Podcast Summary: Thoughts on the Market
Episode Title: Three Possibilities for What’s Next on Tariffs
Host: Morgan Stanley
Release Date: July 2, 2025
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.
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]
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]
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]
Scenarios Post-Pause Expiration
Timestamp: [02:09]
Zezas elaborates on three potential outcomes following the expiration of the tariff pause:
- Base Case: Extension of the pause with most tariffs remaining unchanged, resetting the countdown clock with possible minor adjustments.
- 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.
- 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]
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]
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.
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.