The market was euphoric when Trump and Juncker yesterday announced a temporary ceasefire and de-escalation in the trade war between the US and Europe, announcing an agreement to negotiate tariff reductions and to increase US exports to the EU. It also lowered the risk of US tariffs on European auto imports, which is why the European auto sector is surging 2.3% this morning.
That's the good news. The bad news, according to Goldman, emerges when looking at the fine print, or rather lack thereof: as Goldman economist Alec Phillips writes, "the lack of specifics in today’s US-EU announcement raises the possibility that the negotiations could falter at a later stage, as US-China negotiations did earlier this year."
But a far bigger risk is that the agreement with Europe, which saw Juncker explicitly siding with the US on several occasions against China, "is also likely to embolden the White House to use proposed tariffs to try to win concessions from other trading partners, like China. The recent announcement of supplemental agricultural subsidies to counter the effects of retaliatory tariffs pushes in this direction as well."
This will only be accentuated by China's last-minute decision to scuttle the Qualcomm-NXP merger which Trump has pushed for in recent months and was seen as China's olive branch in exchange for Trump letting ZTE "live." And even tough China's commerce ministry spokesman Gao Feng says at briefing today that the Qualcomm-NXP deal is about market monopoly and has nothing to do with trade tension between China and the US, that's a flat out lie.
In other words, Goldman warns against believing that recent positive developments regarding US-EU trade should be interpreted as a reduction in risk in the other major trade dispute, with China. "In fact, they likely mean the opposite."
Some more details. First, Goldman lays out what was agreed on, and what wasn't:
The announcement did not mention EU auto tariffs specifically, even though reducing the differential between the EU’s 10% tariff on auto imports and the US 2.5% tariff on cars has been a frequently cited White House goal. This could reflect internal EU disagreement over the issue or it could represent a strategy to save auto tariff reductions until later in the negotiation.
While the announcement is a clearly positive development, and was interpreted as such by financial markets, it is in some respects reminiscent of the state of US-China negotiations earlier this year after tariffs had initially been proposed. In that case, after initial negotiations regarding increased exports of agricultural and energy products, among other issues, Treasury Secretary Mnuchin declared that the trade war with China was “on hold”. That situation did not hold for long, however, and the proposed tariffs were eventually implemented earlier this month. The US-EU announcement is somewhat more specific and somewhat more likely to result in a formal agreement, but follow-through remains a clear risk.
More importantly, here is Goldman's read though on what the EU decision means for trade war with China:
.. these programs seem likely to give the Trump Administration more political flexibility to impose additional tariffs on imports from China, in our view. Rural voters voted disproportionately for President Trump in 2016 and most rural areas have Republican representatives in Congress. Retaliatory tariffs recently implemented by China are particularly focused on agricultural exports that would impose disproportionate economic losses in rural areas and could weaken support for the President’s trade agenda among these constituencies. Additional subsidies are likely to reduce this effect, though they will probably not reverse it entirely.
Overall, developments over the last few days suggest that risks from trade policy are becoming more concentrated on the US-China trade relationship. The preliminary US-EU agreement could lead the White House to believe that imposing tariffs on imports from China could increase the probability of a US-China agreement. With subsidies in place to guard against some of the domestic economic fallout from retaliatory tariffs, the White House is likely to have additional political flexibility to pursue that strategy.
This is hardly a surprise, and the market reacted accordingly, because while European stocks, and especially industrials and autos, were broadly higher, China's Shanghai Composite sunk back under 2,900 despite Beijing unleashing a torrent of monetary and fiscal stimulus in recent weeks...
... suggesting that traders are already bracing for the next trade war round, which could be announced by Trump's twitter account at any moment.