Tariffs Aren’t Going Away | PIMCO’s Policy Head Libby Cantrill on Trade and Tax Environment In New U.S. Administration
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this door. Very pleased today to be joined by Libby Cantrell, Managing Director and Head of Public Policy at PIMCO. Libby, welcome to Monetary Matters. Thanks so much for having me, Jack. It's my pleasure. Libby, I want you to break down where we are with this.

tariffs. The news flow has been rapidly changing. As we record this, the US has a 10% tariff on the rest of the world, excluding China. It has a 145% tariff rate on China, which as people can hear is quite a big number, and a series of other tariffs that you are going to get into. But just right now, Libby, looking forward,

What do you think is the ability or willingness of the Trump administration to have some flexibility with tariffs? How are you assessing the odds that the tariff situation, as I roughly summarized it, is going to be the tariff situation in a week, a month or a year from now?

for context, I think it's really important to kind of zoom out a little bit and to consider this president and his view towards tariffs. I think this is something we had been talking to our clients about really since 2017, that one, this president really believes in tariffs. He's been talking about

tariffs as a tool of the United States in order to level what he's viewed as an unlevel playing field really since the early 1980s before the Plaza Accord with Japan in 1985. President Trump was talking about tariffing the

In that case, Japan, he was against NAFTA in the 1990s. He was against China's accession to the WTO in the early on. So he's been incredibly consistent. People may agree with this policy, they may disagree, but he believes that this is something that

the United States can and should use as a tool. Now, how does he view that tool? He views it, I think, both as a means to an end, as in a way to extract concessions from our trading partners, but also as an end in itself. I think this is maybe where the market

was sort of dreaming or pretending that it wasn't going to be an end in itself. I think that a lot of folks had sort of shrugged off the actual terror threat, just assuming it was going to be basically all bark and no bite. I think our view had been that, yeah, there will be a lot of bark, but there would be some significant bite as well.

Now, what we saw on Liberation Day was even for those of us who was probably on one spectrum expecting that this was going to be meaningful was certainly more substantive. Those tariff rates were much higher than certainly what we were expecting. These, of course, they were driven based on the trade deficit versus actual stated tariff rates. And I think that is another important point here, Jack, is that this president,

really does believe that the goods trade deficit, not even the total trade deficit that we might have with a country that usually includes services, but just the goods trade deficit, how much we're buying from a country versus how much we're selling to that specific country, is emblematic of many other things. Emblematic of unfair trade policies, unfair tax policies, industrial subsidies, FX currency manipulation, what have you.

So broadly saying that, again, what we've seen so far has been sort of exceeded our, even our kind of expectations. But I do think all of this is underpinned by the fact that there's real ideology, there's a real worldview, and there's a real objective to try to reduce the trade deficit. So to your question about how amenable will this administration be to getting deals, I

But again, I don't think that folks should assume that all these tariffs are going to roll off. We have a base case that I'm happy to kind of talk to you about in terms of what are likely to stick and what are not going to stick. But in addition to what you've already mentioned, we have tariffs on non-USMCA goods, Mexico and Canada, goods that we are buying and selling that are not necessarily compliant with that trade agreement.

We have sectoral tariffs right now on autos, 25% on autos, 25% on aluminum and steel, forthcoming sector tariffs on semiconductors and pharmaceuticals, which we expect. So very long way of saying, sorry, that one, you know,

We have to take this president seriously on this issue. It's been incredibly consistent for decades. Two is that one of his objectives is to reduce the trade deficit. And he believes that tariffs are an effective tool doing that. And three, while he will be open in negotiations and deals along the way, we should be expecting a higher tariff rate for the foreseeable future. And I would assume for the entirety of the Trump administration. Right.

What is going to cause the Trump administration to moderate on tariffs? You mentioned concessions from other foreign nations. So that would be, for example, other countries lowering their tariffs. What about if the other countries don't have high tariffs and the perceived cheating by the Trump administration that other countries are doing is in the form of non-tariff bans?

barriers? How is that going to be measured? And also, can you speak about the market reaction, the Trump administration's willingness to adjust its policy as the market can react negatively in both the stock, the bond and the currency market? Our base case is that 10% baseline tariff that you talked about that is now on every country, regardless of level of trade deficit or trade surplus, that is very sticky.

That is something that the president's talked about, again, since the 1980s. That's something that Bob Lighthizer, his U.S. trade representative, USTR, had talked about a lot in the first Trump administration. We think that has a lot of durability. We also think these sector tariffs have quite a lot of durability. And then we think that tariffs on China will remain high. Now, will they remain to the kind of 145% level? Probably not. We don't think that's tenable. You saw Secretary of the Treasury

Bess didn't recently say that he doesn't think that this is sustainable. I think a lot of folks would agree with that. But then in terms of those reciprocal, those additional add-on tariffs, we have this 90-day pause right now that we're probably 15 days in or so. We're not expecting much more to be added to that, meaning that when that 90 days expires,

Maybe you could see some tariffs going up, but I think that this administration has kind of touched the hot stove, if you will, and it's probably not going to go back there again. So in some ways, we're probably past peak tariff level, but...

