Podcast Summary: Thoughts on the Market – Episode: "How Companies Can Navigate New Tariffs"

Host: Michelle Weaver, U.S. Thematic and Equity Strategist, Morgan Stanley
Co-Host: Ariana Salvatore, U.S. Public Policy Strategist, Morgan Stanley
Release Date: April 3, 2025

Introduction

In the April 3, 2025 episode of "Thoughts on the Market", hosted by Michelle Weaver and Ariana Salvatore of Morgan Stanley, the discussion centers around the recent announcement by President Trump regarding sweeping global tariffs. The episode delves into the intricacies of the new executive order, exploring its implications for companies and the broader market landscape.

Understanding the Trump Administration's Tariff Objectives

Ariana Salvatore begins by dissecting the Trump administration's dual objectives behind tariff implementation:

1. Policy Concessions: Utilizing tariffs as leverage for quicker policy agreements, exemplified by negotiations with Mexico and Canada.
2. Strategic De-Risking and Supply Chain Realignment: Aiming to reduce dependence on key strategic industries and restructure global supply chains.

Ariana Salvatore (00:42):
"President Trump in advance of yesterday, signaled that he wanted to retool the global trading order based on this premise of reciprocity. And I think yesterday was really just an indication that they're in fact stepping in that direction."

Salvatore emphasizes that the recent tariff announcement reflects a blend of these objectives, reinforcing the administration's commitment to reshaping the global trade framework through reciprocity.

Future Trade Relationships and Policy Uncertainty

The conversation shifts to the potential trajectory of trade relationships moving forward. Salvatore highlights the ongoing uncertainty surrounding tariff rates and the possibility of retaliatory measures from trading partners.

Ariana Salvatore (01:38):
"We really are watching for two things from here. First, countries' reaction functions... Second, any potential clues on how quickly these talks can come together."

Salvatore notes that while some countries, including the EU, Brazil, and India, are offering concessions to initiate negotiations, the complexity of managing multiple bilateral talks simultaneously poses significant challenges. Consequently, a substantial portion of the tariffs is expected to take effect on the scheduled dates of April 5th and April 9th.

Non-Tariff Barriers and Sector-Specific Challenges

Addressing non-tariff barriers, Salvatore explains that the administration's rationale for tariffs includes factors beyond mere tariff rates, such as unfair trade practices and burdensome regulations in sectors like food, agriculture, and environmental compliance.

Ariana Salvatore (03:18):
"Negotiations on those topics are going to be slow moving because... syncing up with the US's regulatory agencies will be a challenging and probably long process."

This indicates that tariff implementation will likely be uneven across different countries and product categories over the next several months as negotiations unfold.

Economic Impact of Comprehensive Tariffs

The discussion moves to the macroeconomic implications of the new tariffs. Salvatore outlines the anticipated effects on the U.S. GDP and other global economies:

• United States:
  Economists have downgraded GDP growth expectations to 1.5%, primarily due to market uncertainty and reduced corporate investment.

  Ariana Salvatore (04:48):
  "We removed a Fed cut in June. And from here we think the risks are skewed to the downside."

• Europe:
  A potential 20% universal tariff increase could contract the euro area's GDP by 60 to 120 basis points, factoring in both direct trade impacts and broader financial tensions.

• Asia:
  While regions like India, Japan, Korea, and Indonesia may negotiate favorable trade deals, China and Vietnam face greater risks both in terms of tariff increases and negotiation challenges.

Micro-Level Strategies for Companies to Mitigate Tariff Impacts

Michelle Weaver outlines five strategies companies can adopt to navigate the new tariff landscape, prioritized from easiest to implement to most complex:

1. Pricing Power:
   Companies may pass tariff costs to consumers or absorb some of the expenses, contingent on their ability to influence pricing without eroding margins.

2. Enhanced FX Hedging Programs:
   Given the volatility in currency markets induced by tariff announcements, robust hedging can mitigate financial risks.

3. Redirecting Products to Tariff-Free Markets:
   Multinationals can reroute goods destined for the U.S. to other regions, such as Europe, to avoid tariff penalties.

4. Stockpiling Inventory:
   Building up inventory ahead of tariff implementations allows companies to manage supply disruptions, though this strategy varies in feasibility across industries.

5. Diversifying Supply Chains:
   Reorganizing supply chains through strategies like China +1, nearshoring, or reshoring can reduce dependency on affected regions, albeit with significant costs and execution complexities.

Michelle Weaver (06:31):
“Managing risk from tariffs is going to be an ongoing process for the rest of the second Trump administration.”

Sector-Specific Mitigation Tactics

Weaver further elaborates on how different sectors may implement these strategies:

• Capital Goods:
  Possessing strong pricing power, capital goods companies can more effectively pass on costs without severely impacting margins.

• Consumer Goods:
  With less pricing flexibility, these companies face greater challenges in mitigating tariff impacts and may need to rely more on supply chain adjustments.

• Energy Companies:
  Operating in global commodities, energy firms can adeptly redirect products to avoid tariffs, leveraging their extensive distribution networks.

Management Confidence and Strategic Implementation

When questioned about the confidence of management teams in executing these strategies, Weaver observes that while diversification of supply chains is the predominant approach, companies await greater tariff certainty before making substantial shifts. Pricing power remains the most immediately actionable strategy, requiring minimal implementation costs.

Key Catalysts and Upcoming Announcements

Looking ahead, Salvatore identifies several critical milestones and potential tariff extensions:

• Section 232 Reports:
  Ongoing reviews could lead to tariffs on pharmaceuticals and semiconductors within the next six to eight months.

• Auto Parts Tariffs:
  Deadlines on May 3rd and June 24th will determine the scope and application of tariffs on non-USMCA compliant auto parts.

• Venezuelan Oil Tariffs:
  A potential 25% tariff on Venezuelan oil may be announced, adding another layer to the evolving trade landscape.

Ariana Salvatore (11:21):
"We have an upcoming deadline of May 3rd for the administration to also scope in non USMCA compliant auto parts..."

Conclusion

In this episode of "Thoughts on the Market", Michelle Weaver and Ariana Salvatore provide a comprehensive analysis of the Trump administration's new tariffs, exploring both macroeconomic and microeconomic impacts. They offer actionable strategies for companies to mitigate tariff-related risks and highlight the uncertainties that continue to shape the global trade environment. As companies navigate these challenging times, the insights shared underscore the importance of strategic flexibility and proactive risk management.

Notable Quotes:

• Ariana Salvatore (00:42):
  "President Trump... stepping in that direction."

• Michelle Weaver (06:31):
  “Managing risk from tariffs is going to be an ongoing process for the rest of the second Trump administration.”

• Ariana Salvatore (11:21):
  "We have an upcoming deadline of May 3rd for the administration to also scope in non USMCA compliant auto parts..."

Disclaimer:
The content discussed in this podcast is for informational purposes only and is based on information available as of its creation date. It does not constitute financial, legal, or tax advice and should not be used as such. Listeners are encouraged to consult with professional advisors to understand how these developments may affect their individual circumstances.