Trump’s trade approach under attack as China readies retaliation; markets poised for big sell-off

Trump’s trade approach under attack as China readies retaliation; markets poised for big sell-off

  • Beijing announces retaliatory tariffs on $60 billion in U.S. goods: “China will never succumb to foreign pressure,” says foreign ministry spokesman.
  • Dow plunges more than 500 points at market open as investors price fallout of trade tensions
  • In tweets Monday morning, President Trump insisted his tariffs on $200 billion in Chinese imports wouldn’t hurt American consumers, contradicting recent comments from National Economic Council Director Larry Kudlow.

President Trump’s efforts to calm investors while he launches a full-scale trade war with China showed signs of cracking Monday, as one of his top advisers admitted the approach could damage the U.S. economy, a Goldman Sachs report predicted it might lead to higher interest rates and China vowed to impose tariffs on $60 billion in U.S. goods on June 1.

China’s response, announced by its Ministry of Finance, said it targeted “U.S. unilateralism and trade protectionism.”

The rapid-fire succession of stark economic news spooked financial markets, with U.S. futures indicating drops of nearly 2 percent at the open for both the Dow Jones industrial average and the Standard & Poor’s 500 index. While many business executives and investors had hoped tensions between the U.S. and China would be resolved easily, the recent developments show how much each country is digging in for a long fight.

“Over the past week, hopes for at least a partial and temporary ceasefire between the two sides have given way to the prospect of a rapidly escalating and broadening economic conflict between the two countries,” Eswar Prasad, senior professor of trade policy at Cornell University.

Amid signs that investors were questioning his adversarial approach, Trump attempted to assuage the public in a series of Twitter posts. But some of his posts contained typos and misspellings, suggesting his comments hadn’t been thoroughly vetted by White House officials and might not represent fully planned out policy initiatives.

The dramatic escalation comes after Trump last week imposed a 25 percent tariff on $200 billion of Chinese imports to the United States. He also told aides to begin plans to hit more than $300 billion in other Chinese goods. Trump has alleged that the Chinese government is ripping off U.S. consumers and businesses by unfairly subsidizing Chinese companies, stealing intellectual property from U.S. firms, and flooding global markets with cheap goods to put other companies out of business.

On Monday, he warned China against retaliation on tariffs in a series of early morning tweets. But China showed it planned to counter his adversarial approach with its own penalties against U.S. companies. The Chinese government said it would impose tariffs on U.S. imports starting on June 1, with the steepest penalties hitting certain beef, live plants, dyed flowers, and a range of fruits and vegetables. The tariffs would range from 5 percent to 25 percent.

Chinese foreign ministry spokesman Geng Shuang said Monday that Beijing did not believe raising tariffs would solve “any problems” but warned that China would be ready to defend itself.

“China will never succumb to foreign pressure,” he said. “We are determined and capable of safeguarding our legitimate rights and interests. We still hope that the U.S. will meet us half way.”

U.S. agriculture companies could be hit hard from the new penalties, as it would make their products more expensive to Chinese buyers. U.S. farm groups have already complained to the White House that they were caught in the middle of Trump’s trade skirmish and that the president had pledged to assist them. Trump has said he would seek an additional $15 billion in U.S. taxpayer money to aid farmers.

Trump had suggested that the impact of the tariffs on U.S. consumers could be mitigated by simply buying American-made products or those manufactured in countries not subject to the tax. He also claimed the tariffs would drive business away from China and warned that the situation “will only get worse” if a deal is not reached.

“Their (sic) is no reason for the U.S. consumer to pay the Tariffs, which take effect on China today,” Trump tweeted. “Also, the Tariffs can be completely avoided if you by (sic) from a non-Tariffed country, or you buy the product inside the USA (the best idea.)”

Trump’s comments about the effects of the tariffs clashed with those of National Economic Council Director Larry Kudlow, who acknowledged that Americans will pay the price in an interview on “Fox News Sunday.”

“It’s not China that pays tariffs,” host Chris Wallace said. “It’s the American importers, the American companies that pay what, in effect, is a tax increase and oftentimes passes it on to U.S. consumers.”

“Fair enough,” Kudlow replied. “In fact, both sides will pay. Both sides will pay in these things.”

After a tweet from an editor of the Global Times, a Chinese state-affiliated media outlet, suggested that China might cease purchases of U.S. agricultural products and reduce Boeing orders, the embattled aircraft manufacturing company signaled optimism in a statement Monday to CNBC.

“We’re confident the US and China will continue trade discussions and come to an agreement than benefits both US and Chinese manufacturers and consumers,” Boeing said.

The new U.S. tariffs largely affect business equipment, but they also apply to $40 billion in consumer products like air conditioners, furniture, clothing and spark plugs. The financial impact of the tariffs could be delayed because they will apply only to products that left China on Friday, which often take two or three weeks to arrive from Shanghai. But businesses often pass these costs on to consumers, which could drive up prices across the country.

“The costs of U.S. tariffs have fallen entirely on U.S. businesses and households, with no clear reduction in the prices charged by Chinese exporters,” Goldman Sachs analysts wrote in a note to investors Monday. It also said “the effects of the tariffs have spilled over noticeably to the prices charged by US producers competing with tariff-affected goods.”

The analysts wrote that the tariffs could pose a double-whammy to the U.S. economy, by driving up the cost of goods and potentially leading the Federal Reserve to raise interest rates to counter inflation. That could further slow the economy.

Trade experts and business groups have said Trump routinely misstates how tariffs work. Tariffs are taxes paid by U.S. companies that bring in products from overseas. So those costs are borne by companies like manufacturing firms, chemical producers and others that rely on Chinese products. This drives up the cost of Chinese products, which Trump has said will help U.S. competitors, but it also pushes up the cost for U.S. companies that use Chinese products as well. The tariffs could end up hurting companies and economic growth in both countries.

Trump imposed a series of tariffs on many Chinese goods last year and threatened to impose steeper penalties in January, but Chinese officials agreed to negotiate with him as a way to prevent more damage to their economy. Those talks began in earnest in December and continued into this year, with Trump at one point saying he predicted it could be the “granddaddy” of all trade deals.

But Trump expressed frustration with the pace of trade talks and threatened to impose steep tariffs on $200 billion in Chinese imports two weekends ago. China’s vice premier, Liu He, came to Washington last week but those discussions didn’t break new ground, and the tariffs went into effect Friday morning. U.S. officials accused China of going back on prior details of the deal; China denied this.

“They were constructive discussions between both parties, that’s all we are gonna say. Thank you,” Treasury Secretary Steven Mnuchin said after the talks concluded.

This is a developing story and will be updated.

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