But again, I think the most important thing is, is while there will be maybe some kind of trade wins along the way, we are still going to be kind of facing a much higher effective tariff rate. And that obviously has implications for growth and for inflation and for currency markets and what have you. In terms of the pain points, I mean, you talked about kind of what would the reaction function be in terms of the markets. I think a lot of folks, perhaps not justifiably, but maybe hopefully,

came into this administration thinking that there would be a direct reaction function between this equity market in particular and these tariff announcements. I think that is absolutely true to a certain extent. But again, what we have seen with this Trump administration is

Trump 2.0, if you will, is a much more maximalist and a much more kind of ideological or stronger worldview and a much better organized administration than what we saw in the first Trump administration. I think that President Trump now having served in Washington, understanding that there's only a specific window of time where you can actually get things done in Washington, is acting with a real sense of urgency. So the point there is that he's maybe less sensitive now

to kind of those normal pain points like the market than he was under Trump 1.0. What we did see recently, though, is that there is an acute awareness of the bond market. We like that, right? We are a bond firm. President Trump has said bonds are beautiful. We would have to, we tend to agree with that. But of course, bonds, as he does, hits the real economy, right? Mortgage rates are based on the 10-year and more or less. Credit card rates,

auto loans. All of this is sort of primed off of the bond market. And so when you did see yields

really back up significantly and quickly, that clearly did get the Trump administration's attention. So again, I think this is not black or white. I think it probably is more gray, but there is a reaction function. They are going to be sensitive to market conditions, to sort of animal spirits, if you will, but maybe less sensitive than what market participants have said, have thought in the very beginning of

Thank you for letting out your base case. So 10% base tariffs, higher than that on China, and then some sectoral tariffs. Libby, when it comes to the negotiations, what is the Trump administration looking to extract from foreign nations in terms of concessions? And that will impact two things. It will impact the countries on whom reciprocal tariffs were placed on Liberation Day, April 2nd, and then those...

every country in the world except for China, that it was then lowered to 10% that 80 or 70 days in the future, it will go up to those reciprocal tariffs. You said that you think those tariffs will not be high, they could be as low as 10%. Under that scenario, I presume President Trump would

say that he has extracted concessions from those foreign nations, what do you expect those to be? If the tariff rate on China is going to go down from 145% to 35% or 25% or lower than 145%, what concessions will the Chinese government have offered the Trump administration that President Trump can go to his political base and the American people and say, here's what I've gotten with this tariff war?

Yeah, I mean, I think China is a bit of a different animal, honestly. So I would just sort of put that in a different bucket. But in terms of the other kind of countries, it is very kind of bespoke and idiosyncratic per country, right? So South Korea, for instance, the administration does not like the fact that the U.S. has to pay rent on some military bases that we have in South Korea. So could that be part of the negotiation? With Europe, they've longstanding...

agricultural tariffs on dairy in particular and on fruit and other agricultural products. Could that be part of the mix? Yes. I mean, Vietnam, there's a lot of allegations of Vietnam subsidizing and manipulating their currency. Could that sort of be on the table? So I think in many ways is why it is a little bit different and a little bit difficult to game theory because each country has

has sort of a different sort of set of issues that maybe they can address. Maybe they'll address cosmetically, maybe it'll be substantively. But I do think this is quite important in that trade agreements, durable trade agreements that will outlive one administration take

not only months, but years, if not decades, to negotiate. So I do think that the expectations for durability of these deals should be quite low. But does that mean that he won't be able, Trump won't be able to get some concessions? No. It just means that these concessions may be, again, more cosmetic or maybe less substantive than what I think maybe the market or what the Trump administration may want to see. In terms of China, which I do think that

The paradigm is quite different there, obviously.

the second largest economy, obviously increasing in terms of its military aptitude. We have other geostrategic, geopolitical concerns with China as it relates to the war in Ukraine with Russia. So I think that it's kind of a different ball of wax. And our expectation, again, is lower tariffs than 145%. But how we get there and what that means and what that looks like, I don't think is linear. I think one starting point will be

the phase one deal that Trump had secured back in Trump 1.0, which the Chinese didn't really honor, right? It was right after that deal was secured right before, I should say, COVID. And as a result, I think that there maybe is a little bit of loss of goodwill in terms of honor and that agreement. So you can kind of go back to that. That's like table stakes, I would think. And then it sort of built on that. But again, this is where you just don't, they don't have enough time. And

and they don't have enough personnel in order to actually make meaningful changes on the trade and from the trade perspective in terms of actually hashing out a kind of durable trade agreement. But you may get at least some concessions that they can sort of take as a win. And I think Jack, the last thing I'll just say is this is also why we just have promised to keep talking because one area that we know, maybe not for the president, but for his trade advisors is a focus is on this

sort of review of the USMCA, which is kind of NAFTA 2.0, right? This was the trade agreement along with the United States, Canada, and Mexico. I think that when it was being negotiated by Trump 1.0, the view was is that this could be kind of like the example for future trade agreements. The way that this has played out is that it has been exposed for some kind of loopholes, sort of a Swiss cheese approach, kind of unwillingly.

