Tariff Update

Big Tariffs on the Table

• The announcement of a 90-day pause on reciprocal tariffs is a considerable (albeit temporary) weight lifted from a tariff program that is unprecedented in both scale and scope.
• The highlights include 125% China tariffs, 25% Canada/Mexico tariffs, 25% product-specific tariffs (e.g., steel/aluminum, autos, etc.), 10% baseline tariffs and country-by-country reciprocal rates ranging from 15 – 49%.
• If tariffs are reinstated after the pause, several Asian nations such as Vietnam, Taiwan and Japan will face average duties of over 20%. China tariffs are the exception, which are less likely to see a reprieve.
• Effective tariff rates are expected to spike higher to Smooth-Hawley levels, resulting in the largest tax increase since at least 1940 that was not intended to fund an ongoing war effort.

Potential Economic Impact

• By our estimate, new tariffs proposed this year are expected to result in a headwind to economic growth of ~2% if implemented fully as announced.
• Given the sweeping and all-encompassing nature of these tariffs, the extent to which companies may be able to adjust supply chains and mitigate some of the impact is notably constrained, though the pause may give firms some runway.
• In a sense, these tariffs resemble an event-driven economic shock similar to the COVID-19 pandemic, when traditional leading indicators offered little guidance for making timely calls on the economy’s direction.
• The tariff headwind is expected to bring near-term GDP growth closer to the 0% line and lift recession odds closer to a coin flip (our estimate of the probability of recession this year has roughly doubled from 20 – 25% to 40 – 50%).

The Potential Paths Forward

• Although reciprocal tariffs have been paused for now, considerable uncertainty remains over the path forward due to the potential of court challenges, status of tariffs after the pause and fiscal/monetary policy offsets.
• Usage of the International Emergency Economic Power Act is likely to face challenges in court, but there are other ways the President could pursue tariffs that are likely to hold up to legal scrutiny (Section 301, 232, 338 authorities).
• Countries that rely on U.S. trade or have low leverage may rush to cut their tariffs and other barriers in hopes of receiving better terms of trade, which would soften the economic impact. Much of Asia ex-China may take this path.
• Other nations may feel the need to respond in-kind with higher tariff rates of their own, fueling the fire a while longer in a tit-for-tat trade war. China, the European Union and Canada may take this path to varying degrees.
• This may provide the impetus for Congress to accelerate and beef up the reconciliation bill that has been in the works, which could provide some needed fiscal stimulus as an offset. The tariff pause provides some breathing room on timing.
• The Fed may find itself caught between a rock and a hard place, with tariffs raising the risk of stagflation. If inflation appears to be the greater concern, the Fed may adopt a more cautious approach to rate cuts this year.
• If it becomes clear that the risks to economic growth are growing starker and begin to outweigh inflation concerns, the Fed may be much more willing to cut rates aggressively.

An aggressive tariff approach could lead to an aggregate impact of ~2% of GDP