Well, the trade news just keeps getting more ominous by the hour.
As the global equity selloff accelerated on Monday morning, WSJ was out with some comments attributed to Xi that sound like the Chinese strongman has indeed heard just about enough bluster from Trump.
“In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek [but] in our culture, we punch back,” Xi is quoted as saying.
That would appear to underscore my humorous take on all of this bullshit from “The Real Estate Developer, The Chinese Strongman And Cheshire Cat’s Smile“:
I don’t know where Donald Trump got the idea that Xi Jinping is a man with whom one wants to fuck, but somewhere along the way, he (Trump) seems to have gotten the impression that he was going to be able to strong-arm the second most powerful man on the planet (the first being Putin and well, that’s another story).
What makes this so bizarre is that given Trump’s admiration for autocrats, you’d think he would have some vague conception of the extent to which “the King of China” is both a dictator and a strongman and thereby not amenable to being bullied by hapless real estate developers with delusions of grandeur. I mean, just think about what Trump has said about Kim Jong-Un lately (e.g., Kim being a “tough guy” whose people “stand at attention” when he speaks). That’s Kim Jong-Un. This is Xi-fucking-Jinping.
Whatever the case, things have gone demonstrably off the rails over the past several weeks when it comes to trade and Trump is starting to find out that generally speaking, there is nothing “good” about starting a fight with Xi and there is no world in which that fight is “easy to win”.
That’s even more true now than it was a week ago when I wrote it. The idea of Trump restricting Chinese investment in U.S. industries as a way to hit Xi on his “Made in China 2025” plan is a non-starter for Beijing – that’s a sore spot for China and more than a few folks have variously suggested it will be a bridge too far.
It’s no longer possible to trot out the old “markets are taking this in stride” meme, because they’re not – taking it in stride that is. European equities plunged on Monday and Chinese stocks are teetering on the edge of a bear market. Trump has also ratcheted up the rhetoric when it comes to U.S. tariffs on European autos.
In light of Monday’s market action it’s probably useful to take a step back and look at where we actually are in terms of what’s been implemented and what might be coming. It’s also helpful to document how exactly it is we got here.
Taking the latter point first, below a fun (and breathless) summary from a Dealbreaker piece out a couple of Fridays ago. This takes you up to June 15 or, more simply, it tells the story of where things stood headed into last week:
First Donald Trump told flyover America that China was largely to blame for the decline of American manufacturing. Then, flyover America elected Donald Trump. Then, Donald Trump made Peter Navarro trade czar. Gary Cohn was supposed to counterbalance Navarro and that worked reasonably well right up until January when Trump took the first baby steps towards what has since morphed into an all-out trade war by slapping tariffs on residential washing machines. Steve Mnuchin made things worse by jawboning the dollar lower in Davos less than 48 hours later. About a month after that, Navarro and Wilbur Ross saw an opportunity to parlay Trump’s consternation at the exit of Hope Hicks into the announcement of steel and aluminum tariffs. That announcement prompted Cohn’s resignation. Then Wilbur Ross showed up on CNBC with a can of Campbell’s soup he said he bought at a local gas station in Florida. Larry Kudlow replaced Cohn, reviving hopes that Trump would call off the trade war. Three weeks later, the USTR published a list of Chinese productsTrump intended to subject to tariffs in connection with the 301 probe. China retaliated immediately. Trump lost his shit and suggested he would slap tariffson another $100 billion worth of Chinese imports which meant that the total amount of goods subject to tariffs would exceed the total amount of goods America imports from China in a given year. A month after that, Navarro was sidelined from trade negotiations with China after reportedly getting into a profanity-laced shouting match with Mnuchin in Beijing. With Navarro out of the picture, a comparatively rational Mnuchin struck a truce with China and told Fox that the trade war was “on hold”. Navarro and Steve Bannon (who started running his mouth to Bloomberg about Mnuchin selling out America) were furious and the backlash from the isolationist contingent caused Trump to change his mind. Fast forward two weeks from that abrupt about-face and you land on June 14, when the White House confirmed that Trump would indeed be slapping $50 billion in Chinese goods with tariffs. In the wee hours of June 15, reports suggested that should China retaliate, Trump would go ahead and publish another list and subsequently make good on the promise mentioned above to take things all the way to $150 billion in total goods taxed. Rounding out the absurdity, Trump, in the official announcement that morning, maintained that he and Xi still have a “great friendship.”
If you’re a visual learner, here’s an actual roadmap from BNP:
And here’s a summary of the actions and proposed actions, also from BNP:
Meanwhile, Goldman is out with an update that essentially takes their previous work and brings it current. Here’s where things stand:
Exhibit 1 provides an overview of the US tariffs that have so far been implemented, announced, and threatened. Duties on $55.7bn of imports have already been implemented, including tariffs on washing machines and solar panels, steel and aluminum. A first round of tariffs on $34 billion of imports from China – a subset of the tariffs on $50 billion in imports first proposed in March – is set to take effect on July 6 unless an agreement is reached with China in the interim. President Trump has threatened three further steps: a 25% tariff on an additional $100bn from China, 20% on $275bn of auto imports and 10% on an additional $300bn from China. If implemented, this would raise the total amount of tariffs the Trump administration has proposed to nearly $800bn.
Next, the bank illustrates “the potential increase in foreign tariff rates if trading partners pursue a full ‘dollar-value’ retaliation strategy to the US tariffs”:
Goldman goes on to update their projections for the real GDP effects of multiple scenarios across economies. This exercise starts with the following chart which shows that overall, the effects are manageable even under adverse scenarios:
But, things get more complicated when China starts to hit back with UST sales and currency depreciation. To wit, from Goldman:
We therefore consider the effects of a reduction in Chinese Treasury holdings (which we assume pushes up 10-year Treasury yields by 25bp) and a weaker currency (which we assume to depreciate by 5%). It has been argued that China can’t simultaneously sell US Treasuries and depreciate the currency, but in our view this underestimates the power of signaling intentions on the currency (as opposed to actual intervention). Exhibit 6 shows how the global output effects change from the all-in tariff scenario in Exhibit 5.
Goldman then extrapolates further, assuming a 10% decline in global equities and an across-the-board 5% tariff levied by everyone on everyone else. They then “layer the two adverse scenarios on top of the all-in scenario in Exhibit 5” to come up with this:
Needless to say, that exercise comes with all manner of caveats and incorporates all kinds of projections and assumptions that may or may not apply in the real world, but the bottom line is that a “total severe trade war” scenario poses a considerable risk to the global economy.
And hell, while we’re extrapolating, allow me to note that it doesn’t take much in the way of imagination to posit a situation where the ongoing escalations that would lead to Goldman’s “total severe trade war” scenario end up “severely” affecting sentiment and creating all manner of second-order effects for markets.
But hey, you can trust Trump to avoid all of this, right? After all, surely to God he understands that this is just meant to be a game designed to bolster the GOP ahead of the midterms.