More pain is coming from Trump’s China tariffs
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The stock market should be peppy this year, as sharp cuts in the corporate tax rate goose profits. Instead, it can’t seem to shake the gloomy feeling that something bad is about to happen.
That’s probably because President Trump is now putting into practice the protectionism he promised as a presidential candidate. In the two days following Trump’s announcement of new 25% tariffs on $50 billion worth of Chinese imports to the United States, the S&P 500 stock index fell nearly 5%. The weekly decline of 6% was the worst since January 2016. Since markets anticipate future activity, this seems to be a portent of trouble looming–and there’s good reason to think it is.
The same day Trump announced his new China tariffs, China announced retaliatory measures involving tariffs on just $3 billion of US imports to China. That relieved markets at first, as stocks stabilized. But those Chinese tariffs weren’t in response to Trump’s latest targeting of China. They were in response to the steel and aluminum tariffs Trump announced on March 8, which were much less significant. China is now waiting to see which of its products will be subject to the new 25% tariffs, with a list due by April 6. At that point or soon after, another set of tariffs from China is virtually certain—and it will probably apply to a lot more than $3 billion worth of US imports.
“It’s guaranteed there’s going to be another announcement, and it’s guaranteed it’s going to be much larger than what China just announced,” says Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for International and Strategic Studies in Washington. “The message from China is that it’s not going to be cowed into submission by American threats, and that it can outlast the United States in any trade war.”
Trump’s tariffs are meant to address a problem many trade experts agree is legitimate: China has, in fact, cheated on trade deals in many ways. The government subsidizes many firms that compete globally, allowing them to offer products well below market value. China often requires western firms to share key technology as a condition of doing business in China. It also resorts to outright theft of trade secrets from companies in developed nations.
But experts don’t agree that unilateral tariffs, imposed by the United States alone, are the right way to address the problem. One of the main reasons is that tariffs invite retaliation. The United States has a large trade deficit with China—which apparently drives Trump crazy—but American companies still export $130 billion worth of goods and services to China each year. Those producers are now vulnerable to tariffs that will make their offerings more expensive in China and cut into sales.