Goldman: US-China Trade War Set To Worsen

Echoing the comments laid out last night by Standard Chartered's Steven Englander, this morning Goldman Sachs doubled down on how the US-China trade war will progress in the near-future, warning that it expects the tensions to get worse, at least initially. Speaking to Bloomberg TV, Goldman's co-head of EM and FX research, Kamakshya Trivedi, said that "we think that trade tensions will probably worsen before they get better."

Trivedi also predicted that "we’ll see probably see more weakness in the renminbi” over the next three to six months, a prediction that certainly has proven accurate today, with the onshore Yuan sliding to the lowest level since August 2011.

"There’ll be more stability after that, thanks in part to China’s growth holding up ok", according to the analyst who doesn't think that Beijing will "treat the currency as a weapon, but some of the weakness so far won’t be unwelcome to Chinese policy makers."

In a separate note, overnight Goldman economist Alec Phillips writes that the release of the list of $200BN in tariffs on Chinese imports "raises the probability that further tariffs will be implemented" adding that Goldman was somewhat taken aback by the timing of the announcement: "

"We had expected that the next round of tariffs on $16bn in goods could be implemented by late August or early September, so the implementation of this next round of $200bn, if it happens, looks unlikely to occur until September at the earliest."

Phillips also writes that networking equipment, computer components, and furniture would be the most heavily impacted imports in the newest round of tariffs. He adds that the list avoids consumer goods, including apparel more than Goldman had expected, while share of computer components, furniture affected is larger than anticipated.

The Goldman analyst also observes that "some imports that are supplied almost entirely by Chinese manufacturers were excluded from the list, including cell phones and toys." He also notes that while targeting divertible imports may be politically desirable, this goal will become increasingly difficult to achieve as the scale of trade restrictions grows.

Indeed, the Chinese share of US imports on today’s list is 51%, compared to 20% for the $34bn in goods subject to tariff as of July 6.

Finally, here is the breakdown of the largest categories affected by the tariffs which include: network routers ($23bn in imports in 2017), computer components ($20bn), and furniture ($29bn).

Across all categories, the breakdown of the tariff list as follows:

  • Agricultural goods ($3bn),
  • processed foods ($3bn),
  • chemicals ($10bn),
  • plastics ($10bn),
  • leather and leather goods ($7bn),
  • wood and wood products ($3bn),
  • paper ($3bn),
  • textiles ($4bn),
  • stone ($5bn),
  • base metals ($16bn),
  • other electric equipment and appliances including refrigerators, air conditioners, and vacuum cleaners ($26bn), and parts for autos, trucks, and agricultural equipment ($12bn).

The question, as noted last night, remains just how China will respond as it can not retaliate proportionately as the US does not exports $200BN in products to China, which means that as the WSJ reported earlier, Beijing may pursue more qualitative responses such as holding up licenses for U.S. firms, delaying approval of mergers and acquisitions involving U.S. companies and ramping up inspections of American products at borders.

A formal response is yet to come, at which point Trump will likely retaliate once again as any more by China will be seen by the Trump administration as a brand new escalation in the tit-for-tat progression of this trade war.