Ignore Tariffs, According To Goldman This Is The Biggest Risk From A Global Trade War

One month ago, when previewing the potential fallout from an "all out" global trade war, which for simplicity's sake many have equated with an across-the-board 10% tariff on all US imports and exports, we presented an analysis from Barclays, according to which the hit to 2018 EPS for S&P 500 companies would be ~11% and, thus, "completely offset the positive fiscal stimulus from tax reform."

Furthermore, the impact on exporters which would be directly affected, would be 5%, while that on US companies that import finished goods or inputs would be higher, at roughly 6%. This, to Barclays, highlights the unintended consequences of imposing tariffs given the global nature of current supply chains.

Since then, trade tensions have only escalated at an alarming pace. In context, the US has already imposed tariffs on $79 billion of US imports and proposed tariffs on an additional $702 billion, with the combined $781 billion in targeted goods representing 27% of total US imports.

Reflecting this escalation in trade tensions, the Trade Policy Uncertainty Index recently notched its highest reading since 1994 around the time of NAFTA’s inception.

Adding fuel to the fire, in recent days all out currency war has also broken out following a sharp devaluation in the Yuan, which has tumbled at an annualized pace of 30%, far faster than during the 2015 devaluation...

... and eventually prompted Trump to also enter the fray, when he first complained about the Yuan "dropping like a rock" on a CNBC interview (coupled with some not so veiled suggestions against the Fed rate hiking ambitions), followed by vows to impose more tariffs and complaints about "illegal currency manipulation", which have resulted in a rollercoaster move in the Yuan and, inversely, the dollar, and prompted Goldman to write that "trade war is evolving into currency war."

And speaking of Goldman, overnight the bank's chief equity strategist came out with a report that seeks to mitigate some of the concerns what a global trade war would mean for S&P revenues and earnings. Specifically, Kostin writes that "Tariffs pose a risk to S&P 500 earnings through two channels: (1) lower revenues from exports and (2) higher input costs and weaker margins."

Kostin quickly dismisses the risk from the first point:

The tariff impact on S&P 500 EPS through lower revenues is minimal. S&P 500 firms derive just 2% of aggregate sales explicitly from China. Even a global trade war where every country imposes a 5% tariff on all trading partners would have a muted revenue impact. Our economists estimate the demand-side effects of such a scenario would reduce US GDP by roughly 20 bp and world GDP by 10 bp. This scenario would translate to a 1% reduction in 2019 S&P 500 EPS (from $170 to $169), given our EPS model’s sensitivity to GDP growth.

On point 2, the Goldman strategist concedes that the key tariff risk to the S&P is via the margin channel:

Tariffs pose a larger threat to S&P 500 EPS through lower margins. We consider adverse scenarios in which tariffs are placed on all imports from China or globally. For all US industry, roughly 15% of cost of goods sold (COGS) is imported. We assume that S&P 500 companies, which are more global in nature and have more complex supply chains, import roughly 30% of COGS. This is consistent with the 29% of S&P 500 sales is generated outside the US. Imports from China comprise 18% of total US imports.

What is the quantitative impact: here Goldman's assessment is roughly in line with that of Barclays.

Conservatively assuming no substitution to other suppliers or pass-through of costs, and no boost to domestic revenues or change in economic activity, a 10% tariff on all imports from China would lower our 2019 S&P 500 EPS estimate by 3% to $165. If tensions spread and a 10% tariff were implemented on all US imports (highest rate since 1940s) our EPS estimate would fall by 15% to $145.

What Goldman points out next is that despite the escalating words - and actions - "the equity market has largely looked through the margin risk from tariffs", to wit:

No clear relationship exists between reliance on imports from China and recent industry performance. Among at-risk industries, Computer & Electronic Products, which include Semiconductors, have lagged the Russell 3000, while Electrical Equipment stocks have outperformed. As our Tech Hardware and Retail analysts have noted, trade headlines may overstate fundamental risk, as companies have many tools at their disposal to minimize margin pressures. Some firms may be able to switch to other suppliers, while others will pass through costs. A basket of TMT stocks with high imported COGS has also shrugged off the risk from tariffs, matching the broader Info Tech sector’s 12% rally since March.

Kostin cautions that this may be a mistake, however not due to the quantitative aspects of the trade war, namely the downstream impact of tariffs, but the qualitative, and thus much more ambiguous, implications. 

In other words, it's not tariffs that investors should be worried about: as the Goldman strategist writes, "a greater risk lies in potential government intervention" and lists the following examples:

Geopolitical tension can manifest itself in ways beyond tariffs. As precedent, China publicly encouraged consumer boycotts that led to a plunge in Japanese auto sales (in 2012) and South Korean products (in 2017). Last week, China issued a temporary injunction on some of Micron’s (MU) chip sales due to alleged patent infringement. The stock fell by 6%. MU downplayed the impact on sales and the share price has since recovered.