And so there will have to be some things that are addressed, particularly as it relates to Chinese investment in Mexico, kind of transshipping through Mexico and also setting up shop in Mexico. So I think there'll be some guardrails around that. But that could be then sort of the standard for trade agreements if the U.S. then goes back to Europe or goes back to Japan and goes back to South Korea and tries to kind of gold plate trade.

their existing trading arrangements with those countries. So I do think, again, at 90 days, we're not going to get very much. We could get some sort of cosmetic concessions or what have you, but it could also set up for a framework for a broader or durable trade agreements down the road. I want to draw attention for our audience that I don't think once, or if you did say it once, not that many times in your response, did you say the word tariff? And that is very,

very revealing because as someone who's just dusting off the textbooks and really getting back in international trade and trying to figure out what's going on, I have learned that a lot of the trade barriers or perceived trade barriers that the rest of the world has with the United States are non-tariff measures. And actually, President Trump over on Easter, he posted on Truth Social and he named

eight different ways of non-tariff cheating, anywhere from currency manipulations to value added tax to export controls, dumping and transshipping, as you mentioned, which is China. Instead of making it in China, it makes it to Mexico and that's transshipping. Which would you say

appear to be the priorities of the Trump administration? And do you think that currency manipulation is on the table? Meaning, and I think if Vietnam is manipulating its currency down to improve its exports and China is manipulating its currencies down to improve its exports,

then the way that the Trump administration would remedy that is to weaken the U.S. dollar, which would be very important for the global economy and financial markets. We've had a lot of discussion about currency and the approach of this administration on the dollar in particular. There's been a lot of attention paid to a paper that Steve Miren wrote, who's the Council of Economic Advisers chair.

And he wrote this back when he was a private citizen before he went into government, just about kind of the constellation of tariffs and sort of protectionism, but also with some sort of currency and capital controls. I think there's my own view. And again, this has been there's been a subject to quite a lot of debate here.

is that you just look at what the principal is saying about the dollar. The president has really not been talking about a weak dollar. He, if anything, recently has talked about the importance of a strong dollar and has threatened actually other countries that he'd tariff them. This is before Liberation Day, of course, that he would tariff them if they were actually selling the dollar to weaken it. Treasury Secretary Bessette has talked about the importance of a strong dollar. So I know there's sort of this

Maybe in New York circles, a lot of talk about this idea of the Mar-a-Lago Accord, kind of the Plaza 2.0 Accord, where you get a lot of our allies, plus China, in the room, and everyone agrees to strengthen their currency and weaken the dollar.

I think our view is that there are a lot of practical obstacles to that. One is trying to get agreement with all those folks that they will actually strengthen their currency and weaken the dollar. And I think China in particular, obviously China's been leaning into more of the mercantilist economic approach over the past few years because they have tried, they've flirted with this idea of domestic consumption.

I think they quickly realized that American consumers and Chinese consumers are quite different in terms of their ethos. Americans love to buy stuff, Chinese not so much. And so they've kind of gone back to this more export-driven model. So the idea of the Chinese agreeing to strengthen their currency and weaken the dollar, it just doesn't, it kind of flies in the face of what seems to be rational, but even if that were true. So even if we got rid of all of our allies in China into a room like then

and the Fawcett Hotel around the corner from us here at PIMCO in New York, there is a kind of another practical obstacle is that the FX markets are much bigger than they were in the 1980s. In fact, our FX traders have put together a setting. It looks like it's five times more than the size in the 1980s. And the reason that's important, obviously, is it just means that all of these countries would have to use a lot more reserves and they just don't really have them

If they have them, are we all going to use that to strengthen their own currency and to weaken the dollar? So a long way of saying, while currency is definitely on the table for some of these countries, and can Vietnam manage to some sort of level versus the dollar, and that's part of this kind of cosmetic agreement, maybe, but this kind of idea of a broad-based weakening of the dollar is

and strengthening of these other currencies, we don't necessarily buy. Now, of course, what's happening practically in the markets is the dollar is weakening. I'm not sure that the administration...

I'm not sure that's the goal of the administration. The markets have been behaving in ways that U.S. markets don't usually behave in terms of bond yields are up, equity markets are down, and the dollar is down. That's a lot more like other developing countries than it is a developed country. And so I'm not sure that's really the goal of this administration. But

But again, I think just more broadly zooming out, this idea of a Mar-a-Lago Accord, just even if people wanted it, it just has a lot of kind of practical obstacles. Okay. So you think of the non-tariff cheating that the currency manipulation may not be a priority and the way to remedy that would be to

weaken the dollar. So the Trump administration is maybe not so keen to weaken the dollar, even though the dollar is weakening. What about this other list? I mean, there's value-added tax, which acts as tariffs and export subsidies. Could you explain the logic behind that argument of value-added tax, which is like a consumption tax? How does the Trump administration view that as a

as a way of cheating at trade. And is that even likely that the European and other countries that use value-added taxes would consider lowering that? We don't think so. That was a little bit of an out-of-left field, if you will. Some of these other non-territorial barriers, well-known and kind of well, I think, discussed in Washington circles. For the VAT tax, do you think there's some economists who have pointed to that as potentially a subsidy for

for folks for exporting from those countries to the United States because they can get that rebated. I think there's, I'm not sure if a lot of people would agree with that logic. Also, as it is in the U.S., oftentimes legislatures have to change those taxes. So this is not something that unilaterally heads of states can actually negotiate away. They would have to go through their legislating bodies.

lobby. So I would say of all of those, that list that President Trump put out on True Social, that seems like the least likely to change just because, hey, I think there's a lot of disagreement that that's even an actual subsidy for exporters or that helps with the trade deficit or what have you, or helps kind of

again, enhance the attractiveness of, say, European goods to the United States. But I also think that there's just the practical question of how that gets changed. And it can't get changed through the head of

