A Possible Roadmap for U.S. Tariff Policy

Summary

Summary of "A Possible Roadmap for U.S. Tariff Policy"

Podcast: Thoughts on the Market
Host/Author: Morgan Stanley
Episode Title: A Possible Roadmap for U.S. Tariff Policy
Release Date: April 30, 2025

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Introduction

In the April 30, 2025 episode of Thoughts on the Market, Morgan Stanley's Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy, engages in a comprehensive discussion with Rajiv Sibil, Senior Global Economist. The focus centers on the evolving landscape of U.S. tariff policy, exploring potential escalation and de-escalation trends, and assessing the enduring impacts of heightened tariffs on businesses and the broader economy.

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Recent Developments in U.S. Tariff Policy

Michael Zezas initiates the conversation by highlighting recent significant shifts in U.S. tariff strategies. He references a White House news conference where President Trump announced a substantial reduction in tariffs on Chinese goods, albeit maintaining that tariffs would not be entirely eliminated (00:26). This announcement followed remarks by U.S. Treasury Secretary Scott Bessant, who suggested that the elevated tariffs on China were becoming unsustainable, according to various news outlets.

However, Zezas notes a subsequent retraction of some of these statements, indicating ongoing negotiations with China that could lead to either further tariff reductions or potential escalations if talks deteriorate. Additionally, Zezas points out the political context surrounding Canada's recent federal election victory by a Liberal government led by Mark Carney, which occurred amid U.S. proposals to increase tariffs on Canada.

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Current and Projected Tariff Levels

Rajiv Sibil elaborates on the current state of U.S. tariffs, emphasizing that tariffs are expected to remain structurally higher than pre-Trump administration levels. He outlines that while reciprocal tariffs for countries other than China have stabilized around 10%, tariffs on Chinese goods remain significantly higher, approximately 60%. Despite this, Sibil anticipates a gradual reduction in China's tariffs over time, citing the electronics exemption as a pivotal factor in lowering the average tariff rate (01:22).

Sibil underscores that the highest tariff rates may have already been reached, with reciprocal tariffs plateauing. Nonetheless, the future trajectory remains uncertain as negotiations continue to determine the final tariff levels. He maintains that the baseline outlook set previously—a 10% baseline with elevated rates for China—still holds, albeit with possible fluctuations based on ongoing discussions.

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Shift from Country-Level to Sector-Specific Tariffs

Zezas steers the conversation towards the nuanced evolution of tariff policies, particularly the transition from broad country-level tariffs to more targeted sector-specific tariffs. Sibil explains that this shift was foreshadowed by a clause in an April 2nd fact sheet released by the Trump administration, which delineated exemptions for certain tariffs related to Section 232 from reciprocal tariffs (02:57).

This strategic move indicates a pivot towards sector-based tariffs, allowing the U.S. to impose tariffs on specific industries rather than entire countries. Sibil predicts that this will become increasingly prominent, with sector-specific tariffs gaining precedence as negotiations progress. He advises investors to monitor these sectoral shifts closely, as they will significantly influence market dynamics moving forward.

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Key Sectors Under Scrutiny

Delving deeper into the sector-specific tariffs, Sibil identifies several industries currently impacted or likely to be targeted in the future:

• Already Affected:

  • Steel
  • Aluminum
  • Automobiles and auto parts (04:36)

• Potential Future Tariffs:

  • Copper
  • Pharmaceuticals
  • Semiconductors
  • Lumber (04:36)

These sectors were selected based on existing investigations and the strategic importance of these industries to the U.S. economy. Sibil notes that while some sectors like steel and automobiles have established tariff frameworks, others are undergoing evaluations that could lead to new tariffs in the near future.

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Implications for Companies and Supply Chains

The discussion shifts to the practical challenges businesses face in adapting to the new tariff environment. Sibil emphasizes the complexity involved in restructuring supply chains, highlighting the substantial investments required to relocate production facilities. He explains that companies must ensure that new locations possess the necessary institutional frameworks, capital, and labor resources before making such transitions (06:15).

Furthermore, Sibil points out that the decision to shift supply chains hinges on the final determination of sector-specific tariff rates. Until these rates are clarified, businesses remain in a state of uncertainty, delaying strategic adjustments. This prolonged ambiguity complicates cost-benefit analyses, making it difficult for companies to decide whether to absorb the increased costs or pass them on to consumers.

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Market Implications and Investor Considerations

Zezas connects the uncertainties surrounding tariff policies to broader market behaviors. He suggests that yield curves are likely to continue steepening as investors react to the unpredictability of U.S. trade policies and the consequent demand for dollars. Additionally, equity markets may experience sideways movements, reflecting the market's attempt to price in the immediate effects of tariffs while grappling with potential second-order, nonlinear impacts on the global economy (08:01).

Sibil concurs, noting that the persistent uncertainty at the sector level contributes to market volatility. He illustrates this with the example of the automotive sector, where ongoing investigations into tariff implications create a "guessing game" environment for investors, thereby sustaining market instability (08:36).

