Trade War: Who Wins and Who Loses - icf.at · China did not start (but probably accelerated) US manufacturing job losses Trade threats have become reality Section 232 steel and aluminum

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October 2018

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Trade War: Who Wins and Who Loses

Prepared for ICF Congress 2018 in Muscat, Oman

Hui Shan Goldman, Sachs & Co. +1 212-902-4447 [email protected]

2 Global Investment Research

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Outline

A look at history

US effective tariffs rate declining over the past century

Historically US current account improved in recessions

China did not start (but probably accelerated) US manufacturing job losses

Where are we now?

Trade threats have become reality

Section 232 steel and aluminum tariffs still evolving

Direct impact on economy limited so far

Our view

Tariffs redirect, not eliminate, trade flows

Headline risk higher, not lower, after the US mid-term election

US-China trade war more than just trade war

A Look at the History


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Long history of US trade policy

.

For most of the 19th century, the US maintains a largely protectionist trade stance

Begnning in the mid-1930s, the US significantly reduces tariffs while attempting to secure

reciprocal market access

Beginning in 1989, free-trade agreements (FTAs) proliferate; as multilateral talks stall, US trade

negotiations shift towards bilateral and regional trade pacts

Source: US International Trade Commission, US Department of Commerce, WTO, Irwin, Douglas A., "Clashing Over Commerce: A History of US Trade Policy," Goldman Sachs Global Investment Research.


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Source: Haver Analytics, Goldman Sachs Global Investment Research.

Historically US current account improved in recessions

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

1960 1970 1980 1990 2000 2010

%%Recession US Current Account Balance as % of GDP


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Source: Haver Analytics, Goldman Sachs Global Investment Research.

China did not start US manufacturing job losses

0

5

10

15

20

25

0

5

10

15

20

25

30

35

40

45

1940 1950 1960 1970 1980 1990 2000 2010

Million%

US Manufacturing Employment Manufacturing Share of US Jobs

Where Are We Now?


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Source: Dataminr.

Trade tensions escalating

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Jan Feb Mar Apr May Jun Jul

Tweets per hour Tweets per hour

Solar panels& Davos

Steelannounced

Steel/NAFTAdebates

China/Section 301

More Chinatariffs

Canada/Mexexcemptions

Steelimposed

G8

Autos China

Volume of Tweets About "Tariffs"


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Source: USITC, White House, Goldman Sachs Global Investment Research.

Tariff threats start to become reality

0

200

400

600

800

1000

0

200

400

600

800

1000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Proposed

Implemented

Billions of dollars Billions of dollars

Steel

& Alum

China 301

Tarif f s

Announced

($50bn) Additional China 301*

Sec. 232Autos

AdditionalChina 301*

Washing Machines

& Solar Panels

US Imports Subject to Proposed vs. Implemented Tariffs

Steel and aluminum

*In April, the White House proposed tarif f s on additional $100bn in imports in response to China's retaliation.This supplemental proposal was increased to $400bn on June 18 and to all remaining imports on July 20.

China 301: Remaining imports*

China: +$200bn

imposed

Sept. 24

China:+$16bn

China:+$34bn

*In April, the White House proposed tarif f s on additional $100bn in imports in response to China's retaliation.This supplemental proposal was increased to $400bn on June 18 and to all remaining imports on July 20.


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Source: Goldman Sachs Global Investment Research.

US effective tariff rate increased

0

5

10

15

20

25

30

0

5

10

15

20

25

30

1890 1915 1940 1965 1990 2015

Effective September 24

Including Remaining China Tariffs

US Effective Tariff Rate

(Gross Customs Duties, as Share of Total Imports)

Percent Percent

*Includes (1) enacted tariffs on steel and aluminum, solar panels, washing machines, and $50bn in imports from China as well as (2) proposed tariffson $200bn in imports from China at a rate of 10%.**Includes January 2019 tariff rate increase from 10% to 25% on $200bn and additional $267bn for remaining imports from China at 10% rate.


