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Goldman Sachs is predicting an escalation of global trade wars

Key Points
  • Goldman Sachs has revised up the possibility of sweeping auto tariffs being introduced this year to 40%, from 25% previously.
  • The Wall Street investment bank raised the possibility of the U.S. introducing a new 10% tariff on the remaining $300 billion of Chinese imports to 60%, from 40% previously.
Donald Trump during bilateral meetings in Beijing in late 2017.
Jonathan Ernst | Reuters

Goldman Sachs has revised up its expectations of an escalation to U.S. trade wars with China and Mexico.

There is now a 60% chance of the U.S. placing a new 10% tariff on the final $300 billion of Chinese imports, a note from the Wall Street investment bank said Monday. This is an increase from a previous estimate of 40%. Last month, President Donald Trump announced that tariffs on $200 billion worth of Chinese goods would increase from 10% to 25%. Washington has now begun looking into whether $300 billion worth of other Chinese imports will also be subject to increased levies.

Goldman also revised its assumptions of a tariff on all Mexican products, suggesting there is now a 70% chance Trump will impose duties on the first 5% of Mexican goods and a 50% chance that this will increase to 10%.

Trump recently threatened Mexico with 5% tariffs on its imports, to be implemented on June 10, unless it could stem the flow of migrants to the southern U.S. border.

"Additional tariff rate increases or an across-the-board auto tariff are also possible but not our base case," the analyst team led by Jan Hatzius said in the note. Goldman revised up the possibility of sweeping auto tariffs being introduced this year to 40%, from 25% previously.

While deals with China and Mexico are anticipated to represent a removal of tariffs, this is not expected until late 2019 or into 2020.

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The note anticipated that a ratcheting up of the trade war between the world's two largest economies, along with the burgeoning tensions between the U.S. and its neighbors to the south, is likely to take its toll on growth.

Goldman analysts lowered their U.S. GDP (gross domestic product) forecast for the second half of the year by around 0.5 percentage points to 2%, but the expectation is that growth will "rebound moderately in 2020 as tariffs come off and financial conditions stabilize."

The downside risks to growth mean Goldman has "sharply raised" its subjective probabilities for interest rate cuts from the Federal Reserve.

"But while it is a close call, the outlook has not yet changed enough for cuts to become our baseline forecast," the note added.

The analysts acknowledged that with only a "moderate tightening" in financial conditions, satisfactory growth and inflation heading above 2%, a rate cut may look "overly political in light of President Trump's vocal demands for easier policy."