So do you think that the concessions that President Trump is looking to extract are in the forms of export subsidies or protective technical standards? And that is something President Trump likes to talk about. And it is pretty amusing to hear him talk about how Canada won't buy our cheese and France won't buy our cars. And basically, Japan won't buy things because they have a bowling ball test. Is that something that's maybe realistic that heads of state could

and then President Trump will be able to say, we've solved it. To go back to your question about tariffs, I mean, I think the tariff rate's probably something that's a little easier for them

to sort of have maybe there's a little wiggle room. So that might be kind of the main lever there, especially like India that just has much higher tariffs just across the board on the US. In fact, they have some of the highest tariff rates on the US. So that seems to be like kind of low hanging fruit for India, for instance. But for other countries where the reciprocal tariff rate is like

pretty much on par or not much higher than the U.S. Like Japan is an example of that. Then yes, I do think that they will try to lean into some of these other things. I think, Jack, though, the broader question here is that will these countries, like, yes, people are willing to

Yeah, negotiate with the United States. Yes, they want to continue to trade. We obviously have lots of active consumers here in the United States. I think they want to make sure that they still have access to that market. But there is a limit to that. And there's a political limit. Obviously, we are very focused on the political, the politics here in the United States, but

Each of these countries have their own kind of political dynamics that they're also trying to navigate. So Europe, for instance, one of the reasons why we have not been able to secure a trade deal is because of ag in Europe. And that's because France, for instance, they want to protect their farmers. So this becomes a political issue for member states in Europe. And how willing are they going to be to negotiate that away? That might actually be a higher threshold. So I do think this is like,

Yeah, I think a lot of countries do want to kind of play ball, if you will, with the United States, but there could be a limit to this. And I think my view is that, again, the administrations touched the hot stove. They're kind of reluctant to go back there again. But if they do really view a country as just not willing to negotiate, then...

We could see those add-on tariffs increase kind of country by country. But I think this is going to be... The hard thing about mapping this out is it could very well be that sort of specific. And the EU might...

The EU might be the hardest, honestly, outside of China, just because we have a big trade deficit with them. We've had longstanding trade issues with them. They probably don't want to do anything but the bad. And then, of course, they have these sort of nationalistic concerns as well, sort of political concerns that might prevent them from making concessions to Trump.

The last thing I'll say, though, is the broader point is that tariff rates will remain high. So this is like, well, we talked to our clients. What do we know? We know that the effective tariff rate is probably going to be somewhere around 15% to 20%. Could it be higher than that? Sure. Is it going to be lower than that? Unlikely, just given...

Again, that universal tariff, those sector tariffs, and then elevated tariffs on China. Thank you. And a world in which the US has 15% to 20% tariffs on the rest of the world, just how radically different is that world from the world of a few months ago or a few years ago? Or frankly, most people who are alive on this planet have experienced US tariff policy. We can put up a chart of tariff rates high from...

18, the late 1860s to the 1940s, and then going down and being very close to zero for most people who are alive's lifetimes, just how different of a world what are they going to be the consequences, what's going to be different in this new world of 15 to 20% tariffs, that was not true in the old world that we all know, the tariff rate, at least in relatively modern history of the last 100 years kind of peaked in the 1930s with the Smoot-Hawley Act, which were tariffs were around kind of

25, 25% or so in terms of effective tariff rate. So this means that that's pretty close. If you're going up to 20%, if you add on all those reciprocal tariffs, if we go back to Liberation Day, for instance, and he goes and does all the things that you threatened to do, then we're seeing 30% effective tariff rate. So that actually would be at a higher tariff rate than what we saw under Spood-Hawley. But again, we don't think we're going to go back there. But if we land at somewhere between 15 and 20%,

Obviously, that means that we're closer to that smooth holly than not. Also, going into Trump 2.0, the effective tariff rate was around 3%, 3.3%. It was a little bit lower under Trump before Trump 1.0, because that was before we had tariffs on China. And Trump, this is where Trump is, he's truthful. The US has the lowest tariff rate in terms of like,

big economies than anywhere. So we are, we were before this, this protectionist country. We definitely were trying to lead by example, trying to get everyone into that sort of free trade, Turk-Hun trade liberalization mode. And we were leading by example. So again, we entered just in Trump 2.0, we had 3.3 affected tariff rate, again, grew up to 15 to 20%. That's obviously a big delta.

And what does that mean? That means for growth, we could see growth.

up to 1% to 2% shaved off of GDP growth. Again, it kind of depends on where it lands and how long it takes to get there. And there's sort of a similar upward pressure on inflation. So we came into the year with kind of a 2-2-2 forecast, 2% real growth more or less, 2-something on inflation, closer to 3, but with a 2 handle on it, and 2 rate cuts. Now, the

We're kind of closer to 0% growth. We haven't dipped over necessarily to, I don't know how firm a recession call, but we're closer to sort of 0% growth, closer to kind of three-ish inflation, if not a little bit higher. And then we do think the Fed will have to cut, but probably later this year and maybe even more significantly.

Our view is that the Fed will likely sit on their hands until they actually see this really in the real economy and real data versus trying to preemptively cut, just given how sticky inflation is and what's happened to inflation expectations over the last few weeks. I mean, the worst thing that they could do is cut and then inflation expectations whole get go.

cold and then inflation goes up and then we're kind of in this wage price spiral. That's what they want to avoid at all costs. So bottom line here is that even if you're resting at a 15% effective tariff rate, a lot of frictions for the economy. And then the last thing I'll say, Jack, is that I think they know that. I think the president appreciates that there will be some frictions, maybe not so significant. I don't think he wants the U.S. to go into recession, for instance. But I

But I think that unlike Trump 1.0, they're willing to tolerate a lot more of those frictions than maybe it's sort of seen that first flash. The Federal Reserve is stuck between a rock and a hard place because if tariffs are stagflationary, they increase inflation. So maybe rates should be higher, but they also weaken growth. So maybe rates should be lower. So it's tough to make that decision. Thank you for sharing your current view.