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Source: USITC, United Nations, WTO, Goldman Sachs Global Investment Research

Initial tariffs avoided consumer products

0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

160

Tranche 1 - $34bn Tranche 2 - $16bn Next $200bn Remaining $267bn

Capital

Intermediate

Consumption

Billions of dollars Billions of dollars

US Imports From China by Broad Economic Category


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Source: USGS, Goldman Sachs Global Investment Research.

One can make a case for aluminum tariffs

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

%% Aluminum Smelter Capacity Utilization Rate in 2017

37%

11%

21%

33%

41%

53%

61%

0%

10%

20%

30%

40%

50%

60%

70%

0

500

1,000

1,500

2,000

2,500

2012 2013 2014 2015 2016 2017

ReliancektUS Aluminum Production and Import Reliance

Primary Aluminum Production Import Reliance (RHS)


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Source: Goldman Sachs Global Investment Research.

Section 232 tariffs on steel and aluminum

Country Current Status Date effective

Aluminum Steel

Argentina 3.8% 0.6% June 1st, 2018

Australia 1.5% 0.8% June 1st, 2018

Brazil 0.8% 13.5% June 1st, 2018

South Korea 0.5% 9.8% June 1st, 2018

Turkey 0.2% 5.7% August 13th, 2018

Indonesia 1.2% 0.1% September, 2018

Other Countries 93.5% 75.2% March 23rd, 2018

* Set out in Proclamation 7604 as 25% tariff on steel and 10% tariff on aluminum

** President Trump tweeted tariffs would increase to 20% for aluminum, but no Proclamation has been issued

*** Announced by Indonesia's Ministry of Trade

**** Companies may apply for product exclusions based on insufficient quanitity or quality available from U.S. steel or aluminum producers, ~120 companies awarded exemptions as of September

Indonesia awarded exemption on 161 steel products***

Subject to current tariff levels*

Import share (2017)

Quota of average annual import volume from 2015-2017 for

aluminum; quota of 135% of average annual import volume from

2015-2017 for steel

Exempt from tariffs, no expiration date

Subject to current tariff levels for aluminum; quota of 70% of average

annual import volume from 2015-2017 for finished steel products and

100% of average for semi-finished steel products

Subject to current tariff levels for aluminum; quota of 70% of average

annual import volume from 2015-2017 for steel

Steel articles covered by Section 232 subject to tariff of 50%**


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Source: Company Data, USGS, US Dept. of Commerce, Goldman Sachs Global Investment Research.

Trade is complicated

Our Views


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Tariffs redirect, not eliminate, trade flows

Source: CEIC, USDA, Goldman Sachs Global Investment Research.

The case of oil… … and the case of soybean


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The politics of US-China trade are different

Source: Pew Research. Goldman Sachs Global Investment Research.

-30

-20

-10

0

10

20

30

40

50

-30

-20

-10

0

10

20

30

40

50

1997 2000 2003 2006 2009 2012 2015 2018

Total

Republican

Democratic

Percentage points Percentage points

Share of public that views trade agreements as "agood thing" minus share that sees as "bad thing"

-60

-40

-20

0

20

40

60

80

-60

-40

-20

0

20

40

60

80

Canada EU Japan Mexico China

Republicans

Independents

Democrats

Trade with ____ is "fair" minus "unfair" (June 2018)

Percentage points Percentage points


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Prediction markets imply a divided congress

Source: PredictIt.. Goldman Sachs Global Investment Research.

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

Sep-2017 Nov-2017 Jan-2018 Mar-2018 May-2018 Jul-2018 Sep-2018 Nov-2018

Senate

House

Implied Probability Congressional Republicans Retain MajorityAs of October 12, 2018

Percent Percent


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For China, trade war is more than just trade war

Source: CEIC. Goldman Sachs Global Investment Research.

20

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Disclosure Appendix

October 12, 2018

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure

Appendix, or go to www.gs.com/research/hedge.html.


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I, Hui Shan, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's

business or client relationships.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.

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Documents

Trade War: Who Wins and Who Loses - icf.at · China did not start (but probably accelerated) US manufacturing job losses Trade threats have become reality Section 232 steel and aluminum