The market believes we’ve likely seen “peak tariffs”, or at least between the US and China.
That may or may not be a safe assumption. Donald Trump has unnerved Beijing with his express reluctance to confirm support for an agreement in principle to start rolling back duties as soon as “Phase One” is done, and reports indicate Peter Navarro and other hardliners are fighting tooth and nail to preserve the levies.
But the prospect of Trump disappointing everyone by seeking to push the envelope when Beijing has made it clear (through a surrogate publicly and likely through Liu He privately) that without tariff rollbacks, no interim deal is possible, seems remote, if only because the White House probably doesn’t want to risk shattering the market calm that’s pushed the VIX back below the 2019 average and driven stocks to new record highs.
Part of the reason equities have surged is that the assumed tariff relief will provide an extra fillip to growth data which may already be on the verge of inflecting thanks to the lagged effect of this year’s coordinated global easing push.
If you’re wondering just how much of drag the trade war has already exerted on the US and China, Goldman has updated their analysis, which breaks down the effect into four channels: net trade, real income, financial conditions and trade policy uncertainty. Here are some key points on each (excerpted from Goldman’s longer note):
- US tariffs on Chinese goods have been largely been passed through to US retailers and households while US exporters have significantly lowered their prices.
- The real income effect is much smaller for China than for the US [because] the Chinese retaliatory tariffs have been less than proportional [and] the share of consumer goods is notably lower on the Chinese lists than on the US lists.
- US FCI index would have been about 50bp easier without the trade war. While we find a somewhat larger cumulative trade war tightening effect on our China FCI, the FCI hit to growth is significantly bigger in the US, where the empirical linkage between financial conditions and growth is particularly close.
Note that when the White House complains about things being “too tight” (as Trump says he did during his sit-down with Jerome Powell on Monday), you can thank the trade war for some of that tightness.
Ultimately, the composition differs, but the cumulative hit to GDP for the US and China is similar. The trade war has exerted a 0.5-0.6% drag on the US economy and a 0.7-0.8% on the Chinese.
This simple exercise is another reminder that, very much contrary to the US president’s insistence of having “won” (or being in the process of “winning”) there are no winners in a trade war. Everyone is a loser. And, as ever, you’re encouraged to note that President Xi is not laboring under the same political constraints as Trump when it comes to deploying stimulus.
In any event, Goldman cheerfully (albeit cautiously) says that “barring another round of major escalation, we expect the negative effect of the trade war on both US and China real GDP growth to gradually fade in 2020”.
Fingers crossed. As the adage goes, “only the dead have seen the end of war”.