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The bank said in a note that chances of a successful deal are now lower, but suggested that an increase in tariffs could still be avoided — especially if the Chinese delegation still attends its meeting with U.S. negotiators this week.
Referring to Trump's latest gambit, Goldman economists said: "This represents a shift from the optimistic statements from US officials over the last few weeks and suggests that the probability of a near-term agreement is at least slightly lower than it seemed to be recently."
U.S. officials had claimed in recent weeks that trade talks were going well, and sources had told CNBC that a deal was possible by this Friday. But major sticking points were said to remain, such as intellectual property theft and a disagreement as to whether tariffs should remain in place as a way to ensure Beijing sticks to its commitments.
Trump said in a Sunday afternoon Twitter post that the current 10% tariffs on $200 billion worth of Chinese goods will rise to 25% on Friday. He also threatened to impose 25% levies on an additional $325 billion of Chinese goods "shortly."
Yet Goldman said it believes an agreement could still be reached, adding that it is still "slightly" more likely to happen than an increase in duties. It put the odds of a tariff escalation by the end of the week at 40% currently.
Investors will have a very clear signal to monitor, the bank added.
"The most important near-term indicator to watch will be whether the large delegation of Chinese officials comes to Washington on May 8, as scheduled. If they do, this would indicate that they believe a deal is still reasonably likely," Goldman said.
If both sides end up meeting after all, the tariff rate would rise only if they are unable to reach an agreement by Thursday — before the hike takes effect on Friday, it added.
Chinese Vice Premier Liu He had planned to bring a large delegation to Washington on Wednesday to hash out a trade deal. But two sources briefed on the talks told CNBC the Chinese side may back out of this week's negotiations.
Goldman warned that could be a sign of an extended trade war: "If the upcoming visit is canceled, an agreement in the coming week would then seem very unlikely. In such a scenario an increase in the tariff rate to 25% would become the base case."
The U.S. imports goods from China totaling $539.5 billion and the trade deficit stood at $419.2 billion in 2018, according to the Office of the U.S. Trade Representative. If Trump follows through with his threats, virtually all goods imported from China to the U.S. would face some sort of tariff.
But there is still hope yet, as Trump has the power to "walk the policy back through an executive order if negotiations progress favorably throughout the week," Goldman said.
— CNBC's Spencer Kimball contributed to this report.