Goldman: If Trump Wants To Win A Trade War, The Market Has To Crash

Now that the Trump global trade war ceasefire is over with both allies (Canada, EU, Mexico) and adversaries (China), the hot takes are coming in, and none more exhaustive than a note by Goldman Sachs released overnight, in which economist Alec Phillips writes that less than two weeks after Steve Mnuchin declared that the “trade war is on hold," a statement which China trade hawk Peter Navarro subsequently blasted as inaccurate, Trump's policy has shifted substantially and "following trade announcements over the last few days, the trade war does not appear to be “on hold” but simply "on", leaving even longtime observers of trade policy confused about the direction from here."

So how should one try to make sense of Trump's unique, confusing negotiating style? According to Goldman, at the start of the Trump Administration, “reciprocity” was the watchword guiding trade policy.

Since taking office the President has cited many examples of “unfair” trade policies where foreign tariffs are higher than US tariffs on the same product.

Trump made as much clear on Saturday when he tweeted that "The United States must, at long last, be treated fairly on Trade. If we charge a country ZERO to sell their goods, and they charge us 25, 50 or even 100 percent to sell ours, it is UNFAIR and can no longer be tolerated. That is not Free or Fair Trade, it is Stupid Trade!"

While the assumption of "reciprocity" may have been a useful concept in evaluating the Administration’s stance on various trade issues - indeed, Trump restated his reciprocal principle again June 1 - Goldman notes three other observations that help explain trade policy in the Trump Administration.

  • First, the President has said in the past that, when it comes to foreign policy, “we have to be unpredictable.” Unpredictability is also likely to be a side-effect of an administration made up of officials with widely divergent views on trade policy. This could result in sudden changes in policy depending on who is leading negotiations, speaking to the media, or taking the lead in advising the President.
  • Second, the Administration’s focus seems to be on bilateral trade deficits and heavy industry, particularly in areas where the two overlap. For example, while China’s intellectual property-related policies are of great concern to US multinationals, the President has often focused more specifically on heavy industry, like steel or the auto sector. This might explain why the President has recently focused on national security-related trade investigations on the EU and NAFTA countries, i.e., US allies that export substantial amounts of autos to the US, rather than China, a strategic  rival which exports a negligible amount of autos to the US.
  • Third, the negotiation might be at least as important to the White House as the outcome. While we believe that the President ultimately is seeking “wins” on trade policy, like an eventual renegotiation of NAFTA or an agreement with China to reduce the trade deficit, we also believe that the White House places substantial political value in the negotiation itself. This keeps the issue in the headlines and, in theory, keeps voters engaged.

And while the three considerations above are useful in framing the Trump admin's thought process in how it  go in and out of negotiations, Goldman makes another far more relevant point, at least as far as traders are concerned, namely that to maintain leverage in negotiations, the Administration must convince trading partners that the US intends to impose trade restrictions. However, and this is the key part, "it is unlikely that the White House can convince trading partners that tariff threats are credible without also convincing financial markets."

In other words, for Trump's trade negotiations to be successful, and for US trade partners to take a flip-flopping Trump credibly, the market has to crash. Incidentally, this makes sense when one considers that when Trump officially launched the trade war with China in early April, the president explicitly warned that stocks "may take a hit", and told investors to prepare for "pain" in the market, a statement which promptly became a self-fulfilling prophecy and sent the market sharply lower.

The other consequence is that markets may tumble not as an effect, but as a cause of the trade war: after all Trump needs to be taken seriously, and that could mean another slide in the S&P. Goldman agrees as much:

... we do not expect trade policy risks to fade anytime soon. While we think that financial market sentiment around trade issues is unlikely to become as negative again as it was in early April, when the President floated the possibility of tariffs on another $100 billion in imports from China, we do not expect markets to become entirely comfortable with the outlook for trade policy, either.

The punchline: "The challenge that the White House faces is that, to maintain leverage in negotiations, trading partners must believe that the US intends to follow through with proposed actions like tariffs. However, repeated threats begin to lose credibility unless they are followed up with action."

In short, just as China said earlier, the US can't have its cake and eat it too: Trump can't have trade war, or the threat thereof, and record high stocks:

It seems unlikely that the US Administration will be able to convince financial markets that the trade war is “on hold” while convincing trading partners that tariffs might be imposed. Assuming that the White House will try to maintain maximum leverage, markets are likely to assume that further trade restrictions are likely to be imposed.

The flipside is that the higher markets rise, the more diluted Trump's threats and warnings will become, until the moment comes that Trump "snaps" and - not used to be ignored - does actually enact tariffs that have a dire impact on markets, at which point risk assets will have no choice but to crash.

