“Tariffs are a great negotiating tool,” President Donald Trump tweeted last month, one of dozens of times he has extolled the power of levies to get the trade deals he wants. In December he tweeted, “I am a Tariff Man.”
Goldman Sachs issued a note to clients on Sunday saying Trump's tariff strategy isn’t going to work with China, the world’s second-largest economy.
“We no longer expect a trade deal before the 2020 election,” wrote Goldman economists in Sunday’s note, led by Chief Economist Jan Hatzius who has won more than half a dozen awards for the accuracy of his economic projections. The economists also noted: “Fears that the trade war will trigger a recession are growing.”
Trump announced in an Aug. 1 tweet he was slapping China with a new round of tariffs to cover all imports from the world’s most populous nation after two days of negotiations had not produced the results he wanted. China retaliated by letting its currency fall and instructing state-controlled buyers to stop all purchases of U.S. agricultural goods. Trump responded by labelling China a "currency manipulator," a move guaranteed to send tensions between the world's two largest economies through the roof.
“China’s position is very clear that if U.S. wishes to talk, then we will talk, if they want to fight, then we will fight,” Zhang Jun, China’s ambassador to the United Nations, said in response to Trump’s new tariffs.
There’s a new propaganda song trending on Chinese social media that includes these lyrics: “Trade war! We’re not afraid of the outrageous challenge! If the perpetrator wants to fight, we will beat him out of his wits.”
There’s still room for the situation to worsen, the Goldman economists said.
“The risks of further escalation have also risen, with President Trump threatening tariffs of `well beyond 25%,'” they wrote in the note.
In its Sunday note, Goldman Sachs lowered its fourth-quarter U.S. GDP forecast by 20 basis points to 1.8%. The economists pointed to the reaction of financial markets, deterioration in business sentiment, increases in trade policy uncertainty, and supply chain disruptions.
“Overall, we have increased our estimate of the growth impact of the trade war,” the Goldman Sachs economists said.
Conditions would be worse if the Fed hadn’t adopted an accommodative stance at its last meeting, the note said.
“This GDP hit from financial conditions would be larger without the monetary policy offset markets are pricing,” the economists wrote.
The Federal Reserve cut its benchmark rate by a quarter percentage point at their meeting last month in a bid to keep the longest economic expansion in U.S. history from petering out. It was the first reduction since the financial crisis more than a decade ago.
