Goldman Sachs Finds Tariffs Impacting American Consumers, GDP More Than Expected

May 14th, 2019

Businesses and consumers in the United States are largely bearing the financial burden of President Trump’s escalating trade war with China, Goldman Sachs said in a note to its clients on Saturday, adding that further provocation could have a significant impact on the U.S. GDP — amongst other negative economic effects.

Specifically, Goldman Sachs writes that “the costs of the tariffs have fallen entirely on U.S. businesses and households,” partly because expectations that Chinese exporters would lower prices to bolster their competitiveness in the U.S. market have not come to fruition. Instead, “…analysis at the extremely detailed item level in the two new studies shows no decline in the prices (exclusive of tariffs) of imported goods from China that faced tariffs.” Moreover, the bank finds that tariffs have provided U.S. producers with protection from Chinese competitors, resulting in manufacturers “opportunistically” raising prices on their domestically-produced goods.

While Goldman Sachs says that it expects the United States and China to strike a deal later in 2019, it also notes that “there is, however, a risk of further escalation.” Accordingly, the chance of additional tariffs on nearly $300 billion of Chinese imports has risen to 30 percent, generating concerns that further escalation could result in a 0.4 percent reduction to U.S. GDP or worse if tensions spark a sell-off in the equity market. Financial analysts are especially anxious about a final round of tariffs because consumer products account for roughly 60 percent of the remaining Chinese goods.

Furthermore, citing two new studies published by the National Bureau of Economic Research, Goldman Sachs warns that President Trump’s recent decision to raise tariffs — from 10 percent to 25 percent — on $200 billion of Chinese goods will increase the preferred gauge of the Federal Reserve of underlying inflation. Goldman Sachs now estimates that the impact of tariffs on core personal consumption expenditures (PCE) inflation has risen to 0.2 percentage point, and that a final round of tariffs on the remaining Chinese goods would increase core PCE inflation to 0.5 percentage point.