US–China tariff war fractures: states sue, courts unwind $100bn, and the divide widens

The US tariff regime built under Section 301 is entering a new phase of legal and political fragmentation, with courts and states challenging the policy while parts of the burden are being unwound. A Financial Times report says US customs officials have refunded about $100bn in “liberation day” tariffs, and that officials repaid roughly 60% of the levies that were struck down by the Supreme Court. In parallel, Pennsylvania has joined a coalition of 24 states in a lawsuit targeting new Trump-era tariffs, signaling that the tariff fight is no longer only a bilateral US–China dispute but also an internal US governance battle. Separately, a China Daily editorial frames the growing litigation as evidence of a widening divide within the United States over tariff strategy and enforcement. Geopolitically, the key shift is that tariff policy is now being contested through multiple domestic channels at once: the judiciary is reversing parts of the regime, while state governments are mobilizing to constrain future tariff expansions. That dynamic reduces the predictability of Washington’s trade posture, complicating how Beijing calibrates retaliation and how US firms price risk across supply chains. The immediate winners are US importers and downstream industries that can benefit from refunds and reduced uncertainty, while the losers are tariff-dependent revenue streams and any administration strategy that relies on durable, enforceable tariff leverage. For China, the narrative that US policy is internally divided can be used to justify a more patient stance in negotiations, but it also risks hardening US political resistance if courts continue to narrow tariff authority. Market and economic implications are likely to concentrate in trade-sensitive sectors and instruments tied to import costs, corporate margins, and risk premia. Refunds and legal reversals can lower near-term effective tariff incidence, supporting equities and credit for firms with high import exposure, while also reducing volatility in FX and rates expectations linked to trade-driven inflation fears. The most direct transmission is through US customs and import-cost channels affecting industrial inputs, consumer goods, and logistics, with knock-on effects for supply-chain financing and hedging demand. If the state lawsuit succeeds, the probability of further tariff rollbacks rises, which would typically be supportive for broad US risk assets, but it can also pressure tariff-reliant policy constituencies and create episodic volatility around court rulings and administrative implementation. What to watch next is whether the Supreme Court’s tariff authority limits are translated into consistent administrative practice and whether the 25-state coalition can secure injunctions or favorable rulings on the “new Trump tariffs.” Key indicators include the pace of remaining refunds, any guidance from US Customs and Border Protection on compliance timelines, and the docket progression of the Pennsylvania-led suit. Trigger points are new tariff announcements that attempt to bypass the legal constraints, and any escalation in retaliatory rhetoric or measures from China that could reintroduce bilateral pressure even as US courts narrow the policy space. Over the next weeks to months, the balance of power will hinge on whether courts deliver additional reversals quickly enough to deter further tariff expansion, or whether the administration finds legally durable pathways to sustain leverage.

Geopolitical Implications

• 01

  Domestic US legal constraints weaken the durability of tariff leverage, reducing predictability for both US and Chinese trade planning.

• 02

  State-level challenges suggest tariff authority is becoming a contested governance issue, which can limit rapid policy escalation even during bilateral tensions.

• 03

  Beijing may use US internal fragmentation as strategic messaging to slow concessions, while US political and judicial actors may harden against tariff expansion.

Key Signals

• —Remaining refund pace and any new Customs guidance on compliance timelines after Supreme Court reversals.
• —Court docket milestones for the Pennsylvania-led coalition suit, including any injunction requests and rulings.
• —Any administration attempt to repackage tariffs to fit within legal constraints, and the immediate market reaction to such announcements.
• —China’s response measures or rhetoric that could reintroduce bilateral pressure despite US domestic legal limits.