New Tariffs, News Patterns of Trade

Summary

Summary of "New Tariffs, News Patterns of Trade" Episode on Thoughts on the Market

Podcast Information

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: New Tariffs, News Patterns of Trade
• Release Date: March 27, 2025

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Introduction

In the episode titled "New Tariffs, News Patterns of Trade," hosted by Morgan Stanley's global Chief Economist, Seth Carpenter, and senior Global Economist, Rajeev Sibyl, the discussion centers around the evolving landscape of tariffs and their profound impact on global trade and the U.S. economy. The conversation delves into the historical context of tariffs, recent developments, sector-specific implications, and the broader economic consequences.

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Current Tariff Landscape

Historical Context and Recent Developments

Seth Carpenter opens the discussion by highlighting the prominence of tariffs in recent economic discourse. He provides a historical overview, noting that tariffs on Chinese imports were first imposed during the Trump administration and remained in place through the Biden administration. Under the new Trump administration in 2025, an additional 20% tariff on Chinese imports has been introduced.

Notable Quote:

"Tariffs were imposed on Chinese imports in the first Trump administration and they stayed in place through the Biden administration. And now so far in the new Trump administration, an additional 20% tariffs have been put on Chinese imports." — Seth Carpenter [00:24]

Tariffs on Other Nations and Goods

Rajeev Sibyl expands on the variety of tariffs implemented, including those on imports from Colombia, Mexico, Canada, as well as steel and aluminum. He emphasizes the dynamic nature of these tariffs, with some being announced and later removed or suspended pending negotiations.

Notable Quote:

"Don’t forget about tariffs on steel and aluminum." — Rajeev Sibyl [01:05]

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Impact on Global Trade and Production

Reciprocal Tariffs and Their Implications

Seth Carpenter brings attention to the announcement of a series of reciprocal tariffs set to be imposed on April 2nd. He seeks clarification on the potential scope and impact of these tariffs.

Rajeev Sibyl explains the complexity surrounding reciprocal tariffs, distinguishing between quantitative tariffs and broader regulatory or non-tariff barriers. He points out that the U.S. does not generally have higher tariffs than its trading partners, especially those within free trade agreements, and that reciprocal tariffs in a qualitative sense could encompass a wide range of trade policies.

Notable Quote:

"If we think about reciprocal tariffs in terms of non-tariff barriers, then the scope of reciprocal tariffs becomes much, much wider." — Rajeev Sibyl [02:16]

Tariffs as Economic Tools

The conversation shifts to the economic mechanisms of tariffs. Seth Carpenter underscores that tariffs act as taxes, influencing prices and consumption patterns. However, he acknowledges the complexities in how tariffs affect trade, including production shifts and trade diversions.

Notable Quote:

"Tariffs are just a tax. They can push up prices, they can reduce the amount purchased of whatever is taxed." — Seth Carpenter [02:44]

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Sector-Specific Analysis

Manufacturing and Nearshoring

Rajeev Sibyl discusses the administration's goal of bringing manufacturing capacity back to the United States, introducing the concept of nearshoring. He notes that while some sectors with existing productive capacities have seen relocation efforts, others, especially those involving complex and highly concentrated supply chains, face significant challenges.

Notable Quote:

"If the tariffs this time are in a wider capacity, then there becomes a question of whether or not there will be productive capacity refocused in other regions." — Rajeev Sibyl [04:50]

Complexity and Concentration as Barriers

The ability to relocate production is heavily dependent on the complexity and concentration of the sector. Sectors like semiconductors, which involve intricate and concentrated supply chains, are less likely to shift easily compared to more straightforward industries like automobile manufacturing.

Notable Quote:

"If a product is highly concentrated or it’s really complex to make, the ability to reproduce that product elsewhere becomes harder and harder." — Rajeev Sibyl [06:13]

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Regional Implications: Focus on Asia

China's Dominant Role

Asia, particularly China, is identified as the epicenter of current trade focus. China’s expansive productive capacity makes shifting production away from it a prolonged and disruptive process. Efforts to diversify production to countries like Vietnam and India are underway, but the scale of China’s manufacturing prowess presents significant challenges.

Notable Quote:

"China is a very large country and their productive capacity is very large. So the amount of time it will take to shift is actually probably going to be very long." — Rajeev Sibyl [06:34]

Long-Term Adjustments

The shift away from China is expected to involve a long adjustment period, impacting global production and consumption patterns. This realignment will have material implications for global trade dynamics and the U.S. economy.

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Implications for the U.S. Economy

Economic Uncertainty and Inflation

Seth Carpenter highlights the uncertainty surrounding the U.S. economy due to escalating tariffs. Tariffs are poised to raise prices, contributing to inflation, which may persist if tariff escalations continue. Additionally, tariffs on goods used in U.S. production can negatively affect manufacturing output and employment, thereby slowing economic growth.

