Two weeks ago, Deutsche Bank’s Aleksandar Kocic said the following about what the interplay of domestic political considerations and U.S. economic strategy likely portends for the future of global trade and commerce:
The outcome is 75/25 in favor of permanent tariffs.
That assessment stemmed from a lengthy exercise that found Deutsche Bank presenting a decision tree designed to help make sense of the myriad embedded contingencies associated with the Trump administration’s decision calculus when it comes to escalating trade tensions with the rest of the world.
The point there is that the midterms are seen as a coin toss and the assumption going in is that the tariff issue is 75% political leverage and 25% “real” (as it were). That’s probably about right. After all, Donald Trump is (at least) 75% bombast and (at most) 25% serious, so there’s no reason to assume that split should be any different when it comes to trade.
But as Kocic notes, “even if tactical bias is high (75%), the probability of persistent tariffs still leans towards their permanence.”
Since then, the situation has escalated materially. This week, the USTR published a list in conjunction with prospective tariffs on some $200 billion worth of Chinese goods. That would be on top of the duties on $34 billion in imports which went into effect on Friday and in addition to levies on $16 billion in Chinese products that are likely to be imposed over the next four weeks.
China was not amused and has variously decried Trump’s latest shot across the bow and vowed to respond.
One thing that should be emphasized is that this wasn’t unexpected. The progression here goes like this. Last Friday was the deadline to avoid the imposition by the U.S. of duties on $34 billion in Chinese goods. Beijing had already clearly stated that they would immediately retaliate if those tariffs were imposed. Once that deadline came and went, the countdown started on additional tariffs on $16 billion in Chinese products which are due sometime in the next month. Again, Beijing will respond immediately. After that, the Trump administration was widely expected to publish a list in conjunction with proposed levies on another $200 billion in imports from China, followed by a months-long comment period before the new tariffs go into effect.
So it wasn’t the publication of the list that was surprising. Rather, it was the fact that the administration published the list prior to going ahead with the next $16 billion in tariffs that seemed to take some folks off guard.
In their latest assessment of the situation, Goldman echoes that, noting that “while there was a clear possibility that a list of $200 billion would be published, it seemed unlikely to us that it would be published before the next round of tariffs on $16 billion in imports had been implemented.”
Now that the list has been published, the bank is raising the chances that Trump will actually impose the associated duties.
“The pace of US trade actions has accelerated and we now believe that it is more likely than not (60% chance) that the US imposes tariffs on the additional $200bn of imports from China that were recently targeted”, Goldman writes, in a note dated Friday, before elaborating as follows:
First, the earlier release date raises the probability that the tariffs will have undergone public comment and will be ready for implementation soon after the tariffs on $16bn in goods have been implemented.
Second, US and Chinese officials still appear to be far from an agreement that could postpone or cancel the proposed tariffs.
Third, the composition of the list and the choice to impose a 10% tariff rather than the 25% in the first round suggests that the White House might believe these tariffs might ultimately take effect. Exhibit 2 shows the goods proposed to be subject to tariff in the first 3 lists of imports from China (the $34bn and $16bn lists released June 15 and the $200bn list released July 10).
As far as the auto tariffs are concerned, Goldman assigns a 35% probability of Trump pulling the trigger on that, with the lower odds (compared to the additional duties on China) attributable to an easier route to securing concessions and “less public support for trade restrictions affecting traditional US allies”.
Here is the visual from Goldman that details the probabilities:
Do note that the lower odds assigned to the auto tariffs assume that Trump is concerned about the possible public backlash from imposing punishing levies on America’s allies. His behavior in Europe this week seems to support the contention that he is not only unconcerned about that eventuality, but actively trying to mitigate it or otherwise negate it by turning public opinion against America’s European trade partners.
In any event, the bottom line is that the odds of further escalations in the burgeoning global trade conflict are rising and that bodes ill for risk assets. At the very least, it means the clouds aren’t going to be lifted any time soon.