The Hidden Toll of Tariffs

Summary

Podcast Summary

Thoughts on the Market – The Hidden Toll of Tariffs

Morgan Stanley | April 23, 2026
Host: Seth Carpenter (A), Global Chief Economist and Head of Macro Research
Guest: Mayank Fatke (C/D), Global Economics Team

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Main Theme Overview

This episode delves into the evolving landscape of U.S. tariffs, with a focus on their purported role in driving reshoring of manufacturing and broader economic impacts. The discussion scrutinizes whether tariffs have delivered on promises to spur domestic production or if their hidden toll is simply higher costs without the expected economic benefits.

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Key Discussion Points & Insights

1. Shifting Attention: From Energy to Tariffs

• Market Focus Shift: While recent discussions have centered on the energy sector, the team notes that headlines previously dominated by tariffs have faded, though the policies remain impactful on markets and economic planning.
  • Notable Quote:

    “Part of the stated motivation for tariffs when they were imposed was to boost reshoring...but for the narrow question of reshoring the data so far, I would argue suggest that there's been very little net effect.” — Seth Carpenter [00:42]

2. Recent Tariff Policy Developments

• Effective Tariff Rate Trends:
  • Tariff rates have decreased to 8.5% as of February, a decline which accelerated after a Supreme Court ruling on the IPA (Import Protection Act).
  • IPA tariff authorities were temporarily reconstituted under Section 122, but these are set to expire July 24th.
  • Durable tariffs are expected to rely on Section 301 and Section 232 authorities after July, keeping overall rates stable (estimated around 10%, similar to late 2025).
• Investigation Timeline:
  • Two new Section 301 investigations announced in March (covering most major U.S. trading partners) are expected to conclude more quickly than previous efforts. Comments were due April 15, with hearings scheduled for May and conclusions likely this summer.
  • Section 232 tariffs, meanwhile, are expected to be implemented in stages as new sector-based investigations move forward.
  • Notable Quote:

    “From a macro perspective, we expect the level to be roughly similar to where it stood at the end of 2025, an aggregate effective rate of around 10%.” — Mayank Fatke [02:24]

3. Tariffs and Reshoring: Assessing the Evidence

• Aggregate Effects:
  • Despite policy goals, aggregate data shows limited evidence of meaningful reshoring. The overall impact on capital expenditure (capex) in manufacturing—outside the AI sector—remains weak.
  • While tariffs “are not going away,” their impact appears muted when it comes to prompting a wave of U.S.-based manufacturing.
  • Notable Quote:

    “Tariffs are here in the aggregate... probably about the same level it's been. But that escapes the question about the individual industries.” — Seth Carpenter [03:10]

4. Case Study: Steel Industry

• Steel's Unique Position:
  • Steel serves as a useful sector for analysis given its contained supply chain.
  • With the imposition of tariffs, imports fell and domestic production rose—but the total supply of steel in the U.S. remained flat.
  • The key effect: U.S. steel prices diverged from global prices, rising significantly.
  • The hosts note that the major outcome is higher domestic prices, rather than increased output.
  • Notable Quote:

    “Domestic production has risen as imports have fallen in, consistent with the idea of reshoring. But when we look at the total supply of steel to the domestic economy, it hasn't risen. More importantly, US steel prices have materially diverged from global peers.” — Mayank Fatke [04:08]
    “The risk of more aggressive sector tariffs across the economy, in our view, is higher prices, an outcome which is consistent with our expectations from a year ago and with economic theory.” — Mayank Fatke [04:27]

5. Broader Industrial Analysis

• Price vs. Output:
  • Across industries, increased domestic production has occurred mainly in nominal terms (i.e., higher prices), not in terms of output (i.e., physical quantity).
  • Real reshoring (a genuine increase in U.S.-based goods production at scale) is not evident in the data to date.
  • Notable Quote:

    “The increase in domestic production has come largely in nominal terms, which means that the price has risen, but very little of that increase is actually higher output. The evidence for meaningful reshoring here is quite limited.” — Mayank Fatke [05:39]

6. Overall Assessment of the Tariff Strategy

• Economic Trade-Offs:
  • The key finding: Tariffs have succeeded in raising the cost structure for U.S. industry but have failed to spur significant increases in domestic output or broader economic growth.
  • The counterargument—that tariffs would “make more in the United States” and boost the economy—is not supported by broad data trends.
  • Notable Quote:

    “As far as I can tell, when we look at the data themselves, there's not a lot of evidence for the upside, but there is clear evidence that we're raising costs for the U.S. economy.” — Seth Carpenter [06:00]

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Memorable Moments & Takeaways

• Seth Carpenter’s wry summary of policymaker optimism versus data reality:
  • “As an economist, I'm always happy when the reality matches what I was expecting in theory.” [04:49]
• The steel case exemplifies the “hidden toll” of tariffs: higher domestic producer prices without domestic supply growth.

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Important Segment Timestamps

• 00:42: Impact of tariffs on reshoring and capex
• 01:39 – 03:10: Recent tariff rate changes, legal authorities, investigation timelines
• 04:08 – 04:49: Deep dive into the steel industry’s response to tariffs
• 05:39: Data-driven review of reshoring across industries
• 06:00 – 06:20: Assessment of macroeconomic trade-offs of tariffs

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Summary Conclusion

The episode presents a data-driven examination of how tariffs, though still headline policy tools, have not meaningfully driven reshoring or output growth in U.S. industry. Instead, the primary outcome is higher prices and increased costs, echoing long-standing economic theory. The hosts contend that while tariff discussion may recede from the headlines, its hidden costs continue to weigh on the broader economy.

