Goldman Says Trade War Escalation ‘Most Likely’ Outcome of Trump-Xi Dinner

(Bloomberg) -- Goldman Sachs Group Inc. said that a continued escalation of the U.S.-China trade war would be the “most likely” outcome of a highly anticipated meeting between Donald Trump and Xi Jinping at the Group of 20 summit in Argentina.

“The first and in our view most likely is continuing on the current path of ‘escalation' -- tariff rates rise to 25 percent on all imports currently under tariff, and tariffs are extended to remaining Chinese imports,” Goldman said in a note outlining three basic scenarios it sees for the meeting's outcome. A close second was a “pause” in which existing tariffs remain in place “but the two sides agree to keep talking with escalation put on hold,” it said.

A deal involving a complete rollback of the current tariffs was “unlikely in the near term,” Goldman said. It added that market participants were “intensely focused on the leaders' meeting as a potential inflection point in the escalating economic tensions” between the U.S. and China.

Trump and Xi are preparing for their first face-to-face summit in more than a year. The high-stakes encounter could be their last best chance to keep the costly trade dispute from spiraling into a broader cold war amid a global battle for influence. Their officials have been working on the contours of a potential temporary truce, in which Trump would postpone levying further tariffs on Beijing in exchange for concessions.

Read more: Trump-Xi Dinner Offers Chance to Avert Deeper U.S.-China Rift

Failure to reach a deal could see Chinese export growth weaken in the coming months, Goldman said. Chinese growth would also probably slow beginning in early 2019, although renminbi depreciation this year would likely mitigate the impact, it said.

Tariffs are also weighing on Chinese domestic demand, it said, increasing uncertainty and rattling confidence in the short term -- and potentially encouraging relocation of some production in the future.

To contact the reporter on this story: Karen Leigh in Hong Kong at kleigh4@bloomberg.net

To contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net, Daniel Ten Kate

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