According to Ben White, Politico’s Chief Economic Correspondent, Trump’s latest trade tweets are “an attempt to force a deal by Friday.”
That’s based on the account of a senior administration official.
Of course that’s only a good plan if China doesn’t simply decide to either delay planned negotiations or, worse, put everything on hold until the US side tones down the boorish attitude.
After all, Xi won’t like the optics domestically if he’s seen as being bullied into a deal by a couple of angry tweets. After Monday’s rout in Mainland equities, Beijing might well feel like they’re being blackmailed.
Read more: China’s Monday Meltdown In Pictures
That underscores why this is dangerous. If Trump is, in fact, simply trying to bluff the Chinese into striking a deal by Friday and they effectively call that bluff, the White House will have no excuse not to move ahead with ratcheting up the tariff rate as the president threatened on Sunday.
Just like Xi, Trump won’t want to appear weak domestically (which means he’s backed himself into a corner if China doesn’t relent), and, from a technical perspective, the administration likely won’t be able to lean on excuses about the mechanics of implementation in order to explain away a delay.
“Today’s announcement is a significant shift in rhetoric, because the option to increase the tariff rate to 25% has already gone through the regulatory approval process it is a part of the Administration’s negotiating toolkit and we believe it can be implemented within a few days”, Goldman writes, adding that “if the Administration moves forward with this policy, we expect the USTR would make a formal announcement and a notice would appear shortly after in the Federal Register.”
The bank does note that Trump could quickly walk things back via executive order in the event the Chinese fold under pressure, but the risks are myriad. Here’s Goldman’s assessment:
This development suggests greater risks from US-China trade policy, in two respects. First, President Trump’s announcement suggests that US-China negotiations might have reached a sticking point. This represents a shift from the optimistic statements from US officials over the last few weeks and suggests that the probability of a near-term agreement is at least slightly lower than it seemed to be recently. Second, this announcement clearly reintroduces the risk of further tariff escalation, which seemed very unlikely over the last couple of months. At this point, we believe the odds of tariff escalation at the end of the week are 40% and we believe an agreement is slightly more likely to be reached instead.
Another problem with Trump’s latest escalation is that it suggests an unpredictable announcement on auto tariffs is still in the cards. Goldman touches on that as well. “This development has incrementally negative implications for the outlook for auto tariffs and passage of the USMCA”, the bank cautions, before noting that “in both cases, the President’s willingness to risk a market disruption by threatening an unexpected tariff hike suggests that he might also be willing to risk the disruption that formally proposing auto tariffs or announcing the intent to withdraw from NAFTA might cause.”
In other words: If Trump is willing to take this kind of risk just as a trade deal with China appeared to be within reach, what else might he be willing to risk?
Anxiety around the auto tariffs issue is showing up in the SXAP on Monday. The gauge is having its second-worst day of the year.
For what it’s worth, Goldman is raising their subjective probability that auto tariffs will be implemented later this year to 20% (from 10%) and lowering their probability that USMCA will pass to 60% (from 70%).
Trump’s trade gamble is also hitting soybeans – hard. “Soybean prices were already collapsing in recent weeks and now the rug has just been pulled out from underneath them”, Bloomberg’s Mark Cudmore wrote overnight.
“Soybeans are the extreme case of a general agriculture commodities theme”, Cudmore continued. “Expect more angry farmers and further disinflationary pressures globally.”