‘Time Is Up’: The Trade War Cometh

Barring some kind of truly dramatic last-minute reversal, the U.S. will pull the trigger on China at midnight.

Trump confirmed as much while aboard Air Force One en route to what turned into one of his most bombastic rallies yet in Great Falls, Montana, where he i) suggested that Maxine Waters is mildly retarded, ii) challenged Elizabeth Warren to a $1 million DNA test to prove her Native American heritage, iii) talked up his upcoming summit with Putin, and iv) promised he’s going to “make NATO pay their bills” starting next week (a reference to the upcoming summit in Brussels).

Friday’s trade escalation is the most dramatic step yet in an ongoing drama that started just six months ago with tariffs on residential washing machines and has now morphed into the threat of a cartoonish $800 billion in total prospective trade fuckery:

It’s worth recapping how we got here for anyone who needs a refresher.

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 products Trump intended to subject to tariffs in connection with the 301 probe. China retaliated immediately. Trump lost his shit and suggested he would slap tariffs on 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. Rounding out the absurdity, Trump, in the official announcement that morning, maintained that he and Xi still have a “great friendship.”

It’s been all downhill from there over the past two weeks, with Chinese stocks plunging into a bear market, the yuan weakening against the dollar at the fastest pace on record, a belligerent Trump threatening to restrict Chinese investment in U.S. industries, China releasing a series of “editorials” aimed at projecting confidence in Beijing’s ability to weather the storm and Xi reportedly telling Party officials that he’s not a “turn the other cheek” type of guy.

Here’s Goldman’s quick take on 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.

Meanwhile, America’s farmers are sweating bullets and automakers the world over are watching in horror as this would seem to suggest that Trump is entirely capable of making good on his threats to tax $275 billion in auto imports.

“By now the impact of the actual levies should be largely priced in, but the real concern for investors may be that this is a Rubicon of sorts that’s about to be crossed,” Bloomberg’s Garfield Reynolds wrote on Thursday evening, adding that “once tariffs are in force, it will become harder for either side to back down.”

As a dejected David Woo (from BofAML) noted earlier this week, this doesn’t bode well for NAFTA. For his part, Deutsche Bank’s Aleksandar Kocic recently suggested the chances of permanent tariffs of one kind or another are now 75/25 in favor.

All of this is to say nothing of Trump’s behind-the-scenes effort to craft a bill that would allow him to circumvent (and thereby undermine) the WTO.

Here’s what Robert Holleyman, former deputy U.S. trade representative for President Obama told Bloomberg on Thursday:

Once these tariffs start going into effect, it’s pretty clear the conflict is real. If we don’t find an exit ramp, this will accelerate like a snowball going down a hill.

And here’s BNP’s take:

Time is up. With no official contact between the two sides after President Trump approved the USTR trade sanction programme against China on June 15, the first round of US-China trade war looks inevitable. Both sides are ready for the fight. The US will impose 25% additional tariffs on the USD34bn of annual imports from China in nine subsectors as part one of action on USD50bn of annual imports; tariffs on the remaining USD16bn have been detailed but will be put into effect later, after public comment (as stated by the USTR). As retaliation, China will charge 25% additional tariffs on the USD34bn of annual imports of US agricultural and aquatic products and vehicles. The remaining USD16bn of imports from the US will be levied only when the US takes action.

Needless to say, all of this raises serious questions about global growth and about the extent to which a protracted trade conflict could lead to economic deceleration and upward pressure on domestic prices, thereby undercutting both pillars of the “Goldilocks” narrative that underpinned the low vol. regime which propelled markets inexorably higher in 2017.

As Trump would say: “We’ll see what happens”.

For now, I’ll just leave you with the tables that show which products are affected in the first round (i.e., what happens on Friday) and the second round: