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Investing.com -- President Donald Trump has rolled out fresh threats to resume reciprocal tariffs on major trading partners ahead of a looming deadline, but Morgan Stanley strategists say the administration is likely to extend the pause, kicking the reciprocal tariff can down the road, giving negotiators more time to work out key differences.
The 90-day freeze on reciprocal tariffs, set to expire this week, has markets on edge. While the administration announced on Monday that it intends to impose a 25% tariff on goods from Japan and South Korea starting Aug. 1, Morgan Stanley’s base case is that the White House will “extend the pause for most of its top trading partners, citing ‘progress’ in bilateral talks. The pause will likely be accompanied by the announcement of high-level agreements with certain trading partners (including Vietnam), the strategists added, coupled with potential tariff rate hikes at a future date for others.”
But the approach may not be uniform and will likely follow a deal by deal basis. The administration could relax some tariff levels where there’s enough progress, or, signal that tariff increases are coming for others. "There’s been little publicly reported concrete progress on trade deals,” Morgan Stanley (NYSE:MS) said, and hawkish signals from the White House suggesting a possible tiered system for global partners, keeping tactical escalation on the table. If negotiations falter, tariffs could be reimposed selectively and with staggered timelines, especially for complex talks with the EU or Japan, leaving room for a fix even after a tougher stance is announced.
A more constructive surprise isn’t off the table either. The administration could announce a handful of regional or bilateral frameworks—not full trade deals, but enough to provide clarity and keep effective tariff rates lower in the near term. Such a move would reduce uncertainty about import costs and offer markets some relief.
For investors, tariffs remain a critical variable. “A more aggressive tariff path would reinforce our economists’ view that risks to the outlook are skewed to the downside,” the strategists say, highlighting a forecast for about 1% GDP growth in 2025 to 2026. While this is “not quite recessionary," it would be softer versus last year,” favoring apreference for US Treasuries and short USD positions, but any tariff relief would challenge those views.
With the July 9 deadline looming, the White House has already showed that its willing to lean with the stick rather than carrot in its approach to tariffs, suggesting markets should brace for more noise—and potentially, more volatility—before the dust settles.