Economic and Market Commentary

U.S. Trade Policy: PIMCO’s Libby Cantrill Addresses Client Questions

14/04/2025

Libby Cantrill

Watch PIMCO’s Washington expert share her answers to the most common questions we’ve received from clients – including key developments in U.S. trade policy, and our base case for U.S. tariffs going forward.

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Text on screen: Libby Cantrill, Head of Public Policy

Libby Cantrill: Needless to say, it's been a turbulent period of time from a trade policy perspective, with lots of twists and turns and head fakes, threats and actual tariffs imposed.

So let's discuss the main questions that we're receiving from our clients okay.

Text on screen: What is our base case for U.S. tariffs going forward?

I think as a base case where we're penciling in that we'll have in terms of tariff actions that will have more longevity, include the 10% baseline across the board tariff.

That is something that President Trump has been talking about for really for years in terms of helping to rectify the trade deficit. We also think that these sectoral tariffs, the tariffs on things like aluminum and steel, automobiles, as well as forthcoming sector tariffs on semiconductors, on pharmaceuticals, those are likely to stick around as well and remain. And then also higher tariffs on China.

We think that higher tariff level has durability just around the politics of China, given, the previous relationship that that the president has had on trade policy with China.

Something that might be underappreciated by the market is just how long standing and deep seated these views are for the president.

And as a result, we believe that trade policy uncertainty will continue for the duration of his administration. Now, again, we do think that this very heightened tariff level will likely decrease as there are negotiations and possible trade deals that are secured with our varying trading partners.

But we do believe that Trump is committed to what he said on the campaign trail, which is to use tariffs both as a means to an end, to increase leverage with our trading partners to get better deals for the United States. But again, also, as an end to themselves.

Text on screen: What effect could the tariffs have on the U.S. economy?

As a rule of thumb, have a broad approximation, if you will, for every percent increase in the effective tariff rate, we expect about a 10th of a percent headwind to growth and a similar upward pressure on inflation, meaning that if we did see a 20% increase on the effective tariff rate and that stuck, you could potentially see a 2% headwind to GDP growth, as well as a 2% upward pressure on inflation.

Now, that's in sort of a steady state in a silo. And there will be some crosscurrents that we'll talk about that may mitigate, the any sort of economic headwind.

Text on screen: Could the U.S. Congress or courts challenge the administration’s tariff policy?

I think that the answer here is that it is very unlikely that Congress takes away the authority for President Trump to impose these tariffs.

Now, that theoretically is possible. But the reality is, is that not only would a bill have to pass both chambers of Congress, but it would probably be vetoed by the president.

And that means that in order to override that veto, you would need 62/3 or 67% of the House and the Senate. That seems very unlikely.

The other potential source of pushback is from the judiciary, from the courts there. There we may see some traction. The president is using a pretty extraordinary, use of what's called IEEPA, the International Emergency Economic Powers Act. This statute from 1977 has never been used for tariffs before, and we've already seen some cases filed in the courts to try to stop the president from using this.

Even if we do see pushback from the courts, the president has many other authorities at his disposal to advance his overall trade policy agenda, which again, includes higher tariffs.

Text on screen: What else should investors be watching in Washington this year?

As many folks know, the Trump tax cuts on the individual side from 2017 all expire at the end of 2025.

We don't expect those to expire. We expect Congress to extend those. That by itself is not necessarily stimulative, but what we where we could see some additional stimulus, is if and when Congress passes a broader kind of additional tax cuts, in addition to the extension

So all in, you could see a more stimulative tax bill passing the Congress partly in response to this trade policy uncertainty. So again, these crosscurrents we think are going to be really important for folks as they think about the overall impact on the macro economy for both 2025 and 2026.

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