BOTTOM LINE: President Trump has proposed a 10% tariff on the remaining $300bn
of imports from China, effective September 1. The announcement further increases
the odds that these tariffs take effect, which was already our base case. However,
with one month until the effective date there is still some uncertainty as to whether
they will be implemented. The next step to watch will be the release of an order
including the final tariff list, effective date, and tariff rate, which we expect in 1-2
weeks. While we have not changed our baseline view that the Fed will cut by a total
of 50bps this year, the tariff announcement tilts the risks toward deeper cuts and
raises our subjective odds of a September cut from 60% to 80%.
MAIN POINTS:
1. President Trump announced plans to impose a 10% tariff on essentially all
remaining imports from China, effective September 1. This would affect roughly
$300bn of goods that currently face no extra tariffs, and would be in addition to the
$250bn in goods that already face 25% tariffs. The move comes following the return
of US negotiators from Beijing and likely signals that US-China talks did not make
sufficient progress to convince the White House that a deal was likely in the
near-term.
2. That said, there is still a chance that the tariffs could be called off. President
Trump’s announcement references “continuing our positive dialogue with China on a
comprehensive trade deal” and it is possible that this announcement could be a
means of applying additional pressure to extract concessions ahead of the next
scheduled visit of Chinese officials to Washington in September. If so, this seems
unlikely to succeed, in our view, but it suggests that these tariffs are not a foregone
conclusion. That said, we believe they are much more likely to be implemented than
delayed or called off.
3. The majority of imports on affected are consumer goods (62%), compared to
capital (28%) or intermediate (10%) goods, which constituted the bulk of the
previous three tranches. The value of imports on the proposed list is concentrated in
key sectors that have up until this point been nearly – if not completely – unscathed
by tariffs in the first three tranches. For example, apparel and footwear make up
nearly 20% of the value of goods on this list, having been untouched by previous
rounds. Toys account for roughly 10%, and cell phones alone comprise about 17%
of the value of goods on the list. Given the higher share of consumer goods in this
next round, firms may pass on a higher proportion of these forthcoming tariffs to