The message to traders here is: keep a close eye on Trump's twitter feed. If he repeats what he said two months ago, wwhen speaking on WABC Radio's “Bernie & Sid in the Morning’’ program, Trump said "I’m not saying there won’t be a little pain so we might lose a little of it but we’re going to have a much stronger country when we’re finished, and that’s what I’m all about" it will again be time to move to cash.


Son of Captain Nemo Sun, 06/03/2018 - 11:36 Permalink

Yes indeed. When you have one U.S. government agency (…) responsible for $21 trillion "x" 10 within the past 2 decades with debts that have been unrecoverable and untraceable since this announcement ( by the Secretary of Defence the day before "IT" happened (!...

I'd say this pretty much sums up the picture rather well!...

Rapunzal skbull44 Sun, 06/03/2018 - 11:58 Permalink

Ha The banksters are trying predictive programming and hiding behind a veil of honesty. Trump is a puppet to the banksters. He does their bidding. Who has the most interest in crashing the dollar ? Clearly the greatest debtors are ! It’s the US government with 21 trillions in debt, but that’s nothing. The top 6 US banks incl. Goldman Sachs have over 200trillion in worthless derivatives. So who is really interested in crashing the dollar.

In reply to by skbull44

Escrava Isaura Cognitive Dissonance Sun, 06/03/2018 - 11:45 Permalink

Goldman: If Trump Wants To Win A Trade War, The Market Has To Crash

And the supermarket shelves in the US will be half empty.

And no one to finance the deficits and investments.


America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves. Abraham Lincoln

Inequality is easy to solve through higher taxation and sovereign money. That's the social base.

Capitalist competition, that sits on the base, only needs investments.


In reply to by Cognitive Dissonance

MK ULTRA Alpha Escrava Isaura Sun, 06/03/2018 - 12:20 Permalink

Entrepreneurial capitalism is the economic growth engine of the US. In the last 30 years, technology industries monopolies, government regulation, unfair trade deficits and the economy being purposely roiled by design has destroyed entrepreneurial capitalism's creative destruction economic cycle.

The foundation of the US economy has cracked and is 50% of what it was. Any economic stress, ie. interest rate increase causes firms to go out of business.

The economy can't compete, the proof is in the annual over $800 billion trade deficit. After a while the trillions and trillions of deficits can't be sustained.

There is going to be a war. If the US Navy has a naval engagement with China in the South China Sea or the Japanese navy has a battle over an island would set it off.

One sunken ship would cause how much of a drop for Goldman? Would Goldman lose money?

Would the initiation of a naval war be used by the Chinese to invade Taiwan? Is the US prepared to fight China? over the South China Sea? Taiwan? territorial disputes between Japan and China? 

Who is hurt the most, a loss of the China trade surplus with the US would hurt who? Would China's debt driven rise be endanger of implosion? How would a loss of several hundred billion revenues or even the loss of the entire China trade because of war, what would that do to China's economy?

The Chinese are acting like any interference with it's rise as the premier global power (at others expense) is now a do or die proposition, a one way street, a Chinese street.

There is going to be war and the US is spread thin. I expect a military draft because no one will join the army, they couldn't meet their planned expansion. However, the army says there is not enough qualified people, that's to cover up the embarrassment of only being able to recruit half of what was planned.

There is going to be a huge war, the writing is on the wall, it will decide the future of who rules the world.

In reply to by Escrava Isaura

Son of Captain Nemo MK ULTRA Alpha Sun, 06/03/2018 - 12:33 Permalink

"I expect a military draft because no one will join the army, they couldn't meet their planned expansion. However, the army says there is not enough qualified people, that's to cover up the embarrassment of only being able to recruit half of what was planned."

After the Gulf War... the Balkans... 9/11 Freedom on Terror... Georgia (South Ossetia)... Ukraine... Syria...


In reply to by MK ULTRA Alpha

snblitz MK ULTRA Alpha Sun, 06/03/2018 - 15:10 Permalink

Is intelligence going through a reversion to the mean?

Some years ago I worked in global infrastructure: Power systems, railways, etc.

The military and industrial operators where publishing articles about the fact that there was no one qualified coming up the employment ladder to replace older workers.

I watched the problem grow.  Automation was installed were possible, and the operator guides were "dumbed" down.  I suppose soon AI's will be making the decisions.

So far we have survived by keeping the old guys working, but that will not last forever.

One of the other problems is that unions have made many of the positions subject to strict seniority rules meaning you cannot bring bright people in from the outside.

Both the military and industry expect to see more operational mistakes in the future.

Some analysts say the young are not interested in the jobs  Others point to the declining "abilities" of the people applying for the jobs.


