Trump 2.0 and the Latest on Tariffs

4 snips

Feb 5, 2025

Recent trade policy shifts impact North American relations as President Trump negotiates tariffs with Mexico and Canada. He delays new tariffs in exchange for border security efforts. Meanwhile, a significant 10 percent tariff on Chinese goods sets the stage for countermeasures from China. This complex landscape reshapes economic forecasts and market dynamics, prompting discussions on the broader implications for U.S. trade and currency health.

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INSIGHT

Tariff Strategy

President Trump delayed tariffs on Canada and Mexico, but tariffs on Chinese goods began.
This aligns with the U.S. strategy to reshape trade with China while maintaining North American ties.

INSIGHT

Tariff Outlook

The base case is "fast announcements, slow implementation" for tariffs.
Tariffs on China and some European products are expected to escalate, impacting economic growth.

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Our Global Head of Fixed Income Research & Public Policy Strategy Michael Zezas discusses the potential economic outcomes of a shifting North American trade policy.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today – the latest on tariffs and potential outcomes of a shifting North American trade policy.

It’s Wednesday, February 5, at 10am in New York.

In a series of last-minute phone calls on Monday, President Trump reached a deal with Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau. President Trump agreed to delay the announced 25 percent tariffs on Mexico and Canada for a month – citing their intention to do more on their borders against migration and drug trafficking. But President Trump’s 10 percent tariffs on all Chinese products went into effect yesterday morning. China responded promptly with its own countermeasures, which are not expected to take effect until Monday, February 10, leaving room for potential negotiations.

These developments don’t come as a surprise. We had been assuming – one – that Canada and Mexico could avoid tariffs by making border concessions, which they did. And – two – that the US would craft a tariff policy related to China independent from its considerations around Mexico and Canada. If the underlying goal is to transform its trade relationship with China, then the US has an interest in preserving an alignment with Canada and Mexico.

Given all of that, our base case of “fast announcements, slow implementation” looks intact. We expect tariffs on China and some products from Europe to ramp up through the end of the year, putting downward pressure on economic growth into 2026.

If tariffs on Mexico and Canada are avoided or delayed further, there would be no change to our broader economic outlook. The U.S. dollar could weaken as it prices out some tariff risk. Within U.S. equities, consumer discretionary as well as broader cyclical stocks could lead.

If, however, we're wrong and tariffs do go up on Mexico and Canada after this one-month pause, then we expect some rise in inflation, growth to slow, and the U.S. dollar and Treasuries to outperform equities; at least for a time as the U.S. gets to work rewiring its global trade relationships.

Tariffs are likely to dominate news headlines in the days and months to come. We'll keep tracking the topic and bring you updates.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.