Three Possibilities for What’s Next on Tariffs

Summary

Podcast Summary: Thoughts on the Market

Episode Title: Three Possibilities for What’s Next on Tariffs
Host: Morgan Stanley
Release Date: July 2, 2025

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Overview

In this insightful episode of Thoughts on the Market, hosted by Morgan Stanley, analysts Michael Zezas and Ariana Salvatore delve into the imminent expiration of the 90-day pause on reciprocal tariffs imposed by the United States. Scheduled to lapse next Wednesday, this pause marks a critical juncture in U.S. trade policy, potentially reshaping international trade dynamics and domestic economic forecasts. Zezas and Salvatore explore three primary scenarios that could unfold post-pause, evaluating their implications for the economy and market stability.

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Current Situation and Base Case Scenario

Timestamp: [00:26]

Ariana Salvatore outlines the current landscape, emphasizing the significance of the April 9 initiation of the tariff pause. She highlights that without an extension, the U.S. may reimpose tariffs on key trading partners. Salvatore presents the "base case" scenario, where the administration extends the pause, thereby postponing immediate tariff escalations. This extension would likely maintain the existing tariff structure, predominantly the 10% baseline applied to most partners, with possible exceptions based on bilateral negotiations.

Notable Quote:

"Our base case is that the administration, broadly speaking, tries to kick the can down the road, meaning that it extends the pause for most countries." — Ariana Salvatore [00:26]

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Administration’s Objectives and Strategy

Timestamp: [01:03]

Michael Zezas discusses the administration's multifaceted objectives regarding trade policy. He interprets tariffs as both a defensive measure and a strategic negotiating tool aimed at addressing trade deficits and non-tariff barriers. Zezas also mentions the administration's exploration of a tiered framework for global trading partners, which would rank countries based on various trade-related criteria, a strategy reminiscent of the rhetoric surrounding the April 2nd Liberation Day tariffs.

Notable Quote:

"A lot of this is similar to the rhetoric we saw ahead of the April 2nd Liberation Day tariffs." — Michael Zezas [01:03]

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Progress on Bilateral Trade Deals

Timestamp: [01:34]

Salvatore addresses the slow progress in negotiating bilateral trade agreements, citing the UK Framework Agreement as a rare exception. She points out that three of the four largest U.S. trading partners—Mexico, Canada, and China—are either not subject to the current tariff structure or are on separate negotiation tracks. This suggests that a comprehensive overhaul of tariffs by the pause's expiration is unlikely.

Notable Quote:

"We're not expecting a sweeping overhaul by Wednesday." — Ariana Salvatore [01:42]

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Scenarios Post-Pause Expiration

Timestamp: [02:09]

Zezas elaborates on three potential outcomes following the expiration of the tariff pause:

1. Base Case: Extension of the pause with most tariffs remaining unchanged, resetting the countdown clock with possible minor adjustments.
2. More Aggressive Path: Reimposition of tariffs with staggered implementation dates, particularly affecting complex relationships like that with the EU. This scenario could leverage strong macroeconomic indicators to justify renewed tariff enforcement.
3. Constructive Outcome: Announcement of regional or bilateral frameworks that alleviate immediate tariff threats, reducing uncertainty without achieving full trade deals.

Notable Quote:

"There’s a lot of optionality in how this plays out. It's trade policy uncertainty in the aggregate is still high." — Michael Zezas [02:09]

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Economic Implications

Timestamp: [03:22]

Salvatore connects the potential tariff scenarios to broader economic outcomes. She warns that an aggressive reimposition of tariffs could negatively impact inflation and GDP growth. Specifically, tariffs may begin influencing inflation approximately four months post-implementation, with GDP growth potentially stagnating to around 1% annually in 2025. This slow growth trajectory edges the economy towards a weak, albeit not recessionary, state.

Notable Quote:

"Our economists estimate that tariffs begin to impact inflation about four months after implementation, with the growth effects lagging by about eight months." — Ariana Salvatore [03:22]

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Conclusion and Final Thoughts

Timestamp: [04:02]

Zezas underscores the importance of monitoring the developments closely as the pause expiration approaches. He emphasizes the persistent high level of trade policy uncertainty and encourages vigilance in assessing how tariff levels may shift in the near term.

Notable Quote:

"Watch carefully on Wednesday and be vigilant for changes to the status quo on tariff levels." — Michael Zezas [04:02]

Salvatore and Zezas conclude the discussion by acknowledging the fluid nature of trade negotiations and the varying pathways that could influence market conditions in the upcoming months.