What is President Trump's strategy with going after Jay Powell and saying, calling him a loser and saying that he can have the power to fire him? Is a President Trump removal of

Fed Chair Jay Powell, is that something that you were viewing as on the table? So we think it's still unlikely. But some ways we were expecting the jawboning that you have seen. If you just go back to 2018 and 2019, even though Trump, of course, nominated Powell to the chairman in 2018, he was very critical of him. He sort of said similar things, maybe not with the gusto that he's saying on True Social this time around, but he was very critical of

of the fact that he didn't cut rates and he didn't kind of get in front of what Trump perceived as slowing and what have you. So in some ways, I think this job-owning

We should have expected it, and we are seeing it. Now, I think the difference, of course, is that you are doing that and overlaying that on top of an already very jittery market, right? This market is worried about this Trump administration or worried that it is a more maximalist Trump administration. I think unlike Trump 1.0, he's saying things and also doing them. So maybe those threats carry more weight. At the same time, President Trump himself has said he's not going to fire Jay Powell.

He did tweet on his true social that he can't wait to be until it's terminated.

I'm not sure that was an intentional use of wording. Jay Powell's term expires as chair in May of 2026. So that's basically a year away. But I think the broader question is, one, can he do this legally? I think there's a lot of legal folks who say, no, he cannot fire Jay Powell as a governor of the board of the Fed. Maybe he can demote him from the chair position, but he can't actually get him off the Fed board.

I think that will likely be the sort of similar issue is playing its way through the court system in a very sort of bespoke instance, the National Labor Relations Board, LRB, where this, he fired somebody and this will be litigated, this is going to be litigated and Supreme Court will likely rule on this before the summer break. So I think there's that question. Can he even do this? And again, I think that's an active legal question. I'm

I'm not sure he can. I think the Federal Reserve statute is pretty clear, but I'm also not aware. But I also think, what does that get him?

And from a market's perspective, obviously not much in terms of getting those yields down. That's exactly the opposite. It puts more of that sovereign risk premium, meaning that investors and treasuries are demanding more yield for investing in treasuries. That's not necessarily what he wants. He wants lower rates across the yield curve, as we talked about, because that does flow into the real economy. But also, what does it get from kicking Powell off the Fed?

It's not like he has somebody there witting the wings on the Fed board who he could elevate, who would be a very political person. Chris Waller, Mickey Bowman, these are people who were also nominated by Trump 1.0. They're like half Fed institutionalists by now. They're serious economists in the case of Chris Waller's. Chris Waller and Mickey Bowman is a banking regulator, broke out of the banking world originally. So I don't.

I don't think it gets him very much. The last thing I'll just say about this is that even if he can nominate somebody new to the Fed Board,

that might not get 50 votes in the Senate. And this is something that I'm not sure people are really focused on because they haven't heard much from Congress. Congress hasn't really been pushing back very much. But it is an advice and consent rule, meaning that you still need to get 50 votes in order to get anybody confirmed. And honestly, I could rattle off four or five or six senators right now who I don't think would vote for somebody if they were replacing a fired person

Jay Powell. I just think there's a lot of squeamishness around that in terms of even the Republican Party, who have been more or less more amenable to his nominee. So long way of saying, sorry, job owning expected, but job owning is quite different from actually firing. And again, even if he were to move forward and fire Powell, I'm just not sure if it actually will achieve any of these purposes, honestly. You brought up the law and Congress. What

What is, as you assess it, the willingness of the Republican senators and Republican Congress to go along with Trump's tariff agenda? Also, can you speak to the fact that the way President Trump is enacting his tariffs has been through the IEPA, the International Emergency Tariff?

Economic Powers Act. So basically, President Trump has declared a national emergency, and that is a non-traditional route. Normally, if you're trying to do a fix the trade deficit, you would require an act through Congress. At what point, or maybe the answer is never, but at what point does President Trump's authority to use this AIPA

expire or get a little bit stale, and he might need to go to Congress to enact these tariffs. And if you said you expect tariffs to be higher than they were before for the entirety of President Trump's term, is Congress going to be on board with that? And what might their role be? So that is a great question. So this International Emergency Economic Powers Act

has never been used to impose tariffs. It hasn't been used many times, I think 30 times since its original, past Congress, which was in 1977. Now, Nixon did impose a universal tariff based on the predecessor of IEFA, but he later very quickly rolled that tariff back. This

This was the sort of 15% search charge that he put on all imports, citing a balance of payments prices. And in that case, it wasn't the judiciary, but it was an appellate opinion that ended up rolling that, causing him to roll that back. Again, President Trump doesn't seem like he's inclined to roll that 10% level back. But I do think this is being litigated right now and will likely could find its way into the Supreme Court. Now, it's not going to be ruled on this session, meaning that that would get us into the fall. It

It's not kind of late winter. It's not early next year. So I think the bottom line for markets is this is not going to happen anytime soon if this gets rolled back through the courts. Very unlikely that an injunction is successful, possible, but usually for an injunction, meaning a stoppage of the law, a stoppage of the act, you would have to have somebody who has standing that shows irreparable harm, meaning that they're going out of business with this 10% tariff.

