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

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.

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.

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.

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.

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.

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.

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).

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.

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

Timecode Reference

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

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.