Even before President Trump’s inauguration, we at PIMCO had identified trade policy as a potential spoiler to the otherwise pro-growth nature of the president’s economic agenda. And the unfolding of this “summer of discontent” has only affirmed our view heading into 2018 that trade policy remains one of the biggest policy risks for markets and the economy this year.

In addition to tariffs on steel, aluminum, washing machines and solar panels imposed earlier this year, the Trump administration recently imposed a 25% tariff on $34 billion of Chinese products, with tariffs on an additional $16 billion of goods expected in the weeks ahead. The administration is also considering the possibility of imposing up to 25% tariffs on an additional $200 billion of Chinese products – ranging from refrigerators to electrical components to seafood – as early as September, with threats of more tariffs should China continue to retaliate.

What’s coming for trade policy?

Given that no high-level negotiations are underway with China, we maintain that trade relations with China are likely to get worse before they get better. A compromise to avert tit-for-tat tariffs remains elusive, since the U.S. will likely require more than just a commitment from China to buy additional U.S. goods; indeed, we believe a deal would need to include concessions in the areas of market access and forced technology transfer, which China is unlikely to agree to given that access to advanced technologies is key to the country’s Made in China 2025 industrial policy.

We also believe that despite the recent détente (and hug!) between President Trump and European Commission President Jean-Claude Juncker, it is still possible that we see the administration proceed with tariffs on autos and auto parts, including those from Europe. Why? For one, the administration is still proceeding with the auto and auto parts investigation, a process that is likely to conclude later this month and would allow the administration the option to impose tariffs. Two, we see several potential pitfalls for the negotiations with the EU, including the already-simmering fight over agriculture, a perennial sticking point for both parties, and the fact that Juncker has limited power when it comes to actually forcing the 28 countries within the EU to agree to the terms of a negotiation (for instance, while Juncker promised President Trump that the EU would buy more soybeans, he actually does not have any real power to enforce that outcome).

While the form and scope of potential auto and auto parts tariffs – and any potential country exemptions – remain unknown should they proceed, we nevertheless think their economic impact could be significant.

China tariffs’ long-term impact is tough to gauge

The direct economic impact of the proposed 25% tariffs on $200 billion of additional Chinese imports, on top of the already announced 25% tariffs on $50 billion of Chinese products, could add about 0.3 to 0.4 percentage points to U.S. headline Consumer Price Index (CPI) inflation and subtract a bit more from real GDP growth over the next year, in our view.