For much of the past year, markets have treated tariffs as a negotiating tool rather than a permanent feature of economic policy. Recent actions targeting imports from Brazil and Canada, alongside a broader expansion of Section 301 tariffs, challenge that assumption. Taken together, these moves suggest Washington is increasingly willing to use tariffs not as temporary leverage, but as a lasting component of trade policy.
That distinction matters because markets can usually look through short-lived disruptions. Structural policy changes are harder to ignore.
The Trump administration replaced the IEEPA tariffs with Section 122 following the Supreme Court's decision invalidating it in February. However, that was done under a temporary authority that expires at the end of July. It's been our view that as we approach that deadline, the administration would seek to replace the existing regime under a new authority. The conclusion of the Section 301 investigations is really a step in replacing the existing regime with a new authority.
Brazil and Canada Expand the Trade Front: What’s Happening Now
Two separate tariff actions are now live or imminent:
Brazil: A 25% tariff on Brazilian imports took effect July 22, under a Section 301 investigation into Brazil's trade practices, spanning digital trade access and market barriers for U.S. businesses. The order carves out major exemptions (oil and gas, beef, coffee, oranges) across a nearly 100-page exceptions list, but still covers roughly $10 billion in trade, about a fifth of Brazil's total exports to the U.S. Brazil's President Luiz Inácio Lula da Silva called it a "lamentable milestone," noting the U.S. actually runs a trade surplus with Brazil, undercutting the traditional "unfair deficit" justification.
Canada: A 50% tariff on select Canadian goods, including electrical equipment, machinery, honey, and hockey sticks, was imposed under a rarely used provision of the Tariff Act of 1930, covering about $20 billion in Canadian goods with no USMCA carve-outs. Economists estimate this hits roughly 5% of Canada's total exports to the U.S., or about $28 billion annually.
U.S. YTD Trade With Brazil & Canada (in million US dollars)
| Brazil | Canada | |
|---|---|---|
| Exports | 21,718 | 144,521.8 |
| Imports | 13,940.7 | 162,957.5 |
| Trade Balance | 7,768.3 | -18,435.7 |
Source: U.S. Census Bureau
Expect a More Durable Tariff Regime, Not a More Disruptive One: Morgan Stanley
Morgan Stanley's Head of Public Policy Research, Ariana Salvatore, argues that while tariff policy will likely remain a source of market volatility and political debate, recent developments do not point to a dramatic escalation in trade restrictions. The administration has repeatedly introduced exemptions, carve-outs, and implementation delays, suggesting policymakers remain mindful of the inflationary and affordability consequences of tariffs, particularly with midterm elections approaching.
This view aligns with Morgan Stanley's broader economic outlook, which remains relatively constructive. The bank expects U.S. growth to continue at a trend-like pace, supported by resilient consumer demand and strong artificial intelligence (AI)-driven capital spending, even as higher energy costs and policy uncertainty create headwinds. On inflation, tariffs remain a contributing factor, but much of their impact is already reflected in current price data.
As a result, Morgan Stanley sees tariff policy evolving toward a more permanent version of the existing framework rather than a substantially harsher regime. Under this base case, targeted measures such as Section 301 tariffs remain in place, United States-Mexico-Canada-Agreement (USMCA) exemptions are preserved, and selective carve-outs continue where the economic costs to consumers or supply chains would be too significant. The implication for investors is that tariffs are likely to remain a headline risk, but not necessarily a threat to the broader growth, earnings, and equity market outlook.
The Section 301 Wave Could Have a Longer Tail
The expanding use of Section 301 tariffs may ultimately prove more consequential than the headline-grabbing country-specific measures. Many of the products affected sit deep within industrial and manufacturing supply chains, including sectors tied to technology, advanced manufacturing, clean energy, machinery, and critical inputs. These costs may not show up immediately in consumer inflation data, but they can gradually move through production networks over several quarters.
The result is a form of inflation that builds slowly rather than appearing all at once.
A New Challenge for the Federal Reserve
Tariff-driven inflation presents a difficult problem for monetary policymakers. Traditional inflation is often associated with strong demand, which can be cooled through higher interest rates. Tariff inflation, however, is fundamentally a supply-side issue. Prices can rise even as economic growth slows.
This creates the risk of a more uncomfortable environment in which inflation remains stubborn while economic activity loses momentum. In that scenario, the Federal Reserve may find itself with less flexibility to cut rates than markets currently expect. The June inflation report released earlier this month showed consumer prices and core CPI inflation at 3.5% and 2.6%, which though representing a slowdown, still remains above the central bank's 2% target.
The Fed does acknowledge the impact of the inflationary impact of tariffs. In the July Monetary Policy report, the Federal Reserve said the pattern of price changes seen in 2025 suggests that tariff increases contributed in part to the upturn in consumer goods price increases. Fed Governor Christopher Waller said in a mid-July speech that inflation began to accelerate after tariffs and was later amplified by the Middle East energy shock.
The Question Markets May Be Underestimating
Investors have spent much of the year debating when the Fed will cut rates and whether inflation is finally under control. The more important question may be whether tariffs are becoming a permanent feature of the economic landscape.
If the answer is yes, then inflation may prove more persistent than many forecasts assume. Businesses would face higher costs, supply chains would become less efficient, and price pressures could linger even in periods of slower growth.
If tariffs are no longer temporary bargaining chips but a lasting policy choice, inflation could face a structural tailwind that extends well beyond the next few CPI reports. The real debate is not whether tariffs can raise prices—it is whether they are becoming permanent enough to reshape the inflation outlook for years to come.
