With the world's two largest economies opening a new front in their multibillion dollar bilateral trade dispute, the risk has risen sharply that the U.S. will eventually slap tariffs on all imports from China, Goldman Sachs said on Sunday.
President Donald Trump ordered a new raft of surcharges on around $200 billion worth of Chinese goods last week, with China retaliating with $60 billion in U.S. goods.
Last year, the world's largest economy absorbed more than $500 billion worth of goods from China, which reciprocated by taking in around $130 billion — a bilateral imbalance the Trump has vowed to rectify. With that in mind, Goldman suggested that all of China's goods and services crossing America's borders may be subject to tariffs in relatively short order.
"Following President Trump's threat of further escalation, we now think the probability that all imports from China will ultimately be subject to tariffs has risen to 60 percent," the bank's analysts wrote in a research note.
Even still, Trump has steadily worked toward finding points of convergence with other trading partners, such as Europe, Mexico and Canada, and those developments have heartened Goldman.
Although a top White House official said last week that the U.S. and Mexico are prepared to move ahead alone on a new trade agreement without Canada, the ongoing negotiations may be encouraging in and of themselves.
"On a more positive note, we have seen de-escalation on other fronts of the trade war, with a NAFTA deal likely by November and reduced trade tension with the EU," Goldman said on Sunday.
According to free trade theory, countries will produce more of, and consume less of, a good for which they have a comparative advantage. According to Goldman, a continued escalation in trade tensions could put that dynamic at risk.
"Economic principles suggest that trade barriers will weigh on productivity in the longer term, as countries are forced to produce goods in which they have no comparative advantage," the bank wrote. As a wide range of goods become more expensive because of tariffs, prices are likely to rise as well.
"The effects on inflation are clearer: The measures announced to date look set to push up U.S. core [personal consumption] inflation by around 0.1pp, and about twice that if the next round of China tariffs materializes," Goldman estimated.
Global trade is coming off its highest growth rate in six years, according to the World Trade Organization, with world exports totaling nearly $18 trillion in goods and services during 2017.
Goldman data shows that growth has held up this year in spite of trade tensions, but that may not continue. Last week, Target admitted it was about how tariffs would affect consumers, and its bottom line, and more companies are getting nervous.
After the Trump administration's announcement of new tariffs, China reportedly canceled high-level bilateral trade talks, according to a report in The Wall Street Journal. The White House did not respond to CNBC's request for comment.
"As the U.S. continues to engage in the back and forth, tit-for-tat escalation of trade barriers and taxes, the mounting tensions have caused increased risk of harming U.S. businesses and consumers in the short term, the very same players the administration seeks to protect in the long run," said Stifel chief economist Lindsey Piegza.