The Supreme Court's latest ruling on tariffs has thrown existing
trade agreements into uncertainty. Our Head of Public Policy
Research Ariana Salvatore and Arunima Sinha, from the U.S and
Global Economics teams break down the fallout.
Read more insights from Morgan Stanley.
----- Transcript -----
Ariana Salvatore: Welcome to Thoughts on
the Market. I'm Ariana Salvatore, Head of Public Policy
Research.
Arunima Sinha: And I am Arunima Sinha on
the U.S. and Global Economics teams.
Ariana Salvatore: Today we'll be talking
about the recent Supreme Court decision on tariffs, what it means
for existing trade deals, and where trade policy is headed from
here.
It's Monday, February 23rd at 9am in New York.
On Friday, the Supreme Court ruled that the president could not
use the International Emergency Economic Powers Act, or IEEPA, to
impose broad-based tariffs.
The ruling didn't give a clear signal on what it could mean for
potential refunds, but the Trump administration said it plans to
replace the existing tariffs, which is something that we'd long
expected – first leveraging Section 122 to impose 15 percent
tariffs for 150 days.
The president is simultaneously going to launch a few new Section
301 investigations to eventually replace those Section 122
tariffs, since they're only allowed to be in place temporarily.
So Arunima, let's start by breaking down some of this tariff
math. What does this mean for the headline and effective rate
given where we are now versus before?
Arunima Sinha: Before the decision, Ariana,
we were at a headline tariff rate of about 13 percent. What this
decision does is that with the move, especially to 15 percent,
for other countries, we think that it takes about a percentage
point off of the headline tariff rate. So, we would go to about
12 percent, and then we have another percentage point coming off
just because of the shifts in trade patterns. And so instead of a
headline tariff rate of about 13 percent, we think that we're
going to be at a headline tariff of just about 11 percent.
But that's really just related to the Section 122s. And as you
noted, this is only going to apply for the next 150 days. So how
should we be thinking about trade policy going forward?
Ariana Salvatore: I think we should view
the 15 percent as probably a likely ceiling for these rates in
the medium term; in particular because this 150-day period
expires some time around the summer, so even closer to the
midterm elections. And as we've been saying politically speaking,
it's unpopular to impose high levels of tariffs.
We've also been saying that the president will continue to lean
on trade policy as his real, only way to address the
affordability issue for voters, which is something that we've
actually seen on the policy side for the past few months with the
imposition of exemptions, more trade framework agreements, et
cetera.
So really, I think this is just another way for him to continue
leaning on this policy avenue. But in that vein, let's talk about
specific pockets of relief. What are we thinking about some of
their findings on a sector level?
Arunima Sinha: So, let's tie this into the
affordability aspect that you mentioned, Ariana, and specifically
using the consumer goods sector. What we think is that with, just
in the near-term period, with the Section 122s applying, for
different consumer goods categories, we could see tariff rate
differentials go down.
So, they could be anywhere between 1 to 4 percentage points lower
across different categories. But what we also think could happen
is that once we get beyond the 150-day period, and there are no
additional sector tariffs that go on. So, the 232s or the 301s,
particularly for this particular sector, we could see some of the
largest tariff relief that we're expecting to see.
So, for example, apparel and accessories could see something like
a 16 to 17 percentage point tariff drop. So that particular part
I think is important. Just the upside risks to consumer
goods.
But that of course brings us to the question of bilateral trade
deals and how they come into play. What do you think about that,
Ariana?
Ariana Salvatore: Yeah. So, I think when it
comes to the bilateral deals, as we mentioned, there's some
opportunities for relief depending on the sectors and the type of
tariff exposure by country. As you mentioned, the consumer goods
are a good example of this. So, in general, I think that trading
partners will have little incentive to abandon the existing deals
or framework agreements, just given that the president and the
administration have messaged this idea of continuity. So,
replacing the IEEPA tariffs with a more durable, legitimate,
legal authority.
But what's notable is that many of our trading partners are
actually now facing potentially even lower levels than they were
before. Even with the increase to 15 percent on the 122s from 10
percent over the weekend. In particular, many countries in
Southeast Asia are actually now facing lower tariff levels since
there were somewhere in the range of 20 or maybe even 25 percent
before. But as I mentioned, the export composition of these
countries matters a lot. So, Vietnam, for example, most exports
are subject to the 20 percent tariff because of the IEEPA
exposure.
This ruling is more meaningful than somewhere like South Korea,
where the exports are more exposed to the Section 232 tariffs.
Based on the export composition – and that's a level, remember,
that's not changing as a result of this ruling. So that's how
we're trying to disaggregate the impact here.
Now, my last question to you, Arunima, what does this all mean
for the macro-outlook? As we mentioned, refunds weren't addressed
in this ruling. We've sketched out a few different scenarios,
most of which leaned toward a long lead time to eventually paying
back the money – if and when the administration is actually, in
fact, mandated to do that. But safe to say in the near term that
we aren't going to see much action on that front. That probably
means status quo.
But why don't you put a finer point on what this means for the
macroeconomic outlook?
Arunima Sinha: That's absolutely right,
Ariana, for the very near term and the second quarter, we don't
think we're going to be very different from what our baseline
expectation is. In the third quarter and in the last part of this
year, there could be some upside risks, especially once the
timeline on the 122s run out, they're not extended. And the
different sector and country investigations take longer to
implement.
So, there could be some upside risks to demand. Consumer goods,
for example. If there were to be some sort of an incremental
tailwind to corporate margins that might lead to better labor
demand from these companies. There could be additional goods
disinflation; that would support just purchasing power. So, both
of those things could be some incremental uplift to demand,
relative to our baseline outlook.
But then the last thing I think just to emphasize from our
perspective, is that we do think that there is some sort of a
near-term ceiling about how high effective tariff rates can go.
We don't think that we're going to be going back to Liberation
Day tariff rates in the near-term or even in the latter half of
this year. Because if history is any guide, many of these
investigations are going to take time and that full
implementation may not actually occur before early 2027.
Ariana Salvatore: Makes sense. Arunima,
thanks for joining.
Arunima Sinha: Thanks so much for having
me.
Ariana Salvatore: And thank you for
listening. As a reminder, if you enjoy Thoughts on the Market,
please take a moment to rate and review us wherever you listen,
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today.
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