Goldman Asks Trump: Is It Really ‘Easy’ To ‘Win’ A Trade War?

President Dennison was up before dawn on Monday tweeting about Chinese cars.

Thanks, Mr. President! Nothing like waking up to find the President of the United States calling America “STUPID” to get the week started on the right foot.

Overnight, Bloomberg reported that China is “studying” a staggered yuan depreciation in an effort to ameliorate a situation where Trump slaps tariffs on enough Chinese exports to make it mathematically impossible for Beijing to respond proportionately/in kind.


So it looks like “winning” won’t be as “easy” as Trump swore it would be early last month in this famously retarded tweet:

In a new note, Goldman cites that tweet on the way to asking the following:

But how easy is it really?

Spoiler alert: the only way this is “easy” is if no one retaliates and if there are no ramifications for financial markets, both highly unlikely scenarios.

The bank begins by noting that “the additional tariffs—if implemented—would affect about 7% of US imports and raise the average US import tariff rate by 1.6 percentage points (pp) to 3.1%”:


Goldman then simulates the effects of a 10% tariff on all imports under three scenarios:

  1. no retaliation from trading partners, and financial conditions do not respond to the trade measures (HR: they call this “unrealistic”)
  2. allowing financial conditions (including interest rates, the dollar and equity prices) to respond endogenously to the tariffs using the financial market equations in the model
  3. assuming in addition that trading partners retaliate proportionally to the US tariff by imposing a 10% tariff on all US exports

Under scenario three, everyone is a loser (growth falls for everyone and inflation rises).

“The US trade position still improves a bit—because the US has a trade deficit— but the improvement comes at a cost,” Goldman writes of the following charts, before explaining that “growth is now weaker than in the no-tariff baseline and inflation remains higher [while] trading partners are better off with retaliation than without—showing the incentive to do so—but still have lower growth due to higher inflation.”


As you can see, the growth boost for the U.S. falls off a cliff if you assume markets and trading partners react (i.e. if you accept the reality that this can’t possibly happen in a vacuum).

On the bright side, assuming Trump does indeed preside over a slowdown in growth (which he invariably will at some point), Goldman writes that a drop off in U.S. demand may be just what the doctor ordered. To wit:

Somewhat ironically, the most effective policies to improve the US trade balance are measures that weaken US domestic demand. For example, a 1% of GDP fiscal contraction improves the US trade balance sharply after two years if demand does not weaken abroad and around half that if trading partners also pursue contractionary policies. But this improvement in the US trade balance comes at a high price as real GDP falls by more than 1% as a result of the fiscal contraction.

So all we need is contractionary fiscal policy and a concurrent slowdown in GDP.




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