Trump’s trade war could spark a recession, Goldman Sachs warns

President Donald Trump’s trade war with China is increasing the odds that America will be thrown into a recession, according to investment bank Goldman Sachs.


On Friday, the president told reporters, “I’m not ready to make a deal” with China, asserting, “It’s working out very well.”

Starting Sept. 1, the Trump administration plans to levy a 10 percent tariff on the final $300 billion of Chinese imports to the United States, a tranche that includes consumer goods such as clothes, shoes and electronics. For many market observers, this is a signal that tariffs, and their economic impact, aren’t going away anytime soon.

“I’m very skeptical that the two sides will come to a deal before the 2020 election,” said Meredith A. Crowley, a faculty reader in the economics department at the University of Cambridge in the United Kingdom. “I see little reason to be optimistic that there will be restraint.”

This portends increasingly dire consequences for the U.S. and the global economic outlook. In a research note released Sunday, Goldman Sachs chief economist Jan Hatzius said, “We have increased our estimate of the growth impact of the trade war.” Fourth-quarter growth could drop to 1.8 percent, according to Goldman Sachs, which calculated the cumulative hit the trade war has dealt to the nation’s gross domestic product at 0.6 percent.

“Fears that the trade war will trigger a recession are growing,” Hatzius said.

Mark Zandi, chief economist at Moody’s Analytics, said the trade war with China already has eliminated 300,000 jobs and reduced the GDP growth by 0.3 percentage points.

“If Trump follows through with 10 percent on $300 billion, and tariffs stay there, the impact by the end of 2020 will be 0.7 percent,” he said. “That’s the difference between an economy that’s growing at its potential and one that’s growing below it.”

American companies and consumers are the ones paying the price, said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics. “He keeps putting out the big lie that prices are not going up because Chinese producers are absorbing the tariffs,” he said. “Every independent study has found that Chinese producers are not lowering their prices.”

Last week, Treasury Secretary Steven Mnuchin labeled China a currency manipulator, a theme the president also mentioned last week, along with a claim that Beijing was engaged in “monetary manipulation.” Economists say there is no evidence that Beijing is interfering in currency markets to drive down the value of the yuan. A more likely explanation is that China is withdrawing some of the support it had been providing to bolster the value of its currency in the face of market forces that otherwise would drive it further down. “The Chinese have consistently moved to slow down the depreciation,” Lardy said.

While Chinese currency depreciation would, in theory, lower prices of Chinese imports, economists say it’s unlikely that Beijing would — or could — use a currency war to wholly mitigate the rise in prices. Trump has called for lower interest rates and a weaker dollar, arguing that this would improve exports, but economists say these kinds of machinations quickly become a race to the bottom, as other central banks engage in monetary easing in response. Paradoxically, the U.S. dollar’s role as a safe haven would cause investors to flock to it — driving its value higher.

Some theorized that last week’s announcement accusing China of manipulating its currency could be a pretext to levy additional trade sanctions. Earlier, Trump had threatened tariffs of 25 percent, rather than 10 percent, on that $300 billion in imports.

Were events to unfold that way, the results would be disastrous, Zandi predicted. “He’s likely got a recession on his hands,” he said.

Not everyone thinks Trump will make good on that more serious threat.

“If Trump is rational, he would not go to 25 percent, because I think that would not help his re-election, and that seems to be what he’s focused on,” Lardy said.

Economists are increasingly worried that the president may have set in motion a chain of events that can’t be controlled. Since the upcoming September tariffs are targeting finished goods rather than inputs or components, the pass-through effect on prices will be more noticeable. “Consumers are going to feel the effects of those tariffs,” Lardy said.

More generally, the on-again, off-again threats the president has made a hallmark of his trade policy could hurt the economy even if the White House doesn’t make good on them. “The longer this goes on and the more permanent it looks, the less likely it is that the sellers in China or the importers in the United States will eat the tariff,” Lardy said.

Looming over the prospect of higher prices is the prospect of the labor market stalling out. Some sectors of the economy that are more exposed to the trade war are struggling to add and maintain jobs, and business investment in capital expenditures already has stagnated across the board. “If they decide, given the recent actions, they’re going to pull back on payrolls and jobs and employment slows much further, that’s recession,” Zandi said.

As recently as a year ago, job gains averaged 225,000 a month. “Now we’re down to 140,000 and decelerating pretty quickly,” Zandi said. The economy requires sustained job gains of at least 100,000 a month for unemployment to remain in equilibrium. That buffer, Zandi warned, could shrink rapidly. “That can be gone in a month,” he said.

For much of Trump’s presidency, the market has bounced back after positive tweets or other indications that a deal with China and an end to the trade war could be near. Zandi said Trump risks draining this reservoir of goodwill dry.

“I think he’s playing with fire, because at some point, people just aren’t going to trust what he’s going to say. At some point, the recession dynamics take on a life of their own,” he said.

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