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Concluding Insights

Both Zezas and Sibil agree that the U.S. tariff landscape is poised to remain complex and elevated compared to pre-Trump levels. The shift towards sector-specific tariffs introduces additional layers of uncertainty, posing significant challenges for companies as they navigate supply chain decisions and cost management. For investors, this environment demands a keen eye on sectoral developments and a cautious approach to market positioning amidst the persistent unpredictability.

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Notable Quotes

• Michael Zezas:
  "Last week, during a White House news conference, President Trump announced that tariffs on goods from China will come down substantially, but it won't be zero."
  00:09

• Rajiv Sibil:
  "But we think over time, the implied rate to China will start to graduate and come down. If you look at the electronics exemption, for example, that's a big step in getting the average tariff rate out of China lower."
  01:22

• Rajiv Sibil:
  "Companies... have to make sure that country B has the institutional framework, that has the capital, has the labor input."
  06:15

• Michael Zezas:
  "Some of the focus on the China tariffs or the country level specific tariffs and the headlines about they're moving up, they're moving down might mask that at the end of the day, we're still dealing with considerably higher tariffs on a broad enough array of products that it will mean difficult choices for companies and or higher costs."
  08:01

• Rajiv Sibil:
  "The uncertainty at a country level then shifts to the sector level as we go through these investigations that we've been highlighting."
  08:36

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Timecode Reference

For clarity, all timestamps are provided in the format MM:SS, corresponding to the podcast transcript times.

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This summary provides an in-depth overview of the podcast episode, encapsulating the key discussions, insights, and projections related to U.S. tariff policies and their broader economic implications.

Transcript

[Michael Zezas]

Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's global head of fixed income research and public policy strategy.

[Rajiv Sibil]

And I'm Rajiv Sibil, senior global economist.

[Michael Zezas]

Today we look through the potential escalation and de escalation of tariff rates and discuss what the lasting impact of higher tariffs will be for companies and the economy. It's Wednesday, April 30, at 11am in.

[Rajiv Sibil]

New York and 4pm in London.

[Michael Zezas]

Last week, during a White House news conference, President Trump announced that tariffs on goods from China will come down substantially, but it won't be zero. And this was after U.S. treasury Secretary Scott Bessant made comments about high tariffs against China being unsustainable, according to some news reports. Now, some of this has been walked back and there's further discussion of challenging negotiations with China and potential escalations if those negotiations don't go well. Meanwhile, Canadian voters elected a Liberal government led by Mark Carney yesterday. That federal election played out against the backdrop of the US Proposing higher tariffs on its northern neighbor. So, Rajeev, amidst all of this noise, what seems clear is that tariff levels will end up higher than where we started before President Trump took office, though we don't exactly know how high they will be. What is it that investors need to understand about the economic impacts of higher tariffs? Just generically?

[Rajiv Sibil]

So, yeah, we do view that tariffs are going to structurally be higher than they were before the Trump administration. This has been a baseline of our outlook since last year. Now, I think the challenge is figuring out where they're going to settle. As you've highlighted, we do think that peak tariff was probably a couple weeks ago when we were at the max pain threshold vis a vis China and the rest of the world. We've since seen the reciprocal tariffs move to 10% for everyone but China. China is clearly higher than 60% today. But we do think that over time, the implied rate to China will start to graduate and come down. If you look at the electronics exemption, for example, that's a big step in getting the average tariff rate out of China lower. So we think we're on a journey. We think we were past peak tariff tariff pain in terms of level. But over the next few months, it's going to take some time in negotiation to figure out where we settle. And we are still looking to kind of our baseline outlook that had been defined some time ago of a 10% baseline with an elevated level on China, if you will.

[Michael Zezas]

So I think this is an important point that there's a lot of back and forth about tariff levels, which countries are going to be levied on, to what degree, into what products. But at the end of the day, we think there'll be more tariffs than where we started. Rajeev, you have a view on where investors should focus in terms of what tariffs are durable, and maybe at the end of the day, it'll be less about countries and more about products. Can you talk us through that?

[Rajiv Sibil]

On April 2, when the Trump administration released the fact sheet about tariffs and reciprocal tariffs, there was a small clause in there that I think the market did not pay enough attention to and which is becoming front and center now. And in that clause, they identified that a number of tariffs related to section 232 would be exempted from reciprocal tariffs. And the notion is that country tariffs would evolve or shift into sector tariffs over time. And in a note that we recently published, we highlighted some of the legal mechanisms that may be at play here. There's still a lot of uncertainty as to how things will settle down, but what we do know is that, legally speaking, country tariffs are coming through ipa, which is the International Emergency Economic Powers act, whereas section and sector tariffs are coming through section 232 and some of the other section structures that exist in US trade law. And so the experience of 2018 leaned a lot more to these sections than it did to ipa. And that was the guiding, I guess, mechanism for us as we thought about what was happening in the current tariff structure. And the fact that the White House included this carve out, if you will, for Section 232 tariffs in their April 2nd fact sheet was a big lead indicator for us that over time there would be an increased shift towards sectors. And so for us, we think the market should be focusing more in that direction as we think about how this evolves over time, now that we've not completely de Escalated, but brought a materially lower tariff level. And everywhere in the world, except for China, the big variability is probably going to be in these sector tariffs now going forward.

