A federal trade court ruled Thursday that President Donald Trump’s 10% tariffs on most imports are illegal, dealing a sharp setback to one of the administration’s central economic policies.

The U.S. Court of International Trade said the across-the-board tariffs, which took effect on February 24, went beyond the powers granted to the president under a 1974 trade law.

The 2-1 decision came in a lawsuit brought by small businesses that import goods for the U.S. market.

The court found that Trump failed to meet the requirements of Section 122 of the Trade Act of 1974. That law lets a president impose temporary duties for up to 150 days to address serious balance-of-payments deficits or to prevent a sudden drop in the dollar’s value.

Court ruling and reactions

The judges ruled that the trade deficits cited by the administration did not qualify under the terms of the decades-old statute.

“This decision is an important win for American companies that rely on global manufacturing to deliver safe and affordable products,” said the CEO of toymaker Basic Fun!, Jay Foreman, as quoted by Reuters. “Unlawful tariffs make it harder for businesses like ours to compete and grow.”

Foreman added that the ruling “brings needed clarity as well as stability for companies operating global supply chains.”

The tariffs covered a wide range of imports and marked the latest effort by Trump to use trade barriers to reshape the U.S. economy.

The small businesses behind the lawsuit argued that the new tariffs were an attempt to get around an earlier Supreme Court decision that struck down Trump’s 2025 tariffs imposed under the International Emergency Economic Powers Act.

Trump invokes Section 122

In February, Trump invoked Section 122 and pointed to the large U.S. goods trade deficit, roughly $1.2 trillion a year, and a current account deficit equal to about 4% of GDP.

Administration officials said these gaps justified emergency action to protect American workers and industry. However, the court disagreed.

The judges said the 1974 law was drafted in an era when the gold standard still prevailed and was meant to address real international payment crises rather than the chronic trade imbalances that are routine in today’s economy.

One judge in the 2-1 ruling said it was too early to declare full victory for the plaintiffs, calling parts of the case premature.

Legal experts and economists had warned from the start that the tariffs rested on shaky legal ground. Many said the United States is not facing the kind of balance-of-payments emergency the 1974 law requires.

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The tariffs hit importers, retailers, and manufacturers quickly, who passed the increased costs onto consumers for everything from toys and electronics to clothing and auto parts.

The decision could force the government to refund duties already collected, though the exact process remains unclear.

It also imposes new limits on how far any president can stretch executive trade powers without clearer congressional approval.

Trump has made tariffs a signature tool since returning to office, using them to pressure trading partners, protect national industries, and raise revenue.

The President and his allies believe the duties help correct unfair trade practices and bring manufacturing jobs back to the United States.

Those who are opposed to such tariffs say they impose a tax on American consumers and disrupt complex supply chains that businesses have spent years building.

Thursday’s May 7 ruling is the latest in a string of court losses for the administration’s trade agenda.

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Earlier decisions had blocked other tariff actions, forcing the White House to seek new judicial channels.

Many importers had warned that the 10% tariff would force them to raise prices, cut staff, or move operations.

Some manufacturers that use imported parts said the duties made it harder to stay competitive against foreign rivals.

Trade lawyers following the case said the court’s narrow reading of Section 122 could make it tougher for future presidents to use the law for broad tariff policies.

The 1974 provision was rarely used for major, long-term tariffs precisely because of its strict requirements.