In reply to by MK ULTRA Alpha

Son of Captain Nemo Escrava Isaura Sun, 06/03/2018 - 12:27 Permalink

"America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves. Abraham Lincoln"

Uncle Abe was an owned "boob" by the banks after that war was finished. And had regrets with what he knew was comin... Keep in mind EI that was a very... very.... very... long time ago when we still had our sovereignty and OWNED our OWN "SHIT"!... Long before we would ever see a half retarded orange coloured freak owned by a parasite ( that completely "demolished" (no pun intended) what was left of U.S. after 1945!...

Suffice it to say if Lincoln could come back to life and see what his Country has become he would have shot Trump first and then himself!

In reply to by Escrava Isaura

holdbuysell Winston Churchill Sun, 06/03/2018 - 11:52 Permalink

Fitts has discussed recently that she thinks the previous world economic order with the USD as reserve currency was effectively agreed upon by everyone. For example, China would accept the USD's status for exchange of being able to build its manufacturing capability, etc.; however, now that the order is becoming more dysfunctional, Trump is quietly renegotiating that order whereby the US will give up reserve status for exchange of bringing back those jobs and capabilities. i.e. MAGA with a much lower valued USD.

In reply to by Winston Churchill

Winston Churchill holdbuysell Sun, 06/03/2018 - 12:11 Permalink

Never ever happened without a (known)World War.Even the pound to USD happened in one,just not

between the holder and successor.With the xenophobia even seen here on ZH, I'd rate the chance of

no WW at<10%. Without war time rationing no population would accept their standard of living dropping

violently without revolt.I think the offer was made by Xi in Peking and rejected.


In reply to by holdbuysell

Son of Captain Nemo Winston Churchill Sun, 06/03/2018 - 12:39 Permalink

Well stated again per your usual W C

Which is why you will never see a WWII, Korea, Vietnam "redux" in the U.S. all volunteer New Pearl Harbour ( establishment post 9/11!...

To put it rather bluntly given my post at the top... "Johnny Wad" has blown all of his $money shot(s) in all directions for the past 25 years... And has no ENERGY left in the two tank(s) but the onset of "AIDS"!

Having said this given it's self-imposed economic straitjacket... With little recourse but an all out "game of chicken" given it's medical condition of deranged psychopath... In the immortal words of Bill Kristol... "What good are nukes if you buy them but never use them"?...

In reply to by Winston Churchill

Son of Captain Nemo Cognitive Dissonance Sun, 06/03/2018 - 11:57 Permalink


That's why you won't see any shortage of these happening (…) with the only "game in town" at the end of the rope that matters (…)!...

One of two things is going to happen in this project should Trump carry the the trade war(s) to fruition which will leave America with no friends only enemies because as you so correctly pointed out the $USD HAS NO VALUE anymore... And has been the only means for the U.S. making any friends the last 73 years by force of coercion if necessary!...

A) Syphilis-in-chief forces the crash through these sanctions which will make him such an unbearable pariah that he "resigns" as POTUS?....


B) He takes the sanctions off the table within the next two weeks and provides America with another 9/11-esque fireworks display on one of his many "outposts" or one of his powerful Armada of ships in Europe or the Middle East that will of course AGAIN sacrifice some of our own for the "greater good" in order to protect and defend "freedom that isn't free" at the end of a c note or a digital wallet!...

One thing is for certain, and I'm sure he's been well informed by the likes of the members of the EU inner circle... Better do it again in your own Country or a volunteer in the UK... Cause if you do one of those in ours you will be giving Brussels the automatic "get out of jail free" to finish a gas pipeline to Germany among many other projects heading East!

In reply to by Cognitive Dissonance

Topper Harley Cognitive Dissonance Sun, 06/03/2018 - 17:07 Permalink

Either Trump doesn't comprehend the concept of global hegemony, resting on actively running up a trade imbalance by buying the world's surplus production at low or zero tariffs, or he does get it but has decided he doesn't like it. Either way, it's hilarious.

If he were serious with 're-negotiating the terms' (=trade war), he could stop the bleeding out of manufacturing, scare the hell out of the Chinese and establish a path to a post-empire future for the US. He could also trigger - not cause, mind you - a global crisis. What's not to like?

In reply to by Cognitive Dissonance

Son of Captain Nemo Frilton Miedman Sun, 06/03/2018 - 13:00 Permalink

This is why Putin is more then willing to accommodate allowing Syria to be turned into "just a bit more rubble" listening to the parasitic bitch that has it's meat hooks in him AS WELL ...  But this is where the rest of Russia especially the military brass and Iran come into the picture that have made the ultimate sacrifices making the "jump off" for the parasite to Russia shall we say "interesting"!...

In reply to by Frilton Miedman