I'm not sure that's probably likely. So I think the bottom line here is, is that we could see the Supreme Court overruling this use of IDFLA because it is unusual. And I think the thing that the Trump administration has done that hasn't necessarily helped themselves, I'm no trade attorney, but I will editorialize here, is that they A, have put the 10% tariff on countries with whom we have a trade surplus.

So that kind of undermines this whole idea that we're in a balance of payments crisis. And then also they've done some exemptions to IEPA as well. So they kind of carved out certain countries and what have you from this sort of IEPA, this sort of IEPA blanket. So I think that is, again, that might just like undermine their arguments in front of the court that this is actually a national emergency, but we'll see. The last thing I'll say is that usually the courts are very,

give a lot of discretion to or deferential to the executive branch around national emergencies. Because usually the courts don't want to interfere with what could be a national security or an economic crisis just in terms of the precedent that it may set. But again, because this is so unusual and there have been things that they've done to kind of undermine their arguments that were actually in a national emergency, then you could actually see this getting overturned at some point. But

No one should hang their hat on that, right? Don't trade on that in the short term because if that's going to happen, it probably won't happen until the end of this year, if not next year.

So I think what you're saying is that President Trump can use IEPA for a while, as long as, so you said, until the end of the year, and that even the Supreme Court may support him. And if the Supreme Court supports him and doesn't rule against President Trump, are you saying that President Trump doesn't need Congress really for anything tariff related for his entire term? Is that what you're saying? Yes, no, Congress actually, in the 1970s and 1960s, basically, I'm sure maybe, you

regretfully now, but they delegated much of the tariff authority to the executive branch. And it's right that the Constitution gives that power to Congress. However, Congress, through something called the 1962 Trade Expansion Act, the 1974 Trade Act, allowed the president pretty vast powers to impose tariffs

tariffs unilaterally. Now, usually you have to go through these investigations. So for these kind of product specific sectoral tariffs, they are doing that very kind of legally buttoned up way. They're going to go through a public comment period. The USTR will run, Commerce will run an investigation with a conclusion that the people then can comment on. So this will be kind of going through the traditional kind of tackling and blocking and tackling, if you will, of the trade law.

IEPA allowed the president to shortchange all of that and not do an investigation, not put this out for notice of public comment and just slap on tariffs. And so that is why it is quite, it is an extraordinary use of the statute. But I think that the thing that markets should understand is even if IEPA gets overturned, there are other tools that the

that Trump has in order to still impose tariffs, they just take longer and are like, you know, again, more subject to public input. But it doesn't mean that like the end result is not pretty similar.

Wow. So I knew that President Trump had widespread powers with regards to tariffs in the short term. But I think what you're saying, and I did not know, is that those powers could last for his entire presidency. That is a big deal and something that our viewers here should be paying attention to. Yeah, Jack, I mean, one corollary is that what happened, the tool that, or the way that Trump put the Chinese tariffs on back in 2018 was something called Section 301 of the 1974 Trade Act. And that required his USTR to do an investigation on China

took them about six months, they came back, determined that yes, China was stealing intellectual property, that they were manipulating their currency, that they were doing it, putting up these other non-tariff barriers, if you will. And then that allowed the president to administer tariffs. So again, it's a more cumbersome mechanism, but the effect is kind of the same thing, honestly. He can still put very high tariffs on

particular countries. And maybe a little bit harder to do a universal tariff, but again, the effect wouldn't be too different if he started using some of those other tools that are available to him.

And Libby, is there a possibility of nominally extremely high tariff rates, maybe on China and elsewhere, but basically most things are exempt? Cars are exempt. iPhones are exempt. Food is exempt. And it ends up being that actual tariff rates, effective tariff rates are not super high, even though on paper tariff rates remain very, very high. Yeah, I think that is a possibility. I just am not sure if that's a probability. I think that the iPhones were partly because of the relationship that President Trump has with Tim Cook.

Also, he understands that people really like iPhones in this country. So I think that for those goods that are really difficult to substitute, maybe we will see some exemptions. Ados, for instance, though, the president's been talking about terraphing

Japanese autos, European autos, English autos for four years. So I don't think I would hold my breath on autos being carved out. And again, it goes back to the goal. Is the goal really to reduce the trade deficit, in which case you can't make too many exemptions or then you basically are undermining that objective? Or is it just to get concessions? Or is it just to raise revenue? I mean, this is the thing I think that has been

complicated for the markets is that they haven't really gotten a straight answer of what the objective is. My view is it's a little all of the above, but for the president himself, I think the trade deficit is sort of the kind of the main arbiter of success. How have you assessed the

the progress of the trade talks with the rest of the world? I know Japan was in DC having talks. I don't believe China has had talks with the US yet. What are you seeing and reading? And what's your analysis of the progress on trade talks so far? The macro point here is the tariffs are going to remain high regardless of like, even if you don't have any additional tariffs. So

I guess it's like that's a little bit of a noise, but I think Japan is going well. I think the Japanese are very inclined to make a deal with the United States. I think they're going to ask, though, for some car about on autos. I think Trump is going to say no. So that is something that's an area to watch. We'll see. India, I think that also, again, very high tariff rates. So India can kind of like right out of the gate, do some things that will, I think, please the president.

and make it kind of closer to getting a deal. South Korea, I believe, is making progress. So I would say kind of Japan, South Korea and India seem like low hanging fruit, if you will, on quotes. And the UK and Australia, given that we have surpluses with them, they also seem pretty easy to kind of get some maybe, again, more cosmetic things from them. The EU, I think, will be more difficult and then China will be more difficult.