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(For a deeper look, listen to the episode segments at the provided timestamps for detailed explanations and supporting data.)

Transcript

[A]

Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's global Chief economist and head of Macro Research, and I'm joined by Mayank Fatke, a member of my global economics team. And today we're going to talk about tariffs.

[B]

I bet that was a surprise.

[A]

It's Thursday, April 23rd at 10am in New York.

[B]

I have to say, for the past couple of months, the focus on energy markets, energy supply, energy prices, that has

[C]

dominated everything that we've been talking to clients about around the world. And so everyone would be forgiven if they had forgotten that we were talking about tariffs much the same way nonstop last year.

[B]

Now tariffs kind of seem like an afterthought. But part of the stated motivation for tariffs when they were imposed was to boost reshoring, that is, to have more production of goods in the United States that had been imported. So tariffs still matter. They matter for capex in that regard. They matter for domestic production. And because of all of that, presumably they matter for markets and for the Federal Reserve. But for the narrow question of reshoring the data so far, I would argue suggest that there's been very little net effect. There will be more tariff news arriving in coming months. So, Mayank, I'm going to pull you

[C]

into this conversation because you have been one of the key people on the team doing a lot of the analysis

[B]

and the data work on tariffs, trade and reshoring. So could you tell us a little

[C]

bit about what's been happening to the effective tariff rate for the United States recently and where we think that's likely to go?

[D]

Tariff levels have declined steadily in recent months, falling to 8.5% as of February, with the decline having accelerated after the Supreme Court ruling. The decision on IPA forced a shift in underlying tariff authorities, with country level IPA tariffs temporarily reconstituted under Section 122. We have long argued, even before the 2025 tariffs, that the legal basis for durable tariffs would need to be anchored in section 232 and section 301 based authorities rather than in IPA. The current section 122 tariffs are due to expire on the 24th of July, and after that we expect more durable authorities to kick in. The shifts that we will see as IPA tariffs are replaced by new section 301 and 232 tariffs means that there will be some differences, but from a macro perspective, we expect the level to be roughly similar to where it stood at the end of 2025, an aggregate effective rate of around 10%. Two sets of Section 301 investigations were announced by the administration in March covering virtually all major trading partners. These investigations are likely to run on a faster timeline than prior efforts. Those took around nine months. The comments were requested by 15 April with hearings scheduled for early May. We're inclined to Expect completed Section 301 investigations over the summer. While Section 232 tariffs will likely arrive in waves as sector based investigations proceed.

[C]

Got it. Okay, so I'm going to summarize that to say tariffs are not going away. Tariffs are here in the aggregate for macroeconomists like us, probably about the same level it's been. But that escapes the question about the individual industries. And it brings us right back to this question of reshoring.

[A]

Is that what's going to happen?

[C]

And so when I think about it, we do have all these negotiations. But the reshoring question forces you to wonder about manufacturing, manufacturing growth and with it capex. And like I said at the top, it's non AI capex. That's really on the soft side of things. So you've spent a lot of time looking at the data. I would say one industry that tends to stand out in all these conversations is steel. So if we look at what's happened with the steel industry, with tariffs, with changes in imports and that sort of things, what's happened? Do we see clear evidence that there's this big reshoring push?

[D]

The case of steel is certainly very interesting. It helps frame why tariff uncertainty matters. And the supply chain for steel is relatively compact, which makes it easier to observe how the sector responds to tariffs. Domestic production has risen as imports have fallen in, consistent with the idea of reshoring. But when we look at the total supply of steel to the domestic economy, it hasn't risen. More importantly, US steel prices have materially diverged from global peers. And the risk of more aggressive sector tariffs across the economy, in our view, is higher prices, an outcome which is consistent with our expectations from a year ago and with economic theory.

[C]

As an economist, I'm always happy when the reality matches what I was expecting in theory.

[A]

So that's super helpful.

[C]

Now that is one specific industry. And I know that you have spent a bunch of time looking at the data across industries. The point that you made though, about the higher prices, the higher domestic prices for steel means to me as an economist, that we have to try to maybe separate out the effects of the nominal versus the real, which is to say if we're measuring how much output there is, how much of that increase is coming from just prices going up versus how much is coming from total quantity. So if I asked you what when you look across industries, when you look at the data, what evidence do you see in terms of lots of reshoring, that is to say a diversion of trade, a reduction of imports, and with it an increase in domestic production? Is that there broadly in the data,

[D]

when we look at production and imports across industries and goods and identify the industries both with and without reduced imports, we see that the increase in domestic production has come largely in nominal terms, which means that the price has risen, but very little of that increase is actually higher output. The evidence for meaningful reshoring here is quite limited.

[C]

All right. So that's super helpful to me because when I think about the implications of tariffs, the economist to me says it reduces the overall productive capacity of the economy, it raises costs for the economy. The counterargument has been we're going to make more in the United States and that's going to boost the US Economy. So as far as I can tell, when we look at the data themselves, there's not a lot of evidence for the upside, but there is clear evidence that we're raising costs for the U.S. economy. All right. Well, Mayank, thank you for joining me

[A]

and thank you to the listeners. If you enjoy this show, please leave us. A review and share thoughts on the market with a friend or a colleague today.

[E]

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