Merrill Lynch Analysts See Tariff Escalation as Likely, With Truce Reached Ahead of 2020 Election

The planned U.S. and Chinese tariff increases are expected to go forward as scheduled and escalation will continue "until both sides feel enough economic, market and/or political pain to strike a deal," said Bank of America Merrill Lynch global economists Ethan Harris and Aditya Bhave in a Sept. 3 research report. "The recent escalation has opened an almost insurmountable gap in terms of numbers and trust," the economists said. "The only real question is whether the Trump Administration takes the politically dangerous step of imposing tariffs on headline consumer products in December. We think they give it a go: given the supply chain lags it will mainly impact consumer prices after the holidays. All told we expect US tariffs against China to increase from about $63bn in August to more than $115bn by yearend, with Chinese tariffs on US products rising from $20bn to $25bn."

Closer to the 2020 election, "we expect a prolonged pause in the US-China trade war, with continued tough rhetoric and behind-the-scenes action by the US Commerce Department, but no major new tariffs," Harris and Bhave said. Staying tough on China is an "important campaign theme" for President Donald Trump, but " in our view the administration would not want to shock the economy and markets going into the election," they said. "One problem with this prediction is that 10 months seems like a mighty long period without a major new US action."

China, meanwhile, appears to be "playing the long game," the economists said. China, as Trump has said, "likely believe[s] it will be easier to negotiate with a Democrat in the White House." Also, "striking a deal that would be favorable for Trump before the election would improve his re-election prospects. For both reasons, as the election approaches, the Chinese have a strong incentive to only accept deals that are very favorable to them," they said. Even so, given the breakdown in talks between the countries in May and the threatened tariffs on Mexico while seeking an updated NAFTA, "China has to wonder if any deal is final."

E-commerce platforms appear to be facing a major new test as a result of the most recent and coming tariffs, said BofA ML analysts Justin Post and Michael McGovern in a separate Sept. 3 report. Specifically, Amazon and Wayfair are among the e-commerce providers that are at "the most tariff risk due to the impact on product pricing," Post and McGovern said. Based on other retailer industry estimates the analysts assume 20% of Amazon's 1st party costs of goods sold and 25% of its 3rd party COGS "is imported from China," they said. Unlike other retailers, Amazon "has less private label, but possibly more consumer electronics," they said. "For Wayfair, we estimate imports from China could contribute 50-60% of some home goods & furniture categories. We expect substitution in the marketplace to reduce the impact, both from consumers buying from non-China sourced sellers, and sellers sourcing from other markets."