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Investing.com -- The Trump administration’s latest round of "reciprocal" tariffs marks a significant departure from expectations and introduces meaningful downside risks to U.S. and global growth, according to Morgan Stanley (NYSE:MS) economists.
Michael Gapen, the bank’s Chief U.S. economist, said the scope and scale of the new tariffs exceeded prior forecasts, with an effective tariff rate that could reach as high as 22% — levels not seen since the Smoot-Hawley era.
“Tariffs will be much higher and more broadly based than anticipated,” Gapen wrote, warning the move reverses decades of global trade liberalization.
The administration imposed a two-tiered structure: a 10% base tariff on all imports and country-specific increases, with China facing an effective 54% rate.
This is a sharp escalation from Morgan Stanley’s earlier baseline, which assumed 40% China tariffs by early next year and more limited measures elsewhere.
While the White House argues the tariffs will rebalance trade and re-industrialize the U.S. economy, Morgan Stanley remains skeptical.
“We think it unlikely that tariffs will reorganize the structure of the U.S. economy in the way the administration desires,” he added, citing structural imbalances such as the persistent federal deficit and low national savings.
The risks, the bank warns, are tilted further to the downside.
“Broad-based tariffs at this level, if held in place, materially increase the likelihood of a recession in the U.S. (and global) economy,” Gapen wrote.
The near-term impact includes a possible slowdown in business investment and hiring, along with adverse wealth effects for high-income consumers if equity markets correct sharply.
Inflation risks are also rising. Morgan Stanley expects core PCE inflation to accelerate on a quarter-over-quarter basis through Q3, with potential for a “material” increase in year-on-year rates.
Finally, Gapen said that protectionism introduces “uncertainty-induced” drag on economic activity.
“The space between a baseline outlook for sluggish growth and a consumption-led downturn is getting narrower by the day,” he said.