Notable Quote:

"Tariffs are likely to escalate from here, especially against China. And that is going to mean slower growth in the us, higher inflation for a while." — Seth Carpenter [07:27]

Challenges for the Federal Reserve

The dual challenges of rising inflation and slowing growth place the Federal Reserve in a difficult position. The central bank aims to lower inflation while sustaining strong growth, but the current tariff-induced economic environment runs counter to these objectives, creating policy dilemmas.

Notable Quote:

"The Federal Reserve, that puts them in quite a bind because what they're hoping for is lower inflation and continued strong growth and we're going to go in the opposite direction." — Seth Carpenter [07:27]

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Conclusion

The episode concludes with recognition of the complex and multifaceted impact of new tariffs on global trade and the U.S. economy. Seth Carpenter emphasizes the significance of the ongoing tariff discussions and their potential to reshape economic landscapes. Rajeev Sibyl's insights provide a nuanced understanding of sector-specific vulnerabilities and the arduous path of shifting production away from dominant regions like China.

Closing Remarks:

"It was great to talk to you." — Rajeev Sibyl [08:40]

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This episode offers a comprehensive analysis of the current tariff environment, its historical context, sector-specific challenges, and the broader economic implications. For listeners seeking to understand the intricate dynamics of tariffs and global trade patterns, Carpenter and Sibyl provide valuable perspectives grounded in economic expertise.

Transcript

[Seth Carpenter]

Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's global Chief Economist.

[Rajeev Sibyl]

And I'm Rajeev Sibyl, senior Global economist.

[Seth Carpenter]

Tariffs have been a dominant topic lately in the news in markets just about everywhere, and today we're going to discuss how they are affecting global trade and the global economy. It's Thursday, March 27th at 10am in.

[Rajeev Sibyl]

New York and 2pm in London.

[Seth Carpenter]

Our listeners are well aware that tariffs have been driving much of the economic conversation lately. So far we have seen a flurry of news on tariffs, but it is probably worth recapping just where we are. Tariffs were imposed on Chinese imports in the first Trump administration and they stayed in place through the Biden administration. And now so far in the new Trump administration, an additional 20% tariffs have been put on Chinese imports. Tariffs were announced on imports from Colombia but removed before implementation. Tariffs on imports from Mexico and Canada were announced and then delayed and then enacted and then suspended, all pending negotiation among the government.

[Rajeev Sibyl]

Don't forget about tariffs on steel and aluminum.

[Seth Carpenter]

Oh, that's a really good point. So a lot has already happened. The administration has also announced that next week, on April 2, there will be a whole slate of reciprocal tariffs imposed. Rajeev, let me turn to you on that. What do we know and what do we not know about the prospect for these reciprocal tariffs?

[Rajeev Sibyl]

I actually think that's the right question. What do we not know? Reciprocal tariffs? It really depends on the definition you're using. If you're going to take an explicit definition and think about it in terms of the reciprocal quantitative tariff between two countries, the United States actually doesn't have lower tariffs than many other countries. Actually, most of our trading partners are in free trade agreements. And so as a result, like with Mexico, there are not standard tariffs across most products. The countries where the United States is facing higher tariffs when they export goods are actually countries that we do not do a lot of trade with. And in fact, as the discussion has started to increase around reciprocal tariffs, we've seen a number of countries start to rethink about how they think about tariffs as well. If we by chance take a wider definition of reciprocal tariffs and think about it in a more qualitative sense in terms of regulatory policy, tax policy, or other aspects of inequal trade.

[Seth Carpenter]

Oh, so this is where, for example, the administration has alluded to maybe looking at value added taxes as part of the reciprocity and also looking at so called non tariff barriers. Is that what you mean?

[Rajeev Sibyl]

Exactly. Non tariff barriers is the best way to think about this, if we think about reciprocal tariffs in terms of non tariff barriers, then the scope of reciprocal tariffs becomes much, much wider. And this is the big question mark that we're focused on ahead of April 2nd. What is the width and depth of the tariff discussion?

[Seth Carpenter]

Okay, but we do also know a little bit about the effect that tariffs have and what they do to the economy. I mean, basically you and I are both economists, and so when we think about tariffs, tariffs are just a tax. They can push up prices, they can reduce the amount purchased of whatever is taxed. But reality is often a lot more complex. What gets a tariff and what doesn't, how that affects trade, what gets diverted and what doesn't. All of that seems to matter a lot, doesn't it?

[Rajeev Sibyl]

Yeah. And we've spent a lot of time digging through the data, trying to figure out what is happening, what are the patterns of trade and, and more importantly, what are the patterns of production so that we have a better idea of what changes might be in store.