Mexico and Canada, that will be kind of a different bucket because that will, I believe, will be really addressed under this USMCA review, which by law has to come up next year. But it's going to be accelerated and probably will start in earnest maybe in the fall after we get past this July 9th deadline.

And what is your view of the sectoral tariffs on consumer tech and semiconductors? I did an interview a week ago, and I referenced the very high rates of tariffs on China, that Apple makes a lot of their iPhones in China. And then immediately the next day, the Trump administration made an exemption on that. And then a few days after that, President Trump said it was not an exemption on that. So just where are we right now on the

iPhone thing and in terms of the sectoral tariffs for semis and other consumer tech, what is your rough range of where the tariff rate range will be? - Yeah, so I do think those tariffs are coming. These are, and again, not to walk out too much. This is called Section 232 tariffs. This also requires an investigation

requires some public comment. So it's sort of this iterative approach, if you will. And so probably it's not expected until I would say this summer at the earliest. And the same thing of the pharmaceutical companies. What that Semi's EO looks like, I don't know. They have said that there's going to be some consumer kind of facing technology included in that. I just, I wouldn't be so sure of that. I think there's like a lot of elasticity around consumer demand.

in terms of prices increased by 25, 50%. So maybe less likely, but I do think semiconductors just in general, obviously an area

of real focus given Taiwan's dominance in advanced semiconductors. I think the president really does want to bring a factory of semis here. Of course, he is sort of dismantling some of the chips folks at Connors. So it's a little bit, it's a little befuddling, if you will. And actually, Bob Lighthizer, one of his trade representatives from one point I was talked about, have

The CHIPS Act was actually a good use of kind of congressional action because it did provide some subsidies and incentives for domestic semiconductor manufacturing.

Anyway, we'll see how that plays out. But I do think semi tariffs are coming, but I think importantly, at a much lower rate than the 145%, right? So anything that was sort of exempted, maybe still be tariffed, but it's going to be tariffed at 25%, not the 100, again, the 145%, at least if it was coming from China. Hmm.

Libby, whenever Treasury Secretary Scott Besson is asked by a journalist, well, won't these very high tariff rates cause XYZ bad economic thing to happen? He always goes back and says, you've got to talk about the three-legged stool. It's not just about tariffs. It's also about deregulation and about tax cuts and tax policy. So those two things are supposed to be stimulative and to attempt to offset the tightening effect of tariffs.

Tell us what you think is going to be happening this year with deregulation, but also tax cuts. How much are the tax cuts going to be extensions of tax cuts, which I don't know, maybe don't count as new stimulus or versus actually new tax cuts, such as taxes on tips? And then also deregulation, what does that actually mean and what's the consequences of that going to be?

Yeah, so I do think that market participants, we call this kind of the vegetables, if you will, and not the dessert, which is sort of the task of the deregulation. And so the dessert is coming. We've just been like fed a strictly veggie heavy diet, if you will. Sorry to belabor the dumb metaphor, but I do think it is. I mean, it is coming. It's just, I think, a question of like, does it sort of like offset the kind of the uncertainty around the tariffs and what have you? I think that's a good question.

In terms of what the composition of that package, we now know and I could bore everybody with the details, but we know the guardrails. And that's because Congress is going to try to pass this tax bill.

with something called budget reconciliation. The reason why it's important is because it only requires 50 votes in the Senate, not the typical 60 that you need, 60 votes you usually need in order to start a benefit filibuster. But there's some things that they have to do in order to kind of set up this reconciliation process, one of which is to pass the same budget that effectively provides some guardrails for that tax bill. So we actually know the guardrails, but we don't know what the

the guts of that bill are, if you will. But the garden rails are pretty broad and pretty big. And I think this is something, I think the bond market's been paying attention to this because it means probably more

Treasury issuance and probably higher deficits, despite the doge, which has, I think, quickly gone into the background, if you will. But it, and again, it sort of set the ceiling for how big that tax cut could be. As of now, that budget that just was passed by Cloteam, it looks like it's $5.6 trillion. That would include $4.2 trillion of extension of the spending of tax cuts, to your point. Those are the Trump tax cuts that are all expiring.

Plus some additional tax cuts. So the president wants no taxes on tips. He wants no taxes on overtime. He can't do no taxes on Social Security because of the budget reconciliation rule. He was going to increase the SALT cap.

For those of us living in New York, this is something that people are highly focused on. Maybe it doesn't drive markets, but definitely does drive, I think, kind of sentiment within California and New York and what have you. So that bill could be quite big. Now, again, that might cause indigestion for the bond market because you might see a big net deficit number. But in terms of kind of animal spirits and risk, kind of risk on, it could actually be the dessert, right? It could be kind of the carrot that the food.

the market has been waiting for. In terms of timing, Speaker Johnson in the House has outlined a pretty aggressive and vicious timeframe. He said he wants to get that done by the end of May. I think that seems unlikely to me. I think more likely it's probably before office recess. But regardless, it will get done and it will probably be quite big. The last thing I'll just say about that is that there's also been talk about spending cuts being included in that bill.

including the House had originally proposed something like $900 billion of Medicaid cuts. We could see some cuts still,

I think $900 billion is very high, and it just will never get for boats. But you could see some spending cuts. Even though the tax cuts could be high, you could also see some offsets from spending cuts. I think from the IRA, the Inflation Reduction Act, kind of green climate stuff, rollback, and then maybe some other things like spectrum sales. They love to sell spectrum. The general government owns a lot of white stuff. And so whenever they're trying to raise revenue without actually really cutting spending, they like to sell it.

