On Friday afternoon, Trump introduced still more uncertainty into the already murky waters of global trade when, while speaking to reporters aboard Air Force One en route to North Dakota, the President said a plan to slap tariffs on an additional $267 billion of Chinese goods is “ready to go on short notice if I want”.
That was an apparent allusion to the possibility that after the U.S. imposes duties on another $200 billion in Chinese imports (the next expected escalation in the trade war), the administration could “go to $500 billion“, as Trump suggested in an interview with CNBC back in July.
The comment period on the prospective levies on $200 billion in Chinese goods expired on Thursday and an announcement is expected soon. Still up in the air is what the rate will be (25% or 10%?).
“Going to $500 billion” would mean taxing everything that China exports to the U.S. and because the disparity between what China ships to America and what America ships to China is so large, Beijing would have no choice but to resort to a series of “alternative” measures to retaliate.
This situation will likely be exacerbated by news that China’s surplus with the U.S. hit an all-time record in August.
At this point, everyone is fumbling around in the dark. The expected and threatened escalations with China come on the heels of what counts as “progress” on NAFTA, although Canada is still skeptical. Meanwhile, there’s still no real resolution with Europe.
The only thing that’s clear is that Trump wants to keep fighting with someone. In a lengthy piece published here late last month, we detailed why populism anno 2018 needs to be perpetually at odds with someone, somewhere, over something. The entire pitch to voters hinges on galvanizing anger and disaffection. Once problems are resolved, voters will expect to see results. But the policies aren’t designed to produce results. For these populist movements to remain viable, supporters have to remain trapped in the dream they were sold.
Trump isn’t engaged in a trade war with China. Rather, the trade war with China is just one manifestation of Trump’s increasingly bitter dispute with reality. So his “strategy” when it comes to China isn’t really aimed at resolving the trade dispute; it’s aimed at perpetuating the dream he’s selling to voters. Paradoxically, the daily battle between Trump and reality is part and parcel of keeping that dream alive. While he’s undoubtedly frustrated by the burden of having to fight it all day, everyday, it’s critical to political preservation.
In a note dated Saturday, Goldman reinforces that notion. “We are not optimistic that there will be a lasting solution to US-China tensions in the near-term”, they write, before lamenting that “while some observers believe that trade tensions have risen to energize voters before the midterm election and could thus fade after Election Day, we see little reason to expect a near-term resolution.”
In the same note, the bank takes a fresh look at the trade outlook in light of Trump’s Friday escalation. When it comes to next round of tariffs on China (so, the prospective duties on $200 billion in goods that will come before the threatened levies on another $267 billion in items) the bank expects the announcement on that to come soon and they believe the rate will indeed be 25% on “the majority of goods targeted, though a lower rate might be proposed on consumer goods.”
China has already promised to retaliate with differentiated tariffs on $60 billion in goods. That’s a foregone conclusion. Goldman expects Trump to use that retaliation as an excuse to move ahead with tariffs on still more goods (i.e., what he threatened on Friday). Needless to say, another escalation on top of the duties on $200 billion in goods risks even more upward pressure on prices for consumer goods in the U.S.
“The majority of the remaining imports from China that the US could target are consumer goods where price increases could have greater political ramifications”, Goldman writes, adding that “this might not dissuade the White House from imposing further tariffs—we believe there is a slightly greater than 50% chance that tariffs will be imposed on imports beyond the impending $200bn list –but could lead to a lower tariff rate on further rounds.”
Goldman goes on to discuss the current state of the trade war in a Q&A format. In the course of that exercise, they note that although risks are squarely concentrated in the contentious U.S.-China dispute, it’s by no means “all clear on the Western front” (so to speak) either. Here’s Goldman:
While recent developments regarding NAFTA and auto tariffs seem to have reduced the risks around these issues, neither has been fully resolved. Negotiations with Mexico have resulted in a preliminary agreement on NAFTA revisions, though details are not yet public and have yet to be finalized. More importantly, Canada has not yet signed onto the agreement and reaching a trilateral deal could result in further changes. A vote in Congress is unlikely until next year in light of the “fast track” process, and the prospect of a Democratic House majority increases the uncertainty regarding congressional approval. On the auto tariff side, the ongoing Section 232 investigation appears to have slowed from its prior expedited pace, but it still appears possible that the Commerce Department will release the report it has been preparing on the national security implications of auto imports.
When it comes to the prospect that the next rounds of tariffs on China will drive up consumer prices stateside, Goldman is coming around to that reality, although they’ve generally been somewhat sanguine about that in the past.
“The first two rounds of tariffs on $34bn and $16bn of imports excluded consumer-oriented finished goods almost entirely [and while] the proposed $200bn product list continues to lean in this direction, roughly ¼ of the subject imports are primarily consumer focused”, the bank writes.
But things get more interesting in the event Trump goes ahead with duties on another $267 billion as he threatened on Friday. Consider the following color and accompanying visual from Goldman:
President Trump said Friday (September 7) that tariffs on an additional $267 billion of imports from China were “ready to go on short notice.” We believe it is more likely than not that the Trump Administration would propose those additional tariffs if China implements the retaliatory tariffs on $60bn of goods noted earlier. However, the outlook is particularly uncertain because the political implications of imposing tariffs on the remaining $267bn of imports would be much different than earlier tariff rounds. Whereas virtually no consumer goods have been targeted by tariffs so far, we estimate about one-fourth of the $200bn in imports subject to the next round of tariffs are consumption goods and, as shown in Exhibit 3, consumer products make up more than half of the remaining US imports from China, and would affect routine consumer purchases like clothing, shoes, mobile phones, and toys.
For the umpteenth time, the effects of these policies may act with a lag, but make no mistake, there are ramifications. You cannot just start taxing everything that comes into the country and not expect consumers to feel the heat eventually. On Friday, for instance, Apple warned that price increases are likely going forward.
Do bear in mind that while wage growth is hitting post-crisis highs, it is not keeping up with inflation. Real wage growth is negative. Here, look:
Working Americans are not getting richer. They are getting poorer. Of course millionaires are getting richer, thanks to the tax cuts, and if Trump goes ahead with the inflation-indexed capital gains idea, the rich will get another $100 billion worth of tax breaks even as working Americans see their paychecks shrink on an inflation-adjusted basis.
That is the cold, hard reality of this situation, and if more tariffs on China drive up consumer prices any further without a commensurate rise in wages, well then the chart above is going to get more negative still.
Finally, if you’re wondering just how absurd this has become from a kind of 30,000 foot perspective, Goldman notes that assuming Trump moves ahead with the duties on another $200 billion in Chinese goods, the total amount of U.S. imports actually subject to tariffs would be “just” $300 billion, but the amount of threatened U.S. imports has now risen to a truly hilarious $900 billion:
And why not, right? After all, “tariffs are the greatest!”
Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs. It’s as simple as that – and everybody’s talking! Remember, we are the “piggy bank” that’s being robbed. All will be Great!
— Donald J. Trump (@realDonaldTrump) July 24, 2018