Since April 5, when Trump flipped out and ordered the USTR to consider whether it’s “appropriate” to propose an additional $100 billion in tariffs on Chinese imports, the general consensus seems to be that tensions have eased.
That’s probably inaccurate. What’s more likely is that the President has been too preoccupied with “gas killing animals” in Damascus, the “death” of attorney-client privilege, and “Slippery James” to worry about his “good friend” Xi who, incidentally, did his best to calm things down on the trade front with a conciliatory speech at the Boao Forum in Asia last week.
But there have been some hints over the past few days that Trump is refocusing on China and trade. For one thing, he accused the Chinese of “playing the currency devaluation game” in a tweet earlier this week, a bizarre accusation considering the yuan has risen for five consecutive quarters and considering the Treasury declined to label China a currency manipulator when they had the chance last Friday.
It’s also amusing that he would say that considering that America has seemingly adopted a weak dollar policy by proxy (Steve Mnuchin accidentally said as much in Davos earlier this year). If you want to talk about “playing the devaluation game”, maybe check on the greenback:
And if you’re wondering how the market feels about that, here’s the latest read on positioning:
Some folks suggested that Trump’s tweet might have been an attempt to lay the groundwork for the publication of a list documenting the additional $100 billion in imports from China that would be subject to tariffs. Beijing has repeatedly warned that if Trump publishes that list, they will retaliate immediately with their own proposed measures and I’ve got to tell you, the imposition of temporary anti-dumping deposits of 178.6% on grain sorghum imported from the U.S. announced earlier this week probably didn’t do much to reduce the odds of Trump moving ahead, despite the fact that those duties were rolled out in tandem with efforts to open up the auto industry.
Well with all of that in mind, Goldman seems to think that a further escalation here is a matter of when not if.
“While we continue to believe that sentiment among market participants regarding trade policy might have reached maximum pessimism a few weeks ago, we nevertheless believe some additional market-negative developments are likely over the next few weeks,” the bank writes in a new note, adding that not only could “the USTR initiate a new Section 301 investigation separate from the recently concluded one, potentially focusing on access for US internet services in China,” but it also “still appears more likely than not that the USTR will publish a list of an additional $100bn in imports from China that would be subject to tariffs, following the initial list of $50bn in goods published on April 3.”
Again, if Trump does that (publishes a new list) he risks infuriating the Chinese and I’m not entirely sure it would be worth it in terms of political points. In fact, it might be politically unpopular to the extent it focuses on consumer products (and thus raises the specter of higher prices). Here’s Goldman’s brief assessment and attempt to make a representative list:
The next list, if published, is likely to differ from the first round in at least two ways. First, we expect it to be less focused on imports related to the “Made in China 2025” strategy. Most of those were already targeted in the first list, though agricultural machinery and a few other categories were not and might show up on the next list. Second, and related to the first point, the next list looks likely to be more consumer-focused. The first list of $50 billion in goods was concentrated to a surprising extent on capital goods and included only a few important categories of consumer goods, like flat-screen TVs. We expect the next list to have a greater share of consumer products. If so, this would increase the impact on measured consumer price inflation compared with the first list. What might be on the list? When USTR released the first list of $50bn of goods subject to tariffs earlier this month, the announcement noted that “products were ranked according to the likely impact on U.S. consumers, based on available trade data involving alternative country sources for each product. The proposed list was then compiled by selecting products from the ranked list with lowest consumer impact.” We follow the same methodology described by USTR, ranking products based on the share that imports from China make up of total imports in each category. We do this at the 8-digit HTS level (there are roughly 21,000 different products at this level of granularity) and then aggregate up to broader categories, which are presented in Exhibit 1.
Ok, so what’s the short version? Well, basically Goldman says it’s likely that apparel, appliances and equipment, auto parts, plastics, and chemicals would be the most likely targets of a new list which, if true, suggests “cell phones and communications networking equipment seem least likely to be affected.” Apparently, there’s still plenty of room for import substitution there.
How would China respond? That’s the big question following the soybean debacle and considering that, as Trump has undoubtedly been made aware, an additional $100 billion in tariffs would effectively make it impossible for Beijing to respond proportionately without resorting to alternative measures (e.g., currency devaluation and/or selling USTs) because they would run out of goods to to target.
So what would they do? Here’s Goldman’s attempt to answer that question:
If USTR publishes a second list of imports from China to be targeted, we expect that Chinese authorities will publish another list of goods from the US that would be targeted for retaliatory tariffs. Unlike the prior list of $50bn of US goods that China published, which targeted politically sensitive exports like soybeans, the next list might be much simpler. Since the US exported around $130 billion in goods to China in 2017 and China has already targeted more than $50 billion in goods in prior retaliation lists, the theoretical retaliation against proposed US tariffs on another $100bn in imports from China might simply be to target all or nearly all remaining US exports not on prior lists. Exhibit 3 shows the amount of US exports in each category already targeted for retaliatory tariffs—these lists have been published but have not taken effect—and not yet targeted, along with the share of exports to China as a share of total exports in that category. For the most part, commodities and aircraft appear to be most at risk from additional retaliation, as certain US exports like ores, paper, leather and wood go disproportionately to China as a share of total US exports. By contrast, industries like jewelry or the auto sector face less risk, as they could much more easily divert the small share of exports to China to other markets.
There you go. That’s your next escalation mapped out. But don’t worry because as we’ve seen during his two weeks-ish on the job, Larry Kudlow is more than capable of pulling the world back from the brink. Remember, Larry swears Trump is “a free trader at heart”.