Three Possibilities for What’s Next on Tariffs

0:00Michael Zezas:Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.

0:06Ariana Salvatore:And I'm Ariana Salvatore, U.S. Public Policy Strategist.

0:09Michael Zezas:Today, we're talking about the outlook for U.S. trade policy. It's Wednesday, July 2nd at 10 a.m. in New York. We have a big week ahead as next Wednesday marks the expiration of the 90-day pause on reciprocal tariffs. Ariana, what's the setup?

0:25Ariana Salvatore:So this is a really key inflection point. That pause that you mentioned was initiated back on April 9th, 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.

0:59Ariana Salvatore:Michael, what do we think the administration is actually trying to accomplish here?

1:02Michael Zezas: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.

1:34Ariana Salvatore: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?

1:41Michael Zezas:Not much, at least not publicly, aside from the UK framework agreement. And here's an important detail. 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.

2:06Ariana Salvatore:Got it. So what are the scenarios that we're watching?

2:08Michael Zezas: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.

2:42Michael Zezas: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 pre-2024 levels.

3:22Ariana Salvatore: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.

3:58Ariana Salvatore:And the tariff passed through to prices and inflation data, probably starting in August.

4:02Michael Zezas: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. Ariana, thanks for taking the time to talk.

4:18Ariana Salvatore:Great speaking with you, Michael.

4:19Michael Zezas: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.

4:27Ariana Salvatore:The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.