- After escalating trade tensions by announcing 10% tariffs on an additional $300 billion worth of Chinese goods, Trump sought to calm the markets by saying, “Things are going along very well with China.”
- China is retaliating against the tariffs, belying the claim that things are going well between the two countries.
Trump escalates trade war
On August 1, President Donald Trump escalated the ongoing trade war once again. He announced that the US would impose 10% tariffs on the remaining $300 billion of Chinese imports starting on September 1. US tariffs will now cover virtually all imports from China to the US. After Trump’s tweet, the stock markets took a plunge. Trump’s announcement came just a day after the Fed announced a 25-basis-point rate cut. The Fed, however, didn’t provide much hope for an aggressive rate cut cycle ahead.
Trump disappointed with the Fed
Trump, on the other hand, was expecting a higher rate cut as well as an assurance from the Fed that the rate cut cycle had just begun. These two developments didn’t go over well with the markets. An intensifying trade war along with a more hawkish-than-expected Fed is a negative for the market’s outlook. The S&P 500 (SPY), the Dow Jones Industrial Average (DIA), and the Nasdaq Composite (QQQ) fell a combined 1.6%, 1.4%, and 2.0%, respectively, on August 1 and 2. According to CNBC, futures are pointing to declines in the S&P 500, the Dow, and the Nasdaq on their openings today.
Another round of tariffs will worsen the already weak economic situation in China and elsewhere
Another round of tit-for-tat tariffs will only worsen the countries’ already weakening economies as well as investor sentiment. The US manufacturing purchasing managers’ index hit its lowest point since 2009 in July. Moreover, China’s manufacturing sector continues to contract, partly due to the ongoing trade war.
The US companies that derive a major part of their revenues and profits from China are the ones that have been the most affected. These include US semiconductor stocks. Broadcom (AVGO), which derives half its revenue from China, fell 4.0% on August 1 and 2. Apple (AAPL) fell 4.3% on these two days. Apple assembles most of its products in China. In its latest results, Qualcomm (QCOM) provided disappointing guidance, which was partly related to trade tensions with China. Due to the news of increased tariffs on China, its stock fell 2.7% on August 1 and 2.
US companies reeling from trade tariffs
Even before the announcement of the fresh round of tariffs, companies were reeling from the negative impact of the tariffs and uncertainty surrounding the US-China trade deal. Many US companies have cited trade concerns as a significant factor impacting their outlooks. Caterpillar (CAT) attributed part of its disappointing earnings to lower demand from China. Mattel’s (MAT) latest results were better than analysts’ expectations, but it warned about the impact of an escalation in the trade war on its outlook.
Trump’s latest tweet seeks to temper the market’s nerves
To calm the markets, Trump tweeted on August 3, “Things are going along very well with China. They are paying us Tens of Billions of Dollars, made possible by their monetary devaluations and pumping in massive amounts of cash to keep their system going. So far our consumer is paying nothing – and no inflation. No help from Fed!”
US consumers are bearing the brunt of the US-China trade war
However, there aren’t many that are buying this argument from Trump. Many economists believe that US consumers are bearing the brunt of increased tariffs. According to a study published by the National Bureau of Economic Research, “The costs of the new tariff structure were largely passed through as increases in U.S. prices, affecting domestic consumers and producers who buy imported goods rather than foreign exporters.”
The latest round of tariffs will affect the US consumer more directly than the previous rounds, which were more focused on industrial goods.
China is ready to escalate the conflict even further. Today, the Chinese yuan fell past the level of 7 yuan to the US dollar for the first time in over a decade. Currency manipulation could be one of the weapons China plans to use to lower the impact of higher tariffs. However, it’s unclear whether the weakness in the yuan is a deliberate response by Chinese authorities to tariffs or just a result of panic selling.
In retaliation to Trump’s additional tariffs, China has vowed to fight back. As reported by CNBC, China’s spokesperson at the foreign ministry, Hua Chunying, said that while China didn’t want a trade war, it wasn’t afraid of fighting one. She also said, “China does not accept any maximum pressure, threat or blackmail.” China’s hard-line stance on tariffs defies Trump’s claim that everything is “going along very well” between the US and China. In fact, the markets are now expecting the trade conflict to get much worse before it gets any better.