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Key Takeaways

• High Uncertainty: The expiration of the tariff pause introduces significant uncertainty into U.S. trade policy, with three main scenarios on the table.
• Economic Impact: Potential reimposition of tariffs could dampen economic growth and sustain inflationary pressures.
• Bilateral Negotiations: Progress on bilateral trade deals remains limited, with only select agreements like the UK Framework advancing notably.
• Strategic Flexibility: The administration retains multiple options, balancing between extending the pause, reimposing tariffs, or forging new trade frameworks.

For market participants and stakeholders, staying informed about these developments is crucial, as the outcomes will likely have substantial ramifications for global trade relations and domestic economic performance.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Michael Zezas, global head of Fixed Income Research and Public Policy Strategy.

[B]

And I'm Ariana Salvatore, U.S. public policy strategist.

[A]

Today we're talking about the outlook for U.S. trade policy. It's Wednesday, July 2, at 10am in New York. We have a big week ahead as next Wednesday marks the expiration of the 90 day pause on reciprocal tariffs. Arianna, what's the setup?

[B]

So this is a really key inflection point. That pause that you mentioned was initiated back on April 9, and unless it's extended, we could see a reimposition of tariffs on several of our major trading partners. Our base case is that the administration, broadly speaking, tries to kick the can down the road, meaning that it extends the pause for most countries. Though the reality might be closer to a few countries seeing their rates go up while others announce bilateral framework deals between now and next week. But before we get into the key assumptions underlying our base case, let's talk about the bigger picture. Michael, what do we think the administration is actually trying to accomplish here?

[A]

So when it comes to defining their objectives, we think multiple things can be true at the same time. So the administration's talked about the virtue of tariffs as a negotiating tactic. They've also floated the idea of a tiered framework for global trading partners. Think of it as a ranking system based on trade deficits, non tariff barriers, VAT levels, and any other characteristics that they think are important for the bilateral trade relationship. A lot of this is similar to the rhetoric we saw ahead of the April 2nd Liberation Day tariffs.

[B]

Right. And around that time we started hearing about the potential, at least for bilateral trade deals. But have we seen any real progress in that area?

[A]

Not much, at least not publicly, aside from the UK Framework Agreement. And here's an important detail. 3. Three of our four largest trading partners aren't even scoped for higher rates next week. Mexico and Canada were never subject to the reciprocal tariffs. And China's on a separate track with this Geneva framework that doesn't expire until August 12th. So we're not expecting a sweeping overhaul by Wednesday.

[B]

Got it. So what are the scenarios that we're watching?

[A]

So there's roughly three that we're looking at and let me break them down here. So our base case is that the administration extends the current pause, citing progress in bilateral talks. And maybe there's a few exceptions along the way in either direction, some higher and some lower. This broadly resets the countdown clock, but keeps the current tariff structure intact. 10% baseline for most trading partners, though some potentially higher if negotiations don't progress in the next week. That outcome would be most in line, we think, with the current messaging coming out of the administration. There's also a more aggressive path if there's no visible progress. For example, the administration could reimpose tariffs with staggered implementation dates. The EU might face a tougher stance due to the complexity of that relationship, and Vietnam could see delayed threats as a negotiating tactic, a strong macro backdrop, resilient data for markets that could all give the administration cover to go this route. But there's also a more constructive outcome. The administration can announce regional or bilateral frameworks, not necessarily full trade deals, but enough to remove the near term threat of higher tariffs, reducing uncertainty, though maybe not to pre2024 levels.

[B]

So wide bands of uncertainty. And it sounds like the more constructive outcome is quite similar to our base case, which is what we have in place right now. But translating that more aggressive path into what that means for the economy, we think it would reinforce our House view that the risks here are skewed to the downside. Our economists estimate that tariffs begin to impact inflation about four months after implementation, with the growth effects lagging by about eight months. That sets us up for weak but not quite recessionary growth. We're talking 1% GDP on an annual basis in 2025 and 26 and the tariff pass through to prices and inflation data probably starting in August.

[A]

So bottom line, watch carefully on Wednesday and be vigilant for changes to the status quo on tariff levels. There's a lot of optionality in how this plays out. It's trade policy uncertainty in the aggregate is still high. Arianna, thanks for taking the time to talk.

[B]

Great speaking with you Michael.

[A]

And if you enjoy thoughts on the market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

[C]

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