And spectrum is one of the things that they've been able to sell actually quite well, and it's raised part of their revenue. So I think that's the open question. But really, August, it was probably the most likely timeframe. Another component of that will be the increase in the debt ceiling. So that will be, from our perspective, every year or two years when we have to navigate a debt ceiling increase, it's like I'm telling our clients it will happen, but it's

But it's just a question of when, but it becomes oftentimes like the 11th hour and the T-bills start selling off and people get very antsy. So I think we'll be able to avoid a debt ceiling fight, which is, again, that's another piece of dessert, if you will, that the market may not be expecting. And then your question about deregulation, I always frame this in a way that's less about deregulation, less about actually rolling back regulation and more about, I'm

I'm in the absence of new regulation. So, you know, under the Biden administration, do you love President Biden? Do you hate President Biden? The reality is, is that they issued a ton of regulation. And it was not only the volume of regulation, but it was the scope of regulation, even in our markets, the treasury market with FCC did. It was like very broad regulation.

and it just took a lot of time and resources just to kind of internalize and to comply and what have you so even just the absence of new regulation is i think very welcome and then i do think you will see some clarifying of some of the binary regulations that they people are like written quickly and also i think you will see a kind of a softening of say capital rules um so we've been expecting some

something on SLR, the Supplemental Leverage Ratio, and that would allow dealers to basically more easily make markets. It would make some of these capital restrictions less punitive. So I do think it's a little bit more nuanced than just deregulation. But I don't think, like in terms of what the market has experienced, we haven't really seen the benefits of that yet. Usually deregulation has a longer tail. It just takes a while. You get the folks in there and people are just getting confirmed. Like the SEC, Paul Atkins, was just

sworn in yesterday. So you really haven't seen the benefits of some of that. Yeah, probably that tailwind can be ridiculous.

Libby, from PIMCO, I got to ask you about the bond market. How is this three-legged stool, this cocktail of radically new fiscal policy from the Trump administration impacting your view on the credit risk versus duration risk? Do you want to go out on the curve and buy longer-term bonds? Do you want to take greater credit risk? Or neither? Do you want to just go in very low-risk instruments? How is that impacting your view on that as well as your colleagues at PIMCO?

Yeah, so our views kind of before Trump 2.0 got really underway was that we had a bias toward having a steeper yield curve with the expectation that we would likely have some tariffs may add a little bit of inflation, that you would have probably higher deficits just with this tax bill. And we also had kind of overweight to duration into the year. Now, a lot of people had a much

kind of underweight situation. They didn't want to have a lot of interest rate risk. We had a bit of a different view. We thought that maybe the economy would be slowing. But again, some of these tariffs, we took it pretty seriously on the tariff risk. And so as always, we're well positioned coming into all of this. We also have very light credit risk, meaning we didn't own a lot of corporate credit.

We thought more of that was an evaluation. Corporate spreads were so tight, they're priced to perfection, like the equity market, honestly. And so we didn't have a lot of exposure there. We like securitized products. So agency mortgage-backed securities that effectively have a government guarantee. We also like other non-agency residential and

and consumer loans just because of their cash flows and what have you. And they're actually, usually people pay this stuff more than they'll pay lots of other things. In fact, their mortgage, people are very unwilling to actually stop paying their mortgage unless things really start getting very bad. But we also own a lot of agency mortgages, which are basically government guaranteed, as I said. So anyway, I think that

That positioning hasn't really changed all that much. We don't think that the dollar, maybe the dollar is overvalued coming into this year. We don't necessarily think that the reserve currency is going away, the kind of dollar as reserve currency. Is it going to be chipped away incrementally? Maybe. Do we see...

foreign private investors, maybe diversifying away for the dollar-based assets, sure. But I do think people need to distinguish between the sort of like wholesale rejection of the dollar and people just kind of acknowledging that maybe the dollar was like too strong and that it needed to actually come down just because from a valuation kind of technical perspective. So I would say that we are, again, our light on credit given the sort of slowing economy, but we're not eschewing

the US duration necessarily, but we do also like global duration. So we like Australia, we like Canada, places where we do see some rate cutting the EU, where you're already starting to see some of the central banks on their kind of start their rate cutting cycles. And that is good from a total return perspective when you own active fixed income. Last thing I'll say is a little plug for PIMCO is it is a great environment for active fixed income, right? If you own, if you just own kind of the benchmark, then, you know, you just owe you...

what you can't get versus where you've been able to take active positions on duration, on credit risk, kind of across the yield curve and around the globe. So even though this environment is like taxing because there's just so much coming at us, it's actually created quite a lot of opportunities for us to make money for our clients.

Stig Brodersen : Libby, thank you so much for coming on Monetary Matters. You've got a lot of expertise. I will share for our viewers your most recent think piece on PIMCO, where you actually lay out in details many of what we're talking about, but you also say just what are the tariffs as we said here today?

that are actually in place. That is a shockingly difficult thing to figure out for a non professional like myself of what actual tariff rates are in place. So thank you for coming on and sharing your insights. Thank you everyone for watching. A reminder to subscribe to our YouTube channel and Monetary Matters Network. And also you can find Monetary Matters on Apple Podcasts and Spotify. Thank you everyone for listening. Thank you. Just close this door.