Finally, while the bank acknowledges it is next o impossible to accurately define it, this is how Goldman believes a "severe global trade war" would impact the S&P:

Our base case forecast is that S&P 500 rises 2% to 2850 at year-end 2018 and by 7% to 3000 at year-end 2019. In the event of a severe global trade war, our 2019 EPS forecast could equal $145 (a 10% decline from $159 in 2018) and the forward P/E multiple could contract by 10% to 15x, dragging S&P 500 to 2200 by year-end 2018.

Which incidentally brings up an interesting point from BNP earlier in the week, which asked if "global trade war could cause a depression", and answered that judging only by the market, the answer is no - at least for now - for one simple reason: the market is unable to quantify the full impact of such a development:

The intensifying trade war has so far not seen a bear market. If this indicates the markets are correctly pricing in a Great Depression-like crisis not occurring, we would agree that there is little likelihood of a repeat of the Great Depression. However, the possibility of the trade war leading to a global recession is not so small. Perhaps share prices are firm because the uncertainties are too great for risks to be priced in appropriately.

Or share prices are simply firm because trade wars lead to currency wars, which in turn lead to more QE, and the market's most recent memory from central bank liquidity injections is a very fond one. Only this time, not even BNP sees a happy ending:

One cause for concern is that renewed monetary easing by the world’s central banks might rekindle a fear of competitive currency devaluations, as it did in 2015 and early 2016. While monetary policy has become markedly less effective, as nominal interest rates are very low and the natural rate of interest continues to flounder, currency depreciation is still a tried-and-true channel for transmitting monetary policy. Globally, this might be a zero-sum game. For this reason, monetary easing itself poses a risk of destabilising the global financial markets by rekindling memories of currency wars.

The bank's conclusion: "All things considered, we do not think the outlook is very bright."


two hoots Jay Sat, 07/21/2018 - 10:55 Permalink

"Every dollar that goes overseas in trade has to come back in trade."

So if it "has to" why do we have a $45B-ish trade imbalance every month?  It apparently doesn't have to, so how do you fix that or should Trump just ignore that like the rest?  $45B loss every month  has taken its toll, must be corrected and  Trump has the courage to do it.

Interesting:  https://tradingeconomics.com/united-states/balance-of-trade  -  Clinton and increasing trade deficits?

In reply to by Jay

Knave Dave Jay Sat, 07/21/2018 - 10:59 Permalink

And, because tariffs get built into the cost of goods sold, they will assure that we go far beyond the Fed's inflation target, which we are already overshooting by almost 50% (using their numbers). Therefore, the Fed could get caught in an inflation trap to execute QT all the way to the moon and back.

Of course, I suppose they could blame inflation on tariffs and say the higher rate of inflation doesn't matter because it is due solely to tariffs which they cannot control and use that as their excuse to drop back into QE.

Either way, inflation is assured. I think it is more likely that the rapid rise in inflation due in part to tariffs will cause them to hit the accelerator on QT and blow up their fake recovery faster. Inflation will be hitting us from one side and lack of liquidity from the other.

In reply to by Jay

Consuelo CatInTheHat Sat, 07/21/2018 - 11:21 Permalink


Corporations in League with Congress and $lobbying interests.   Ignorant flag-wavers who think these companies would even want to bring business back to the U.S. are deluding themselves.   Hasn't the glorious repatriation-Not of Trump tax breaks for large multinationals already proven this in spades...? 

In reply to by CatInTheHat

PitBullsRule Sat, 07/21/2018 - 10:50 Permalink

Tariffs don't work, never have, never will. You can't give a society a job by taxing the competition.

But Trump knows that, he has other plans for you morons.

Strawboss Sat, 07/21/2018 - 10:53 Permalink

Tariffs are the means through which Trump intends to rebuild the middle class - by bringing our factories home.  Local factories with local supply chains.

Its absolutely doable.

There is that small issue with the Fed debt though.  Lots of bonds to sell...

And then there is that Triffin thing...

Could a gold revaluation solve these problems?

All it would take is a tweet to find out...

Consuelo Strawboss Sat, 07/21/2018 - 11:29 Permalink

Of course it's 'do-able'.   Anything is do-able...   What people are missing is what happens between the nirvana of the other side, and right now.   As if, snap fingers and it's the 1950's of domestic manufacturing again- no pain involved...

It took the United States 30+ years - and still on going, to 'offshore' its manufacturing base, along with a complete re-pricing of labor in the process, due to the flipping of a Savings & Production paradigm, into a Debt & Consumption paradigm (Financialization)

Getting the U.S. ramped for large-scale domestic production to compete in today's global economy, means a complete re-pricing of labor.   

I don't want to come off as condescending, but do you have any idea of what that re-pricing of labor means for current standards of living for the average American...?

In reply to by Strawboss

Jackprong Consuelo Sat, 07/21/2018 - 12:48 Permalink

The labor has been re-priced.  After 35 years, Chinese and Indian labor wages have increased at a 10-15% annual rate whereas the U. S. has experience wage stagnation.  Dropping the corporate rate, placing tariffs on certain imports have bridged a much smaller gap than existed in the past while U. S. quality of goods have increased during the interim.  It's all about Time and Price.  Trump couldn't fight the Price twenty-five or thirty years ago with the policies the country was undergoing.  However, Trump can now place the U. S. economy on a better trajectory.