[Seth Carpenter]

Okay, but if we take a step back. So there were tariffs imposed on imports from China in the first Trump administration and we know that something like one third of the goods tariffs were finished consumer goods and about two thirds were capital goods or other inputs that go into US Manufacturing. How do you think we should be thinking about a broader slate of possible tariffs? Is that going to create just a wholesale rewiring of the global trading order?

[Rajeev Sibyl]

I think this is the big challenge. One of the goals I think of these tariffs is try and introduce manufacturing capacity back into the United States. And indeed there's this concept of near shoring, which was partly a focus after the last round of tariffs. As you alluded to, when capital goods came under the tariff umbrella, there was an effort to relocate productive capacities. What we've seen in this concept of near shoring is that a lot of the focus was on sectors where productive capacities already existed. And when you started to try and move to adjacent sectors, you didn't actually have a lot of the buy in and investment that you would have expected with a broader near shrink concept. So if the tariffs this time are in a wider capacity, then there becomes a question of whether or not there will be productive capacity refocused in other regions. And if it does happen, then okay, you have to invest, you have to think about where you're going to shift that production and how long it's going to take. But if it doesn't happen, then to your point, it becomes like a tax and it just increases the prices of goods that are being Purchased.

[Seth Carpenter]

Okay, so if I'm understanding you correctly, we did see tariffs before. We also saw some disruptions from COVID We saw some shifts in the way that businesses were orienting their supply chains. Some of that has already been done. You're saying that the second phase then is what?

[Rajeev Sibyl]

You know, we're going to have to go sector by sector, and companies are going to have to decide if they want to shift the factor of production. One of the things we analyzed in our note, which did a broad based, deep dive into all global trade products, is figure out which sectors are more and less likely to be able to shift. Semiconductors, which has been in the press quite frequently, is a sector that the United States has been trying to invest in, but has not really shifted so far because there's a lot of complexity and concentration in the supply chain right now. So semiconductors are an example of a sector that we think will just take a long time to move. The factors of production, if you're looking at automobiles, perhaps that's a little bit easier because you have that capacity in a place like Mexico or in other regions of the United States. So I think it's very sector dependent, and we're going to get different outcomes across different sectors depending on whether or not it's easy to move that production.

[Seth Carpenter]

Okay. And easy to move that production. You mentioned complexity and concentration. Is that sort of the key framework we should be thinking about for which sector could relocate and which ones can't?

[Rajeev Sibyl]

That's the way we frame it is that if a product is highly concentrated or it's really complex to make, the ability to reproduce that product elsewhere becomes harder and harder.

[Seth Carpenter]

Got it, Got it. What about other regions? So I mentioned China as a focal point. What can you tell us about Asia? Do we see any key takeaways in terms of trade policy for Asia?

[Rajeev Sibyl]

Asia's really at the epicenter of the trade focus. We see that China has actually taken a leadership position in most products around the world. Almost all manufactured goods have some link to China one way or another. And so by putting tariffs on China, the question becomes, who else can produce these goods? We've seen some efforts to relocate production to Vietnam, to India, and some of the other countries around the region. But China is a very large country and their productive capacity is very large. So the amount of time it will take to shift is actually probably going to be very long. And so we just think that there's going to be a long adjustment period. And more broadly, it'll take a long time to find alternative sources of production away from China. And so we do think this is going to be disruptive in the near term. So changing patterns of trade will have material implications for all production and all goods consumption in the world and in the us. So what does that mean for the US Economy?

[Seth Carpenter]

Seth, I have to say the uncertainty that you mentioned before is here for the US Economy as well. Where do we end up, I think is a hard question question to answer. What do we know? Well, like I said before, we know that tariffs can raise prices even though the effect on inflation tends to be temporary. But if we end up with a whole series of tariffs escalating over the rest of this year and maybe into next year, then that boost to inflation which might otherwise be temporary, could actually last for a few quarters. Similarly, we know that some of the goods that we import into this country go into production. That happens in the this country. So you get a hit to US Production. That's worse for employment, it's worse for output. That's got to slow the economy. We take very seriously that these tariffs are likely to escalate from here, especially against China. And that is going to mean slower growth in the us, higher inflation for a while. And I have to say for the Federal Reserve, that puts them in quite a bind because what they're hoping for is lower inflation and continued strong growth and we're going to go in the opposite direction. So higher inflation and some weaker growth with the central bank having to sit back and wonder how is this all going to end. But I have to say, why don't we end it here? Rajeev, thanks for coming in. It was great to talk to you.

[Rajeev Sibyl]

Thanks for having me. It's great to speak to you and.

[Seth Carpenter]

Thank you for listening. If you enjoy thoughts on the market, please leave us a review wherever you listen and share the podcast with a friend or a colleague today.

[C]

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