Full-blown trade war quickly shifting from risk to baseline


HONG KONG • After months of predicting a trade deal between the world’s two largest economies, economists at some of the biggest financial institutions are growing increasingly pessimistic.

Goldman Sachs Group Inc, Nomura Holdings Inc and JPMorgan Chase and Co are among those that have rewritten their forecasts as US President Donald Trump threatens to impose a 25% tariffs on around US$300 billion (RM1.26 trillion) of additional Chinese imports.

Analysts at Nomura have made that hike in duties — which would mean practically all of China’s exports to the US are hit by tariff hikes — their baseline forecast. They see it as a 65% probability before year-end, and most likely to come in the third quarter.

“The US-China relationship has moved further off track over the past two weeks after a period of what appeared, on the surface, to be steady progress towards reaching an admittedly narrow agreement,” Nomura economists wrote in a note. “We do not think the two sides will be able to get back to where they seemed to be in late April.”

The effect of the conflict between the two nations is spreading from trade and investment flows to the technology sector and more.

Shares in voice recognition company Iflytek Co tumbled following news it is on a list of Chinese technology firms that may face US restrictions.

Surveillance companies Hangzhou Hikvision Digital Technology Co and Zhejiang Dahua Technology Co plunged on Wednesday on news that they were on the list.

Goldman economists warned that without signs of progress over coming weeks, implementation of the further tariffs could easily become their base case. “While we still think an agreement is more likely than not, it has become a close call,” they wrote.

Those duties would have a material hit to inflation and lift the core personal consumption expenditure price measure in the US by 0.6 percentage points, on top of the 0.2 percentage points already felt from tariff hikes.

It would also, combined with limited Chinese retaliation, hit US GDP by 0.5% and Chinese GDP by 0.8% over a three-year period, Goldman’s team estimated.

For Bank of America Corp (BofA), there’s not enough admonishment from investors yet to force the two sides to a deal.

“The tepid response of equity markets to the trade war threats has increased the likelihood of an even longer period of more intense brinkmanship,’’ BofA economists led by Ethan Harris wrote on May 17. “The lesson from the latest round of tariffs is that the pain threshold is higher than we earlier thought.’’

It’s not just Wall Street sounding more pessimistic. A senior Chinese government researcher said on Wednesday China and the US could be stuck in a cycle of “fighting and talking” until 2035.

Zhang Yansheng, who previously worked at the nation’s top economic planning body and is now at a prominent Beijing think tank, said none of the key American demands can be “realised in the short term”.

JPMorgan analysts on May 17 said their new baseline is for the status quo — that is, all the rounds of tariff hikes to date from the two countries — staying in place well into 2020.

“We also take seriously the alternative, more severe scenario of moving into a fullblown tariff war, ie 25% US tariffs on the remaining US$300 billion Chinese imports in the second half of 2019,” the JPMorgan team wrote.

Such a move would see the yuan slide through seven per dollar, JPMorgan chief China economist Zhu Haibin said on a conference call on the new projections earlier this week.

Morgan Stanley is one bank that’s still clinging to the view that the latest increase in protectionism will prove temporary.

But their economists said this view has a time limit — about four weeks.

“There is only a relatively short window left to address the trade tensions risk such that global growth stays on the recovery path in line with our baseline,” Morgan Stanley economists including Chetan Ahya wrote on Monday.

“The impact on global growth is non-linear — the risks are firmly skewed to the downside and the window for resolution is narrowing.” — Bloomberg