Moody's Corporation · NYSE:MCO

Moody's — Will Trump Push the Trade War Too Far? Webinar (May 2019)

25 slides from Moody's's conference presentation, May 20, 2019

  1. Slide 1: Will Trump Push the Trade War Too Far?

    Will Trump Push the Trade War Too Far? Mark Zandi, Chief Economist Cris DeRitis, Deputy Chief Economist Ryan Sweet, Senior Economist May 20, 2019

  2. Slide 2: How Did We Get Here?

    1 How Did We Get Here?

  3. Slide 3: The Trade War Escalates

    The Trade War Escalates U.S. effective tariff rate, % 6.5 Solar and Steel China 2 Steel 6.0 washing and and ($16B) machines alum. alum. 5.5 ($10B) ($18B) Canada, 5.0 Mexico, 4.5 EU ($10B) China 3 4.0 ($200B) 3.5 China 1 3.0 ($34B) China 4 2.5 ($200B) 2.0 1.5 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19

  4. Slide 4: Who Bears the Brunt of the War

    Who Bears the Brunt of the War Chinese imported goods subject to tariffs by round, $ bil 180 160 Capital goods 140 Intermediate goods 120 Consumer goods 100 80 60 40 20 0 $34B $16B $200B Remaining Sources: Commerce Department, Moody’s Analytics May 2019 4

  5. Slide 5: Balanced Trading Relationship

    Balanced Trading Relationship U.S.-China trade balance, $ bil 50 0 -50 -100 -150 Total as reported Total plus in-country sales of subsidiaries -200 -250 -300 -350 -400 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Sources: Census Bureau, Deutsche Bank, Moody’s Analytics May 2019 5

  6. Slide 6: Economic Impact to Date

    2 Economic Impact to Date

  7. Slide 7: Tariffs Didn’t Boost Employment

    Tariffs Didn’t Boost Employment Steel and aluminum, share of U.S. manufacturing employment, % 1.05 1.00 0.95 0.90 0.85 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Sources: BLS, Moody’s Analytics May 2019 7

  8. Slide 8: Shifting Trade Patterns

    Shifting Trade Patterns Nominal U.S. trade deficit, yr-to-yr difference, $ bil, NSA 10 Rest of the world China 5 Narrowing in trade deficit 0 -5 -10 -15 Widening in trade deficit -20 -25 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 Sources: Census Bureau, Moody’s Analytics May 2019 8

  9. Slide 9: Composition Limits Impact on Inflation

    Composition Limits Impact on Inflation Tariff-impacted goods’ contribution to CPI, % change yr ago, ppt 0.08 Tariffs implemented 0.06 0.04 0.02 0.00 -0.02 -0.04 -0.06 15 16 17 18 19 Sources: BLS, Moody’s Analytics May 2019 9

  10. Slide 10: Trade War Hits Business Sentiment

    Trade War Hits Business Sentiment % difference between positive and negative responses 80 Trade tensions escalate 60 40 20 0 -20 -40 Present conditions -60 Expectations -80 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: Moody’s Analytics May 2019 10

  11. Slide 11: Focus on Tariffs Had Faded

    Focus on Tariffs Had Faded Fed’s Beige Book references, word count, # 50 Tariffs *Trade war or trade tensions 40 Uncertainty Trade* 30 20 10 0 Jan-18 Mar Apr May Jul Sep Oct Dec Jan-19 Mar Apr Sources: Federal Reserve, Moody’s Analytics May 2019 11

  12. Slide 12: Regional Casualties of the Trade War

    Regional Casualties of the Trade War % of GDP in industries impacted by Chinese retaliatory tariffs U.S.=13 <13 13.1 to 22 22.1 to 32 >32 Sources: BEA, Moody’s Analytics May 2019 12

  13. Slide 13: Trade War Scenarios

    3 Trade War Scenarios

  14. Slide 14: Possible Scenarios

    Possible Scenarios Scenario description Economic impact Financial market Value of $ implications Deal • No change to the baseline. • U.S. and Chinese equity • U.S. real • Potential upside risks as markets rally as unease about trade- • U.S and China reach a trade confidence rebounds and supply the t

  15. Slide 15: Timeline for a Trade Deal or No Deal

    Timeline for a Trade Deal or No Deal U.S. begins to run off tariffs YES Implement terms of deal Deal? China ?% retaliates 50% • Increases tariff rate Trade deal Stalemate (75% odds) at or before 70% • Devalues G-20 yuan (45% meeting U.S. 25% U.S. odds) June 28-29 tariffs on imposes • Nontariff ? $20

  16. Slide 16: Chinese Have Leverage…

    Chinese Have Leverage… 10 largest foreign holders of U.S. Treasuries, $ bil China Japan Brazil U.K. Ireland Luxembourg Switzerland Cayman Islands Hong Kong Belgium 0 200 400 600 800 1,000 1,200 Sources: Treasury Department, Moody’s Analytics May 2019 16

  17. Slide 17: …Significant Leverage

    …Significant Leverage U.S./Renminbi exchange rate 7.1 Agreement to delay tariff increase 7.0 Depreciation 6.9 6.8 U.S. announces 6.7 25% tariff on $50B 6.6 of imports President Trump’s tweet 6.5 6.4 6.3 6.2 Jan-18 May-18 Sep-18 Jan-19 May-19 Source: Moody’s Analytics May 2019 17

  18. Slide 18: China Should Be Able to Manage

    China Should Be Able to Manage China’s reserve requirement ratio for major banks, % 22 20 18 16 14 12 10 8 07 08 09 10 11 12 13 14 15 16 17 18 Sources: PBoC, Moody’s Analytics May 2019 18

  19. Slide 19: Trade War Fallout

    VAN Trade War Fallout

  20. Slide 20: Trade War Scenarios Turn Darker

    Trade War Scenarios Turn Darker U.S. real GDP, 2012$ tril 20.25 20.00 Baseline 19.75 Trade War Standoff Trade War Conflagration 19.50 19.25 19.00 18.75 19Q1 19Q3 20Q1 20Q3 21Q1 21Q3 Sources: BEA, Moody’s Analytics May 2019 20

  21. Slide 21: Full-Blown Trade War Will Ignite Recession

    Full-Blown Trade War Will Ignite Recession Diff in real GDP, 2020Q4, Trade Conflagration vs. No Tariff scenario ≥ -0.5% -0.51% to -1% < -1% Source: Moody’s Analytics May 2019 21

  22. Slide 22: Fighting Yesterday’s Battle…

    Fighting Yesterday’s Battle… U.S. trade deficit as a % of GDP 2 1 0 -1 -2 -3 Japanese NAFTA -4 competition China enters -5 the WTO -6 60 65 70 75 80 85 90 95 00 05 10 15 Sources: BEA, Moody’s Analytics May 2019 22

  23. Slide 23: …Will Cost American Jobs

    …Will Cost American Jobs U.S. trade balance, % of GDP 2 1 0 -1 -2 Services CAPX, indust. supplies, agri. -3 Consumer goods Oil -4 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 Sources: BEA, Moody’s Analytics May 2019 23

  24. Slide 24: moodysanalytics.com

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  25. Slide 25: May 2019

    © 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, and affiliates (collectively, “MOODY’S”). All rights reserved. licensors and suppliers

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