“In our view, the administration has a more nationalist, zero-sum transactional view of great power politics, trade, and national security”, Barclays writes, in a new US public policy update which serves as something of a reality check amid the market euphoria around news that Bob Lighthizer, Steve Mnuchin and Liu He will meet early next month to try and find a path forward on trade talks.
The good vibes engendered by news that the two sides are still set to meet manifested themselves in a rousing risk asset rally and contributed to a brutal selloff in bonds, which were pressured by other factors including decent data in the US and a flood of corporate issuance.
Is the optimism misplaced? Well, probably. After all, it was just Tuesday when Donald Trump deep-sixed post-holiday sentiment with a series of shrill tweets about China’s economic deceleration, which he clearly intends to exacerbate. Also, don’t forget that according to sources who spoke to CNBC, the US president initially wanted to double tariffs on China on August 23 after flying into a rage upon learning that Beijing had retaliated against the levies announced on August 1.
If you ask Barclays, the current bilateral negotiations will not produce a comprehensive deal.
The bank cites “possibly irreconcilable differences between US security concerns and China’s industrial policy and its objective to avoid the ‘middle income trap'”.
Obviously, the next round of talks is not being conducted under what one might call “amicable” circumstances. The US moved forward with the new tariffs on Sunday and China retaliated. Barring a change of heart from Trump, the rate on $250 billion in Chinese goods that were originally taxed at 10% from September 24, 2018, and then at 25% from June, will go to 30% on October 1. And then there’s the currency manipulator label.
“Removing tariffs and the FX manipulator designation will likely require significant concessions [and] the election cycle may affect the administration’s negotiating objectives and tactics”, Barclays goes on to say.
As a reminder, the bank has maintained, pretty much from the beginning, that Trump would end up slapping tariffs on all Chinese imports and that China would hit back. That is now a reality – or at least it will be once the scheduled duties on $160 billion in goods go into effect on December 15.
(Barclays – note that the 10% rate mentioned in the chart is now 15%)
As ever, it’s impossible to measure the second-order effects of an all-out trade war between the world’s two largest economies. The effects on sentiment, capex and financial conditions (via falling stock prices, for example) could exert a far larger drag than any mechanical impact from the tariffs and countermeasures.
For their part, Barclays projects “direct net economic losses to the US at 0.2-0.3% of GDP over the long run”, but cautions that “indirect effects could easily lead to larger declines in output and employment”.
And all of that is to say nothing of Trump’s notoriously fraught relationship with Europe.
Barclays estimates that 25% tariffs on US-NATO autos and parts trade would result in a long-run economic loss of roughly 0.2% of GDP, but the bank warns that “the short-run costs could be higher if private sector confidence fell and financial conditions tightened”, which would invariably be the case.
The bottom line is that when you ponder days like Thursday, when risk assets surge on news that amounts to little more than confirmation that communication lines haven’t been entirely severed, don’t let it be lost on you that Trump is nowhere near striking comprehensive trade agreements with China and Europe.
“You know, I think of it — this is a — possibly a long rainbow here, and at the end of that rainbow is a pot of gold”, Larry Kudlow said, at a press briefing last November when asked if Trump understands that tariffs will ultimately be paid by American citizens.
It’s a nice thought, but as JPMorgan’s Marko Kolanovic wrote in March, “we all know there is no pot of gold at the end of a rainbow, and that searching for one is a misguided effort”.
That doesn’t mean deals of some kind won’t ultimately be struck in the interest of expediency or in order to avert a prospective slide in stocks or more damage to the US economy. It’s just to say that if Trump really wants to rewrite the rules of global trade and commerce and overhaul America’s trade relationship with China and the EU, he’d have to serve several more terms to come anywhere near pulling off something as ambitious as his trade agenda calls for.
Of course, the US president has repeatedly “joked” about serving three or four or even five terms, so who knows, maybe time is on his side after all.