Market moves past trade deal euphoria—Morgan Stanley dives into what comes next

Morgan Stanley analysts warn that global trade policy remains highly uncertain, with tariffs continuing as a 'moving target' despite recent agreements which often lack clear legal foundations. They project a steady-state global baseline of 10-15% tariffs, potentially higher for China, noting that the EU deal has actually increased effective U.S. import tariff rates to around 15%. The inflationary impact of these tariffs, expected to cause up to a 1% price shift, is now filtering into data with a lag, with costs primarily borne by U.S. importers.

Analysis

Global trade policy remains a significant source of uncertainty for investors, according to a recent Morgan Stanley analysis. Despite headline agreements between the U.S. and partners like the EU and Japan, these deals are characterized as "moving targets" that lack legal foundations and clear implementation details, complicating corporate investment decisions. The firm projects a new baseline global tariff rate of approximately 10-15%, with potential for significantly higher rates of 20-45% on goods from China. Counterintuitively, the recent U.S.-EU deal has contributed to a higher effective tariff rate on U.S. imports, pushing it from ~10% to ~15% as exemptions for sectors like pharmaceuticals and semiconductors were removed. The inflationary effects are now becoming visible in economic data, with tariffs expected to add up to one percentage point to price levels before potential demand softening provides relief. This impact is uneven across sectors; while Fabricated Metals and Textiles face high rates of ~24% and ~20% respectively, their smaller import share mutes the aggregate effect, whereas high-volume categories like Computers & Electronics face lower rates below 10%. Currently, costs are being absorbed by U.S. importers, leading to a 5% drop in overall import volumes in May as the policy's impact begins to materialize.

Key Decisions for Investors

• Investors should scrutinize portfolio exposure to sectors with high tariff sensitivity, such as Fabricated Metal Products and Textiles, which face rates exceeding 20%, and monitor for margin compression in import-heavy businesses.
• Treat headline announcements of trade deals with caution, recognizing that a lack of legal and implementation clarity creates ongoing risk and uncertainty for supply chains.
• Closely monitor upcoming U.S. import and CPI data for June and July to gauge the convergence toward the forecasted mid-teens effective tariff rate and its true inflationary pass-through.
• Consider favoring companies in sectors like Computers & Electronics or Chemicals, which the analysis notes face substantially lower tariff rates and may be more insulated from direct cost pressures.