The Trump administration will ultimately hike the tariff rate on $250 billion in Chinese goods to 30% and will eventually go through with 15% levies on another $160 billion in products.
But it’s a close call.
That’s the message from Goldman, delivered via a sweeping new trade war update out Sunday evening, that finds the bank striking a cautious tone on the current “pause” in the escalation cycle. As a reminder, here’s where things stand:
Although recent rhetoric has been somewhat conciliatory ahead of planned talks between Vice Premier Liu He, Bob Lighthizer and Steve Mnuchin next month, Friday served as a stark reminder that we’re never more than one trade headline away from a knee-jerk move lower in equities.
The new week started off on the right foot, with Chinese media suggesting there was no connection between the trade talks and China’s negotiators canceling plans to visit US farms. The itinerary change unnerved risk assets on Friday, pushing stocks to their first weekly loss of September.
“The Trump White House has never reduced any major tariffs on imports from China once they have been imposed and most of the tariff increases that the White House has previously proposed have indeed occurred, albeit sometimes with a delay from the originally proposed date”, Goldman reminds you, adding that “if the October and December tariff escalations go into effect as scheduled, nearly all proposed tariffs on imports from China will have taken effect without once lowering tariffs”.
Remember, when things started to escalate in earnest last summer, virtually nobody had, as their base case, Trump actually going through with the imposition of tariffs on all Chinese imports. If he pulls the trigger in December, we’ll have realized that outcome.
Obviously, public opinion is turning against the trade war. An NBC/WSJ poll released last month showed support for free trade hitting an all-time high, perhaps suggesting this quixotic endeavor is starting to backfire.
A few weeks later, a Quinnipiac Poll found 37% saying the US economy is getting worse, versus just 31% who say it’s improving. It was the first time since the election that more Americans believe the economy is getting worse than getting better. In another first, the poll showed Americans think Trump’s policies are doing more harm than good.
University of Michigan sentiment in August told a similar story, crashing to a Trump-era low, in part due to erratic trade policy.
And yet, as Goldman goes on to say, “public opinion puts only modest pressure on the Administration to reach a deal”.
The bank writes that “since the outset of the trade war in early 2018, the President’s average approval rating on trade policy has been -11pp, far below his net approval rating on handling the economy (+5pp) and in line with his overall net approval rating (also -11pp)”. His approval rating on foreign trade recently dropped to its lowest in a year, alongside flagging public opinion with regard to his handling of the economy more generally.
But, as the somewhat amusing header on the following chart indicates, the recent move lower isn’t more pronounced than previous drops during the trade war.
The bank goes on to tackle another “common argument” among those who contend pressure is mounting on Trump to strike some manner of deal – namely that the conflict with China is hurting the president in key states.
“Of the 10 states with the narrowest electoral margins in the 2016 election, only Michigan and North Carolina have high shares of farm agriculture and auto, chemical, and plastics manufacturing as a share of Gross State Product”, the bank observes. Other swing states do not exhibit high economic concentration in industries hit by China’s retaliatory tariffs.
Given that, the assumption that Trump is under intense political pressure to strike a deal with Beijing may be somewhat overstated.
Goldman also notes that although the trade war is generally unpopular, “the public sees taking action against China as a priority and sentiment toward China has become more negative among voters”. In addition, the bank reminds you that “Trump faces little pushback from Democrats in Congress and Democratic candidates for President [who] have expressed subtle critiques rather than widespread denunciations of the trade war”.
All of this casts doubt on the notion that a deal before the election is likely, let alone any semblance of imminent. Indeed, Trump on Friday emphasized that he doesn’t need to strike an agreement before 2020 and appeared to say that the rumored “interim” agreement will not work for him, despite suggesting he’d be open to it previously.
Finally, Goldman notes that the timing of the potential December escalation is “interesting”.
“It comes only four days after the December FOMC meeting and 10 days before Christmas”, the bank writes, on the way to musing that “to the extent the President continues to want the Fed to continue to lower rates, leaving a source of uncertainty immediately following the FOMC meeting could push the Fed toward a slightly easier stance, all other things being equal” even as “raising tariffs on consumer goods just before the holidays is likely to be politically problematic”.