[Michael Zezas]

So what sectors do you think are particularly in focus here?

[Rajiv Sibil]

So, on the April 2nd fact sheet that the White House provided to countries and to the market, they specifically identified steel, aluminum, autos and auto parts as already having Section 232 tariffs. And we know that's true because those investigations had started in a prior Trump administration. And so kind of the framework was already in place for them to execute those tariffs. The guidance then suggested that copper, pharmaceuticals, semiconductors and lumber would also potentially fall under Section 232 tariffs in the future. And Then there's been a range of indications as to what might be in play, so to speak, for section 232. I know pharmaceuticals is at the top of the list of many investors as the semiconductors. So this is our kind of sample list. But we're pretty certain that this will evolve over time. But that's where we're starting.

[Michael Zezas]

Okay, so pharmaceuticals, semiconductors, automobile, steel, aluminum, it's a pretty substantial list. So if that's the sort of endgame landscape here, relatively elevated China tariffs and then all of these product specific tariffs, what does an investor need to know about a company's options in this world? Can companies just rewire their supply chains around all of this? And ultimately there's some temporary price pain, but once things are rewired around this, that should dissipate or are the decisions more difficult than that? And that there has to be some cost pass through to the consumer or to the companies themselves because this is just too many tariffs in too many places.

[Rajiv Sibil]

Yes, I think the latter of your question, the difficulty is really where we need to be thinking about what's happening here. If you think about the bigger picture, and you go back to the note that we collaborated on earlier in the year called Supply Chain Strain, we highlighted the complexity of moving factors of production and the extreme levels of investment that are required to shift factors of production. So companies, if they're going to move a factory from country A to country B, have to make sure that country B has the institutional framework, that has the capital, has the labor input. And this is a big, big decision. So as a company, you're not going to make that decision to shift your investment or reconstruct productive facilities in a new country until you understand the cost benefit analysis. And in order to understand the cost benefit analysis, you really need to know what the sector based section 232 tariff looks like in the end. If we Remember back in 2018, the government tried to implement a wide range of tariffs. On average it took about 250 days for each investigation to be completed. And that's a long time frame. And so I think what we're going through now, apart from automobiles and steel, aluminum, where that process has kind of already been done and we kind of have the framework of the tariffs in the new sectors. Companies are going to have to wait for this investigation to take place so that they understand what the tariff level is, because the tariff level is going to determine the risk of actually shifting productive facilities or if you just kind of absorb the cost because the tariff isn't at A high enough level that it incentivizes the shift. And so these are the changes that I think remain an open question and will be the focus of companies over the next few months as their sectors are exposed to tariffs.

[Michael Zezas]

Right. So what I think I'm hearing then, and correct me if I'm wrong, is that some of the focus on the China tariffs or the country level specific tariffs and the headlines about they're moving up, they're moving down might mask that at the end of the day, we're still dealing with considerably higher tariffs on a broad enough array of products that it will mean difficult choices for companies and or higher costs. And so therefore markets are still going to have to price some of the economic challenges around that.

[Rajiv Sibil]

Yeah, I think that's absolutely right. And we've seen the market try to price some of this stuff at a country level context, but it's been hard. And even the headline tariff rate in the US is really hard to pin down for the simple reason that we don't know if the Mexican and Canadian trade into the US is compliant or non compliant and how that gets counted grounded in the current structure of the tariff regime. And so as these questions remain outstanding markets are going to be volatile trying to figure out where the tariff level is. I think that uncertainty at a country level then shifts to the sector level as we go through these investigations that we've been highlighting. Autos is a great example. We finished the investigation, we've implemented a Section 232 tariff and we still don't know what the implied auto tariff rate is because we don't know how many parts in a car are compliant within existing free trade agreements of the United States. And if they're compliant or not really determines what the implied tariff level is for the US and until companies can decide and give forward guidance and understand what their margins look like, I think markets are going to be in this guessing game.

[Michael Zezas]

Yeah, and that certainly syncs up with our fixed income strategy views. The idea that yield curves will continue to steepen to deal with the uncertainty about U.S. trade policy and demand for dollars as a consequence, that equity markets might be moving sideways as perhaps we priced in some of the first order effects of tariffs, but not necessarily the second order potentially nonlinear effects on the broader global economy. Unfortunately, the lingering uncertainties that you talk about about implementation, they're going to be with us for a while.

[Rajiv Sibil]

Yeah, I think that's really fair. And our economics outlook mirrors that as well.

[Michael Zezas]

Well, Rajeev, thanks for joining us today to help us sort through all of this.

[Rajiv Sibil]

Mike, thanks for having me on the.

[Michael Zezas]

Podcast, and to all of you, thanks for listening. If you found this podcast helpful, let us know and share thoughts on the market with a friend or colleague today.

[Rajiv Sibil]

The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for.