Donald Trump’s latest and, he would probably say “greatest”, tariff escalations have forced analysts to go ahead and pencil in an even larger hit to US GDP growth and a bigger fillip to inflation.
“Following Friday’s escalation, we have increased our estimate of the trade war hit to the level of US GDP by 0.1pp to 0.7%”, Goldman writes, in a new note.
The bank’s baseline policy scenario now sees the trade war drag on the annualized pace of GDP growth reaching almost 0.5% in second half of this year and the first half of 2020. That’s up markedly from just 0.2% in the first half of 2019.
(Goldman)
As far as the outlook for inflation goes, Trump’s decision to raise the tariff rate by 5% on both the second tranche of Chinese goods and the third tranche (which is now itself divided in two) will result in a boost to US core consumer prices of an additional 0.05%-0.10% by mid-2020, Goldman says.
That pushes up the projected cumulative boost to consumer prices to >0.4%. “We see the impulse to core PCE inflation peaking at +0.3pp in mid-2020”, Goldman goes on to project.
(Goldman)
Of course, the most worrisome bit in Trump’s Friday tweets was the suggestion that he might force US companies to leave China. Over the weekend, the president insisted, in yet another tweet, that he in fact had the authority to do so.
On Sunday, during interviews with Fox Business and CBS, respectively, Steve Mnuchin and Larry Kudlow chimed in, supporting Trump’s assertion that IEEPA permitted him to dictate business decisions to private enterprise.
Read more: Mnuchin, Kudlow Tell Cable News Trump Has Authority To Order American Companies To Leave China
Weighing in on that, Goldman notes that although IEEPA “does not specifically confer [the] authority” that Trump indicated in his tweets, it does authorize the following:
… the President to ‘prohibit…transfers or credit of payments…to any banking institution, to the extent that such transfers or payments involve any interest of any foreign country’ or to ‘regulate, direct, and compel….any acquisition, holding [etc] any property in which any foreign country or a national thereof has any interest.
What, exactly, does that mean in the context of Trump’s tweets and the trade war, you ask? Well, it’s not entirely clear, but Goldman seems to concede that historical precedent aside, it could be interpreted in a variety of ways.
“In the past, this act has generally been used in cases of sanctions against specific regimes, often but not always related to terrorism”, the bank remarks, adding that while “it does not directly confer the ability to force US companies to exit from a jurisdiction, presumably the powers enumerated in the act could be used to incentivize such activity”.
Yes, “presumably”.
And you can be absolutely sure that the White House and the Treasury are now “presuming” just that.
Would not even a limited application of the authorization presented above result in the wiping out many businesses and therefore create a measurable drag on the economy?
If Trump forces manufacturers to leave China, the Chinese could just insist on taking over the factories, equipment and all. The workers are there. The equipment is there. What’s to stop the Chinese from starting the machines, putting the workers back to work and making the goods themselves. They’ll still be able to make the goods cheaper than if the companies moved back to the US. So they will undercut the companies that try to restart in the US by selling the goods outside the US cheaper. A lot of companies won’t be able to compete and will go under. The goods sold to US citizens by the companies which restarted in the US will be more expensive and probably protected by tariffs so inflation will jump up. It’s a lose lose situation for a lot of companies. Frankly, it would be a disaster.