Look at Mrs. Bill Clinton:  she represents a dying past--literally!

In reply to by Consuelo

JibjeResearch Sat, 07/21/2018 - 10:56 Permalink

Fuck it....

Stupid people, American or Not, will fall in living standard.

Smart people, American or Not, will rise in living standard.

Both of these people deserve what they get!

shortonoil Sat, 07/21/2018 - 10:57 Permalink

Obviously, Goldman writers are paid by the word. Capital out flows from the EM (which constitutes 34% of world GDP, and 48% of world trade) are now better than $4 trillion per year, and it is all coming to the West! Tariffs are being used to maintain that flow of funds. Without that flow of funds the author would be eating their pencil, or at least the @ sign on their keyboard! There is just not enough remaining resources to keep the Globalization ponzi scheme running for the entire world, so a couple of the stronger economies plan on taking what's left. As oil prices are kept ridiculously high, and interest rates continue upward EM currencies go over the cliff; their bond markets sell off, and the the money comes home. It is sort of cute how Goldman is pretending not to notice what is happening! Sure; the rip off artists of all times aren't part of the rip? And, bears don't shit in the woods!

Balance-Sheet Sat, 07/21/2018 - 12:05 Permalink

The US economy and growing segments of the global economy are being stimulated at the highest levels in the past 200 years and this is VERY deflationary so a great deal of new currency will reverse this in nominal terms.

Trade struggles and tariffs influence this but these are separate if interrelated issues. If there were NO tariffs or non tariff barriers even MORE currency issuance would be required at higher rates.

Help yourself buy understanding this as you need to adapt. The World is not going to issue a flood of Gold and Silver coins and the net cost of capital has to be less than zero.

Example: Imagine the Fed announces that the inflation rate is 10% then you get 6% on passbook savings. Simplified, you get a nominally positive return in your desire 5-7% range and lose 4% in real value year to year.

Md4 Sat, 07/21/2018 - 13:08 Permalink

“Furthermore, the impact on exporters which would be directly affected, would be 5%, while that on US companies that import finished goods or inputs would be higher, at roughly 6%. This, to Barclays, highlights the unintended consequences of imposing tariffs given the global nature of current supply chains.”


See what outsourcing for nearly five decades does to a, once-vibrant, first-world economy?

And who continues to pay the freight?


No one ever said this was going to unwind well.

But...unwind it must...

Md4 Sat, 07/21/2018 - 13:13 Permalink

“One month ago, when previewing the potential fallout from an "all out" global trade war, which for simplicity's sake many have equated with an across-the-board 10% tariff on all US imports and exports, we presented an analysis from Barclays, according to which the hit to 2018 EPS for S&P 500 companies would be ~11% and, thus, "completely offset the positive fiscal stimulus from tax reform."


Positive fiscal stimulus?


Corporate share buybacks set a record in 1H 2018.


If the actual opportunity costs are even more share price pumping fraud...



Money_for_Nothing Sat, 07/21/2018 - 13:15 Permalink

Micron flash chips are twice as good as Toshiba. Check the data sheets especial the wear-leveling. China is trying to steal IP from the best. US could shut down most of China's electronic exports by banning sales of Micron chips to Chinese firms. Japan and Taiwan might also think twice about trading with China till they remove and dismantle their bases in the Spratly Islands.

snblitz Sat, 07/21/2018 - 13:29 Permalink

highlights the unintended consequences of imposing tariffs

I think people, other than the author, are aware of how tariffs work.

If not:


Which would you rather have

  • welfare or minimum wage job + cheap chinese goods


  • $25/hour job in american manufacturing + american goods


Canadian Gal snblitz Sun, 07/22/2018 - 13:35 Permalink

Companies who invest in building factories first determine who their market will be.  At 25/hr factory wage who will you export goods to, or is Trump's bigger picture to only serve US people with US goods produced? 

If you do build factories, investors, even US ones, will want automation wherever possible to compete with the wage levels of competing countries....think Bangladesh, India, Indonesia, China.  The Chinese are the biggest buyer of robots in the world for a reason.  They have massive warehouses and factories now that are manned by small numbers of people and 100's of robots with a goal of automating as much of the manual labour, lower paying jobs as they can. The Chinese don't see their future as factory workers...they're moving to a service industry and support education in medical fields, science, tech, engineering and math.  

So back to the question of who you sell high priced factory goods to.  Maybe Trump plan to keep tariffs on for good, forcing you to be captive buyers of overpriced goods while foregoing exports?  If that's not it, and Trump wants the US to be an exporter, what source of below-minimum-wage workers does he have at his disposal?  Ex-convicts?  Prison-run factories?  Work for Welfare programs?  The only other option I can see is automation and that doesn't employ many people. 

In reply to by snblitz