And the hits just keep comin’.
On Monday, markets managed to shake off the trade war threat and incessant balderdash from Donald Trump, who continued to broadside U.S. trade partners, accusing Canada of mistreating American farmers, Mexico of not doing enough to stop the flow of drugs into the country, and Europe for “sending cars in here like water.”
But he got some pushback from Paul Ryan and everyone is still holding out hope that someone will talk some sense into him before he passes the point of no return.
In the meantime, the E.U. has prepared to hit Trump and Republicans where it hurts. “Targeting 2.8 billion euros ($3.5 billion) of American goods, the EU aims to apply a 25 percent tit-for-tat levy on a range of consumer, agricultural and steel products imported from the U.S. if Trump follows through on his tariff threat, according to a list drawn up by the European Commission,” Bloomberg reported on Tuesday, adding that “the list of targeted U.S. goods — including motorcycles, jeans and bourbon whiskey — sends a political message to Washington about the potential domestic economic costs of making good on the president’s threat.”
Well speaking of costs of “making good” on absurd bombast, Goldman is out with a sweeping critique of Trump’s tariffs that quantifies what those “costs” might look like.
Late last week and into the weekend analysts and economists ripped into the tariffs and we did our best to document the bulk of that commentary for you here (you can find some of the color here, for instance). Goldman’s take is one of the more comprehensive assessments yet.
“By choosing across the board tariffs that are even more draconian than those recommended by Secretary Ross, the President has likely created a two-tier metal market, US versus the rest of the world, and politically created friction with key US allies,” the bank’s Jeff Currie and Damien Courvalin write, on the way to laying out 10 points on the issue.
For one thing, Goldman notes that because “US allies produce many of the value-added steels that current US capacity cannot fully replace without substantial increase in investment … the US will end up simply paying the tariffs on the higher quality imported metal from US allies even if the amount was at or under the quota.”
They continue, contending that in steel, most of the spare capacity in the U.S. is in long products and so, “the introduction of tariffs would likely result in a smaller trade deficit in long products (net imports of tubes, pipes and bars currently add up to 11 million tonnes) while leaving the balance in other product categories largely unchanged unless US steel producers invest in the upgrade, conversion and/or expansion of current electric arc furnace capacity that produces higher quality steel.”
Goldman says that that kind of investment is possible given the margin impact of the tariffs, but because producers will not know the fate of the tariffs under someone other than Trump and, perhaps more to the point, because the tariffs will hurt downstream demand, the bank doubts whether the incentive will be strong enough.
And it gets even more absurd. Goldman next takes a look at the aluminum industry and notes that “while the primary aluminum sector has contracted severely over the past five years with the US currently producing only 1.2% of aluminum worldwide, the US is actually the second largest producer of semi-manufactured aluminum products after China.” Additionally, capacity utilization is high in certain semis products and much lower in others which means “a blanket tariff will likely generate much more significant price pressure for some products than for others, suggesting that exemptions for certain niche steel and aluminum products may be needed to avoid outsized price jumps.”
Unfortunately, that “opens the door for metals to be imported in disguise of these niche products.”
Now for the most important part. Here’s Goldman explaining what happens to downstream industries where steel and aluminum are inputs:
Economically, a two-tier market is ultimately damaging to US downstream industries that consume these metals, as it creates an uneven playing field for US industries that face higher metal prices. While some downstream industries may be intensive users of steel or aluminum, if they are able to add a lot of value to these materials (generating a large gross surplus) then we expect that they should also be able to absorb higher input costs from steel and/or aluminum without disrupting production or having to hike output prices significantly. In contrast, if an industry is both an intensive user of these metals and has very thin margins, output volumes and prices are likely to have to readjust rapidly. In order to assess these potential impacts, we use a calculation based on “direct requirements” from US industry Input-Output tables. This analysis points to three downstream industries as being potential vulnerable: motor vehicle and trailer parts (steel and aluminum), can manufacturing (aluminum), and to a lesser extent soft drink manufacturing (aluminum).
Oh, and guess what? It turns out that Russia and China get out relatively easy under Trump’s plan. Imagine that, right?
“By imposing across-the-board tariffs to all steel and aluminum imports, the larger economic impact is on Canada, Mexico and the EU, and it ironically eases the economic impact to China and Russia; hence China’s muted response so far,” Goldman continues.
Yes, “ironically”, Putin and Xi (who Trump praised this week after China dropped term limits allowing Xi to effectively rule until his death), get the white (or “red”, in this case) glove treatment.
Finally, Goldman notes that “it isn’t a coincidence that the EU’s suggested retaliation is in Harley-Davidson motor cycles from Wisconsin (home state of House Speaker Paul Ryan), bourbon whiskey from Kentucky (Senate Majority Leader Mitch McConnell) and Levi jeans from California (Minority Leader Nancy Pelosi).”
All in all, this is an almost incontrovertible indictment of these measures and it comes from Gary Cohn’s old stomping ground. Gary, of course, is highly displeased with the tariffs.
To be sure, Goldman is not alone in this assessment. As noted above, the entire sellside as well as the economist community is united in opposition to the tariffs and especially in opposition to an all-out trade war, the consequences of which would be so far-reaching (by definition), that no one even has the gumption to try and quantify them (yet).
H