Yesterday, in "Here Comes The Main Event: Trade War With China, And What Is Section 301", we wrote that Trump's recently announced global steel and aluminum tariffs were just a (Section 232) preview of the (Section 301) main course: Trump's imminent trade war with China, which will be unveiled any moment in the form of tariffs and restrictions on trade with China, reportedly in retaliation for Chinese IP violations.
Today, Goldman's chief political economist Alec Philips, picks up on this and confirms that he too expects "the Trump Administration to announce tariffs on imports from China in coming weeks, as part of an intellectual property-related investigation that could also include restrictions on Chinese corporate investment in the US and restrictions on the export of intellectual property to China."
Conveniently, we already know in rough terms what this escalation will look like: in a preview of his trade war with China, Trump in January said in a Reuters interview that “we have a very big intellectual property potential fine going, which is going to come out soon,” and more recently announced that the “U.S. is acting swiftly on Intellectual Property theft” after a series of tweets on trade policy.
And while the White House has not provided its own estimate of the cost of IP infringement, a frequently cited estimate from the Commission on the Theft of American Intellectual Property puts the annual cost to the US economy at $225bn overall. The US International Trade Commission (US ITC) placed the cost of lost sales, royalties, and licensing fees due to infringement by Chinese companies at $48bn in 2009 (or over $60bn in 2017, if held constant as a share of world GDP).
As we explained yesterday, and as Goldman reiterates, in 2017, US imports from China totaled around $500bn, so tariffs equal to the low end of the range of estimated economic damages from IP-related policies would require a 12% tariff on all imports from China, or a much higher rate on a narrower segment.
This is confirmed by recent reports by Politico and Reuters suggesting that the categories of imports targeted could total $30bn to $60bn. This suggests that the Trump Administration might be leaning toward high tariff rates on a narrow segment of imports.
But which Chinese imports will be targeted: that is a critical question as the resulting tariffs will send prices of the products surging, with significant downstream consequences for both US producers and consumers, as well as corporate margins.
Ultimately, the decision which factors to consider will depend in part on who is advising the President on trade policy. Goldman here expects that USTR Robert Lighthizer will take the lead in developing the list, with input from White House trade adviser Peter Navarro and, ultimately, the President himself. The Treasury will play a larger role in determining the investment restrictions.
With that in mind, in attempting to answer what goods might be targeted when/if Trump decides to follow through with Chinese import tariffs, Goldman has looked at imports from China in 57 categories. The answer is shown in the table below.
Commenting on the ranking above, Goldman first separates categories in which the US runs a bilateral trade surplus, as it seems unlikely that the Administration would impose tariffs here. These categories are shown at the bottom of the table. From there, industries are ranked using a weighted average z-score across the five criteria shown:
Power tools and electrical appliances top the list, based on a substantial bilateral trade deficit, higher tariffs applied in China versus the US, and high share of imports going to final (in this case, consumer) use.
Sporting goods, toys, jewelry, and consumer electronics like TVs rank highly, for the same general reasons. However, in most of these categories, imports from China constitute a large share of total domestic sales of these products.
This is not true in the next set of product categories, ranging from aeronautical and marine navigation equipment , rail equipment and ships to furniture and household appliances, where Chinese imports represent a small share of total domestic sales, in some cases because domestic production still exists.
By contrast, the White House seems very unlikely to apply tariffs in categories where the US enjoys a trade surplus, such as aircraft, soybeans and other agricultural exports.
Of course, these will be the first categories Chinese policymakers consider when they impose retaliatory tariffs against the US, which should happen just days after Trump launches the China trade war.