Ignore Tariffs, According To Goldman This Is The Biggest Risk From A Global Trade War

  • Written by Zero Hedge
  • Published in Economics

One month ago, when previewing the potential fallout from an "all out" global trade war, which for simplicity's sake many have equated with an across-the-board 10% tariff on all US imports and exports, we presented an analysis from Barclays, according to which the hit to 2018 EPS for S&P 500 companies would be ~11% and, thus, "completely offset the positive fiscal stimulus from tax reform."

Furthermore, the impact on exporters which would be directly affected, would be 5%, while that on US companies that import finished goods or inputs would be higher, at roughly 6%. This, to Barclays, highlights the unintended consequences of imposing tariffs given the global nature of current supply chains.

Since then, trade tensions have only escalated at an alarming pace. In context, the US has already imposed tariffs on $79 billion of US imports and proposed tariffs on an additional $702 billion, with the combined $781 billion in targeted goods representing 27% of total US imports.

Reflecting this escalation in trade tensions, the Trade Policy Uncertainty Index recently notched its highest reading since 1994 around the time of NAFTA’s inception.

Adding fuel to the fire, in recent days all out currency war has also broken out following a sharp devaluation in the Yuan, which has tumbled at an annualized pace of 30%, far faster than during the 2015 devaluation...

... and eventually prompted Trump to also enter the fray, when he first complained about the Yuan "dropping like a rock" on a CNBC interview (coupled with some not so veiled suggestions against the Fed rate hiking ambitions), followed by vows to impose more tariffs and complaints about "illegal currency manipulation", which have resulted in a rollercoaster move in the Yuan and, inversely, the dollar, and prompted Goldman to write that "trade war is evolving into currency war."

And speaking of Goldman, overnight the bank's chief equity strategist came out with a report that seeks to mitigate some of the concerns what a global trade war would mean for S&P revenues and earnings. Specifically, Kostin writes that "Tariffs pose a risk to S&P 500 earnings through two channels: (1) lower revenues from exports and (2) higher input costs and weaker margins."

Kostin quickly dismisses the risk from the first point:

The tariff impact on S&P 500 EPS through lower revenues is minimal. S&P 500 firms derive just 2% of aggregate sales explicitly from China. Even a global trade war where every country imposes a 5% tariff on all trading partners would have a muted revenue impact. Our economists estimate the demand-side effects of such a scenario would reduce US GDP by roughly 20 bp and world GDP by 10 bp. This scenario would translate to a 1% reduction in 2019 S&P 500 EPS (from $170 to $169), given our EPS model’s sensitivity to GDP growth.

On point 2, the...

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