last months, not years. Global supply chains have already begun to reroute and are not easily reoriented in one economic quarter. For now, the U.S. Frameworks and Agreements reached to date are holding (more on that below).
Moreover, the long-term corporate bet when viewed in this context is hardly a matter of temporary tariff arbitrage. Yes, the Trump Administration can-and likely will-be outlasted by Xi Jinping, but the CCP has little ability to roll back the coming changes in Iran and Venezuela regardless of who enters the White House in 2029. Should the Russian economy further weaken for lack of markets to offload its oil, Xi will be hanging on to a dwindling alliance that is only further isolated.
China will cling to its advantages in power generation and its stranglehold over rare earths. But those countries directly threatened have found renewed strength in the face of CCP pressure. Case in point are the Japanese under the emboldened leadership of Prime Minister Sanae Takaichi, who is rebuilding her nation’s military despite-or even in response to-Chinese threats. Takaichi has gone so far as to publicly assert her country’s right to self-defense if China were to invade Taiwan.
While China’s new “Watch List” bans foreign firms from supplying the Japanese with “dual-use” goods, Takaichi has yet to back down from her plans to remilitarize. Given her strong relationship with President Trump-and the CCP’s ineffectual rhetoric towards the Iran attack-Xi’s pressure tactic against Japan is unlikely to achieve its desired effect.
TRADE UPDATE
This week’s trade note focuses on two areas of focus dominating the current policy space:
- IEEPA refunds
- Supplemental tariffs
IEEPA Refunds
To say the refund process for over $150 billion in tariffs collected under IEEPA is unsettled is an understatement. Over 300,000 importers were subject to IEEPA tariffs in 2025 and to date 1,800 companies have filed suit.
Administration lawyers had assured courts that companies would be “made whole through a refund, including interest” if IEEPA was struck down, but that same team requested a pause on Friday of roughly four months to “allow the political branches an opportunity to consider options.” Congress, of course, has little ability to reach consensus on tariff policy under its current vote realities.
Interestingly, the Administration is floating a rehearing of the Supreme Court case. On Thursday, President Trump suggested on Truth Social that a “Rehearing or Readjudication” was possible. Though this is not without precedent, it is highly unusual and would require a majority of the Court’s justices to agree. The Administration’s “roughly four month” delay tactic appears to be backed by an argument that the tariffs collected last year are now legal under the revamped set of duties it is cobbling together.
Another apparent strategy of the Administration is to offer companies quick remediation if they agree to forfeit a portion of tariffs they are due to recoup. Treasury Secretary Scott Bessent went further on Friday, telling Fox News that refunds were akin to “corporate welfare” and that the American people “won’t see” their fair share if companies are made whole by the lower courts.
Finally, the Department of Justice has hinted at challenging claims on a case-by-case basis, as another delaying tactic, making the process extremely onerous for those seeking refunds. In short, companies should not expect the refund question to be answered anytime soon. Rather, a protracted legal process is likely, combined with various Administration attempts to throw sand in the gears.
Supplemental Tariffs
The aforementioned cobbling together of tariff authority to supplement IEEPA involves a bridge of Section 122 while Section 232 and Section 301 investigations are finalized. The Department of Commerce and USTR are now in the process of backfilling the IEEPA tariffs while ensuring that newly-imposed authorities match the rates of agreements reached with each respective trade partner. As part of this continuum, we expect existing and new Section 232 investigations to unfold throughout the spring and be paired with Section 301 investigations (or at least the threat of them).
According to Commerce Undersecretary for International Trade, William Kimmitt, “It’s certainly likely that more 232s will come out.” New investigations could apply to “large-scale batteries, cast iron and iron fittings, plastic piping, industrial chemicals” and digital services according to the Wall Street Journal.
Meanwhile, USTR is using Section 301 as both an IEEPA supplement and as a threat in order to pressure countries to eliminate existing barriers. According to USTR Ambassador Jamieson Greer, Section 301 tariffs “would really only happen if the countries reneged on their deals or doubled down on these unfair trade practices.”
