US: Trade restrictions are still a relevant risk – Goldman Sachs

Analysts at Goldman Sachs suggest that some new restrictions on imports are still likely, reflecting the cabinet’s composition and the president’s authority to increase tariffs.  

Key Quotes

 “Trade policy was a key theme during the presidential campaign and in financial markets in the first few months of the Trump presidency.  Equity and currency markets were initially pricing in substantial increases in the average aggregate US tariff rate across all imports—perhaps by as much as 10 percentage points (pp) according to our rough estimates.  However, market expectations of major trade policy changes now appear to have completely reversed.”  

“Some new restrictions on imports are still likely, in our view, reflecting then cabinet’s composition and the president’s authority to increase tariffs.   Our base case looks for sector-specific restrictions, which together would raise the average aggregate tariff rate by about 1pp.  Areas at particular risk include steel and aluminium, and possibly also household appliances and semiconductors.  Such targeted restrictions could have important micro-economic effects, but together these four industries account for just 5% of US imports.”

“A near-term increase in the average tariff rate of more than a couple of percentage points appears unlikely, in our view.  This outcome would likely require broader restrictions affecting large import sectors, such as Chinese computers, which seem difficult from a geopolitical perspective for now.”

“But the risk of substantial trade restrictions is likely to rise over time.  Possible catalysts include a deterioration in the US-China relationship, a slowing of US economic activity, or prolonged lack of progress on the administration’s broader legislative agenda.”

“In our base case, a 1pp average tariff increase would have modest inflationary effects. A larger increase in the US average tariff rate by 5pp would increase the core PCE price level by 0.3pp cumulatively. The growth impact would depend on whether trading partners retaliate, which would lower exports and GDP growth.”

“While markets likely overestimated the scale of policy changes under President Trump initially, markets may now be underestimating the odds of policy implementation.  This applies to policies with negative implications for growth, such as tariffs, as well as fiscal policies with positive near-term growth implications.  We continue to see substantial trade restrictions as a downside risk to our medium-run growth outlook and as an upside risk to our inflation forecast.”