After the Trump administration released the final version of the $200bn in imports from China that it plans to subject to additional tariffs, markets seem to have taken the news in stride for two reasons: i) China's response has been contained for now, and despite vowing to retaliate, China's foreign ministry said that it would announce countermeasures "at an appropriate time" without elaborating; ii) the US Tariffs will initially take effect at a rate of 10% (before rising to 25% on January 1, 2019). In its initial phase, this is a less restrictive outcome than the roughly 20-25% average tariff rate most had assumed.
On the other hand, the amount of imports subject to immediate tariffs is greater than banks such as Goldman had assumed, which had expected that the Administration would revise the list and that a portion of it would be implemented in a later stage. Instead, Goldman notes that "the list is mostly unchanged and we estimate that $180-190bn of imports (2017 levels) will be subject to tariff in one round starting September 24."
Some more details from Goldman's take on the Trump tariffs:
- Overall, we expect that the initial 10% tariff on this list should boost core PCE inflation by roughly 3bp (yoy), and by a cumulative 8bp if the rate steps up to 25%. We expect the effect on real GDP growth in the US to be very modest as well.
- Of the over 6000 items on the initial list, the Administration removed about 300 in full or in part, amounting to about $10bn. The removals were widely distributed across sectors, and the composition of the final list closely resembles the initial list, with the shares of intermediate (48%), capital (30%), and consumer (22%) goods remaining roughly in line with those in the initial list. A full updated list of imports subject to tariffs is in the appendix.
But the key highlight in the White House statement was that "if China takes retaliatory action" against farmers or other industries, the US "will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”
Which, in light of China’s previously announced plans to impose retaliatory tariffs on $60bn of imports from the US, prompted Goldman to predict that the US could announce plans to impose tariffs on “phase three” within the next couple of weeks. However, Goldman economist Alec Phillips adds that if the Administration follows a timeline similar to that of past tariffs, these tariffs would likely not be implemented until early next year.
In the interim, the market will likely to focus on the potential for an agreement between US and Chinese officials that could reverse these tariffs. That said, Goldman does not not expect a resolution prior to the midterm election on November 6. As such, the two potential milestones that will be closely watched after the midterm election include i) a potential meeting between President Trump and Chinese President Xi at the G20 meeting scheduled November 30 and ii) the potential escalation of US tariffs at the start of 2019.
So what does that mean for the current and future state of the US-China trade war? As Goldman concludes in a note sent out this morning, "while the situation is highly uncertain, at this stage we believe it is likely that the White House will propose an additional round of tariffs in the next few weeks and we believe there is a slightly greater than 50% chance that the tariffs will take effect in early 2019." Meanwhile, even though there is a fair chance that US and Chinese officials will ultimately reach an agreement to reverse the tariffs, Phillips cautions that reaching such an agreement this year will be a challenge.
A separate analysis by Bloomberg agrees with this assessment, noting that the U.S.-China trade war is shaping up to be a long confrontation. It notes that according to its initial estimate, the tariffs will take 0.5% point off China’s GDP growth, and the cost will be around 0.9% a year when the 25% tariff on the latest round of goods takes effect. The damage would rise to 1.5% once Trump enacts the remaining $267BN in tariffs.
The gradation of escalated moves, and respective GDP hit, is shown in the Bloomberg chart below.
Below is the final list of Chinese imports subject to the latest tariffs:
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Meanwhile, US consumer will now find themselves paying higher prices on a broader basket of products, which however should not be too material, with Goldman estimating that the initial 10% tariff on this list should boost core PCE inflation by roughly 3bp (yoy), and by a cumulative 8bp if the rate steps up to 25%. The effect on real GDP growth in the US should be very modest as well, which likely means even more market upside, providing Trump with even more conviction that his trade war is winning and leading to further tariffs in the near future.
The big wild card remains the US business response: "It appears that the administration responded to some industry concerns, but for many American businesses and consumers this still represents a rapid acceleration of costs and much higher uncertainty,” said Rufus Yerxa, president of the National Foreign Trade Council. "Business hates uncertainty. They’d rather have an imperfect trading relationship than this much chaos."
It's not just the US that will be impacted: Asian officials also warned about the trade war’s impact. Japan’s Finance Minister Taro Aso said it will impact other countries while Australia’s central bank warned that "significant tensions” around trade policy are a “material risk” to the global outlook, it said in minutes of the September policy meeting released Tuesday in Sydney.
"We’re looking at quite treacherous waters here which could considerably destabilize global economic confidence and threaten a future recession," former European trade commissioner Peter Mandelson told Bloomberg Television. "That’s how serious the stakes are now."