That is not to say the Administration’s confidence in the durability of deals reached to date is shared by all trade partners. Following the President’s post last weekend announcing that Section 122 tariffs would rise from 10 percent to the statutory cap of 15 percent, a number of trading partners have hit the pause button or begun to look elsewhere.
The European Parliament has again frozen its legislative process, while India has delayed a planned trade meeting to the U.S. The UK, the first to reach an Agreement with the U.S. and therefore achieve the lowest rate of all trading partners (10 percent), is particularly concerned about an escalation of Section 122.
Meanwhile, German Chancellor Friedrich Merz was in Beijing last Wednesday attempting to thread the needle between U.S. security and Chinese-fueled growth. Long a Chinese-skeptic, Merz is under pressure from his auto industry (Volkswagen recently implemented its largest job cuts and closed a plant for the first time in its long history) and a trade deficit with China that has climbed by 33 percent.
Others, however, appear unfazed. The South Korean legislature remains on track to authorize its $350 billion investment fund in early March, and the Japanese Embassy confirmed that it plans to “continue implementing the agreement we made with the United States last year.” Even EU Trade Commissioner Maroš Šefčovič urged European Parliament members to approve the Agreement following assurances from the Administration.
Thus, the delay in raising Section 122 from 10 percent to 15 percent has everything to do with the existing Frameworks and Agreements and how best to achieve the number therein. As Greer told Bloomberg last week, the tool of raising the Section 122 tariff rate to 15 percent would be only used “where appropriate.”
We assume that ultimately each of the various Frameworks and Agreements will carry forward, and that the Supreme Court’s impact in striking down IEEPA will be merely logistical. For a view into the complexity of the math involved, Bloomberg created a helpful interactive chart embedded in this piece.
The interaction between the loss of IEEPA and the initial imposition of a 10 percent Section 122 tariff regime does create a challenge, however, with a few of the most difficult trading partners; namely China and Brazil. The PRC’s effective rate has dropped by over seven percent while Brazil’s is down nearly 15 percent. We will learn more from President Luiz Inácio Lula da Silva’s upcoming visit to Washington, but China’s revised rate is of particular concern to the Administration.
Knowing what’s likely to come, the CCP is attempting to threaten the Administration in the hopes of avoiding any new levies, claiming they would violate the November truce and asserting that the Phase I deal of Trump 1.0 should reflect the new baseline tariff regime.
As the CCP Commerce Ministry (MOFCOM) stated last week, “If the US insists on pushing forward with relevant investigations – or even uses the investigation as a pretext to introduce restrictive measures such as tariffs – China will take all necessary measures to resolutely defend its legitimate rights.” A strategy to revert to the parameters of the Phase 1 deal, however, lacks credibility and portends an awkward leadup to the Trump/Xi meeting in less than a month.
OUTLOOK/ANALYSIS. Iran quickly learned the same lesson as Venezuela and Cuba this weekend. An alliance with China and Russia provides no military intervention but for existing technology and hardware (Russian-made drones have been found in attacks on U.S. military installations in the Middle East). Though the CCP under President Xi seems content to play the “long game,” they are quickly losing leverage in today’s kinetic theaters. U.S. military intervention is all but unchecked.
Upcoming visits between President Trump and President Lula, as well as President Trump and President Xi, must be reframed. Can Brazil continue to hold out as the U.S. makes material gains in its Donroe Doctrine? And what leverage will the CCP bring to bear when Trump visits Beijing in less than 30 days?
Remarkably, President Trump is both undeterred and emboldened, despite the IEEPA loss and domestic politics that are trending against him and congressional Republicans. We see no signs of his trade policy abating but for marginal consumer relief around beef, steel, and aluminum.
Meanwhile, we expect little in the way of concessions when he meets with Lula and then Xi. Rather, the risk of a re-escalation with the CCP is now rising. Two upcoming negotiations prior to the March 31-April 2 summit in Beijing will be highly impactful: Brazil and Russia. Should President Trump succeed in further squeezing these alliances and cutting off both fuel and revenue, President Xi may feel he has been backed into a corner.
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