Earlier on Sunday, we noted that according to plans that aren’t yet plans, Steve Mnuchin might consider taking some time away from signing dollar bills and licking Louise Linton’s Louboutins to take a trip to China, where he would ostensibly try to convince Beijing that negotiating with Trump and Peter Navarro isn’t a lost cause.
Of course it is a lost cause because if Trump is serious about adopting the Navarro doctrine, well then he’s even crazier than everyone thought and if this is all just a political gambit aimed at bolstering the GOP ahead of the midterms, then it’s not clear why Beijing shouldn’t just keep threatening to retaliate in ways that hurt voters in key states and then just sit back and wait on the elections to be over.
The problem here for markets – and for the world more generally, because if China loses patience with this and does something that destabilizes global equities, it could ultimately tighten financial conditions and choke of growth – is that Trump is right on the verge of stepping over the line.
And as anyone who knows Trump will tell you, he’s a “habitual line stepper”:
In case you aren’t aware, the “line” Trump is about to cross involves releasing a list of products tied to the additional $100 billion in tariffs he instructed the USTR to consider earlier this month after China’s initial retaliation to the original list published in conjunction with the 301 probe.
As a reminder, Trump published the original list on the evening of April 3 and just hours later, Beijing struck back, announcing 25% reciprocal tariffs on 106 U.S. products, including soybeans, cars, planes and chemicals.
The soybeans were a real kick in the balls for Trump as it raised the specter that Beijing might try and undercut the President’s support in the agricultural community and so, unable to contain himself even for 24 hours, Trump responded by suggesting another $100 billion in tariffs which, when combined with the initial $50 billion and the steel and aluminum levies, took the total proposed measures to a number larger than the entire amount of goods the U.S. exports to China:
Well, earlier this week, Goldman suggested it’s just a matter of time before Trump releases a list tied to the $100 billion in proposed additional tariffs and Beijing has variously warned Washington that if the U.S. goes that route, retaliation will be swift. Because, as the above chart clearly illustrates, a proportionate response using tariffs would be mathematically impossible, “other” measures would likely be part of that response.
It’s also worth noting that any new list would likely portend pain for U.S. consumers (although obviously, the tariffs would actually have to go into effect first). That’s the subject of a Reuters piece out over the weekend and it’s worth highlighting here. To wit:
A Reuters analysis of Chinese imports shows that to quickly reach $100 billion worth of goods to tax, Trump may have to target cellphones, computers, toys, clothing, footwear, furniture and other consumer goods, prompting price rises at U.S. retailers.
“There is no way to avoid consumer products when you’re thinking about how to hit $100 billion worth of imports coming from China,” said Hun Quach, vice president of international trade for the Retail Industry Leaders Association which represents U.S. retailers.
[…]
The USTR could quickly find $100 billion but at the cost of targeting three broad categories of consumer electronics – cellphones at $44 billion, computer equipment at $37 billion, and voice, image and data recorders at $22 billion.
Trump could get a quarter of the way to $100 billion in goods taxed by levying toys, games and sporting goods, categories with little U.S. content that totaled about $25.5 billion from China in 2017.
But China made up 81.5 percent of all U.S. imports in this group, meaning that there would be few alternative sources for importers that could blunt the tariff impact on consumers.
Right. And see this is where the “forgotten people” that Trump supposedly represents are being “forgotten” (if you will). They are going to be fucked by this.
Reuters goes on to note that while import substitution and alternative sourcing would be feasible for products like “clothing, pet food and lighting fixtures,” it’s not as simple as just looking at what products you could slap tariffs on that could conceivably be sourced from other countries where the cost of labor is low. China is so integrated into global supply chains that companies can’t simply flip a switch. Recall the following simple chart that shows you how important China has become to global trade:
The bottom line, as communicated to Reuters by Chad Bown, a senior fellow at the Peterson Institute for International Economics, is this:
You end up shooting yourself in the foot, shooting your allies in the foot, and maybe you wound China’s big toe.
Any questions?
For those who might have missed it, here’s what Goldman had to say about this:
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.
