Our Global Head of Fixed Income and Thematic Research explains
why President-elect Trump’s proposed tariff plans may look
different than the policies that are ultimately put in place.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan
Stanley’s Global Head of Fixed Income and Thematic Research.
Today on the podcast I'll be talking about what investors need to
know about tariffs.
It’s Wednesday, Dec 4, at 2 pm in London.
There’s still over a month before Trump takes office
again. But in the meantime he’s started sending messages
about his policy plans. Most notably, for investors, he’s started
talking about his ideas for tariffs. He’s floated the idea of
tariffs on all imports from China, Mexico, and Canada. He’s
talked about tariffs on all the BRICs countries unless they
publicly dismiss the idea of pursuing an alternative reserve
currency to the US dollar. In short, he’s talking about
tariffs a lot.
While we certainly don’t dismiss Trump’s sincerity in suggesting
these tariffs, nor the ability for a President to execute on
tariffs like these – well, mostly anyway – it’s important for
investors to know that the ultimate policies enacted to address
the concerns driving the tariff threats could look quite
different than what a literal interpretation of Trump’s words
might suggest. After all, there are plenty of examples of
policies enacted on Trump’s watch that address his concerns that
were not implemented exactly as he initially suggested.
The Tax Cuts and Jobs act is a good example, where Trump
advocated for a 15 percent corporate tax rate but signed a bill
with a 21 percent tax rate. Another is the exceptions
process for the first round of China tariffs, where some
companies got exceptions based on modest onshoring concessions.
These examples speak to the idea that procedural, political, and
economic considerations can shape policy in a way that’s
different from what’s initially proposed.
This is why our base case for the US policy path in 2025 includes
higher tariffs announced shortly after Trump takes office;
but with a focus on China and some exports from Europe; and
implementation of those tariffs would ramp up over time, as has
been suggested by key policy advisors. There's broad
political consensus on a stronger tariff approach to China, and
there’s already executive authority to take that approach.
Something similar can be said about Europe, but with a focus more
on certain products than across imports broadly. However, we
see scope for Mexico to avoid incremental tariffs through
negotiation. And a global tariff via executive order risks
getting held up in court, and we’re skeptical even a
Republican-controlled Congress would authorize this approach.
Of course we could be wrong. For example it's possible the
incoming administration might be less concerned about the
economic challenges posed by a rapid escalation of tariffs. So if
they start quicker and are more severe than we anticipate, then
our 2025 economic projections are probably too rosy, as are our
expectations for equities and credit to outperform over the next
12 months. The US dollar and US Treasuries might be the
outperformer in that scenario.
So stick with us, we’ll be paying attention and trying to tease
out the policy path signal from the media noise from the new
administration.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen to podcasts and share Thoughts on the
Market with a friend or colleague today.
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