Goldman Has A Simple Message On Trade Wars

Donald Trump has a habit of getting nostalgic for “the old days”.

This week, that pining away for an undefined lost era when things were done “right” manifested itself in the president suggesting that “spies” used to be dealt with “a little differently”.

Trump’s allusions to the “old days” aren’t always couched in macabre terms. Besides summary executions, the “old days” also featured, according to the president, doctors making house calls, people building bridges, good hairspray and debtors deliberately defaulting on loans for the sheer hell of it.

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One thing that was never true, though, not even in the days of yore, is that trade wars are “good and easy to win”, as the president famously proclaimed, in March of 2018.

We’ve used the following chart before, but considering Friday’s news that the US is considering a variety of options to limit capital flows to China as part of an effort to win trade concessions, it’s worth rolling it out again:

A rip-roaring post-election rally sputtered when Trump announced the metals tariffs, and the cumulative gains since then have been meager compared to the near 30% rally from election day to the president’s infamous trade war tweet (note that were it not for the VIX ETN “extinction event” in February 2018, the rally from election day to the “easy to win” tweet would have been even larger).

Clearly, the trade war has impeded US equities, suggesting critics were correct to warn Trump that trade wars are the furthest thing from “easy to win”, even if you want to insist on them being “good”.

What can we learn about this from “the old days”?

Well, as alluded to above, even limited trade wars ended up lasting quite a while, and generally didn’t produce a clear “winner”.

“The major lesson from previous conflicts is that tariffs are often in place for long periods of time”, Goldman writes, in a note dated Friday evening. “Conflicts involving specific commodity-level disagreements with allies have taken years to resolve, and more complicated disputes like softwood lumber (Canada) and commercial aircraft (EU) involving deep disagreement and strategically or nationally-important sectors have remained unresolved for decades”, the bank goes on to warn. Here’s a handy table:

(Goldman)

The thrust of the bank’s note is captured in the title: “Trade conflicts are hard to end”.

That’s the opposite of “easy to win”.

And, as you might have gathered from the short excerpts above, Goldman’s overarching point is that if limited disputes took years to settle even with US allies, an all-out trade war with a hostile foreign power that just happens to be the second-largest economy on the planet will be even more difficult to end, let alone “win”. To wit, from the note:

The ongoing trade war with China stands far apart from these other disputes. The conflict with China is unprecedented in size and scope in the post-war era. Products targeted by imposed or scheduled tariffs now account for 20% of total goods imports, dwarfing even the largest disputes in recent decades, which covered no more than 1% of imports in any one conflict. As a result, these past conflicts had little effect on the economy and financial markets. Protectionist measures from past disputes were too small to affect the average US effective tariff rate, whereas the scale of today’s conflict has caused the effective tariff rate to rise by over 5pp.

The takeaway is simple: There is no end in sight to the Sino-US trade spat, and if the history of trade disputes is any indication, this conflict could span at least five years, if not far, far longer.

Put differently, “in the old days”, trade disputes were not “easy to win”. Whether they were “good” or not is in the eye of the beholder, we suppose.