President Trump’s new China tariffs will further undermine U.S. growth, business leaders and investors say, and likely pressure the Federal Reserve to lower interest rates more than expected.
Fallout from U.S. trade wars, which will include duties on all Chinese imports as of Sept. 1 as well as threats to add levies on items from French wines to automobiles and parts, were among the reasons the central bank cited Wednesday for lowering its benchmark short-term rate to 2% to 2.25%. The 25 basis-point cut was the first since the financial crisis in 2008 and interrupted a string of nine increases.
The new Chinese duties of 10%, which will cover the remaining $300 billion in imports that escaped earlier 25% levies, “are going to really weigh on the economy,” said Tony Roth, chief investment officer for Wilmington Trust, which manages $84.9 billion in assets. “That just raised the chance of more rate cuts significantly.”
The blue-chip Dow Jones industrial average slid 1.1% to 26,583 after Trump’s Twitter announcement, while the broader S&P 500 sank 0.9%. The president’s decision, made amid ongoing negotiations with Chinese President Xi Jinping, dealt a blow to companies from large corporations to small businesses, who had warned that most of the Chinese imports previously not subject to tariffs were consumer items. Driving up their costs with the duties will force some importers to stop buying and potentially drive others out of businesses, since they may well have to raise prices higher than shoppers are willing to pay.
The tactic “will only inflict greater pain on American businesses, farmers, workers and consumers, and undermine an otherwise strong U.S. economy,” said Myron Brilliant, head of International Affairs at the U.S. Chamber of Commerce. “We urge the two sides to recommit to achieving progress in the very near term before these new tariffs come into effect, and to remove all remaining tariffs as swiftly as possible. “
Trump blamed his decision on China failing to buy large amounts of U.S. crops or block the sale of the addictive opiate fentanyl, which he said it had promised to do, and characterized the new duties as small.
“We look forward to continuing our positive dialogue with China on a comprehensive trade deal, and feel that the future between our two countries will be a very bright one,” he said.
…We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!
— Donald J. Trump (@realDonaldTrump) August 1, 2019
How the Chinese may retaliate after Trump’s action, particularly with the 2020 presidential election drawing nearer, remains to be seen, Roth told the Washington Examiner.
“I still believe that the Chinese do not want an agreement with Trump unless he wins re-election,” Roth said. “The Chinese are looking for a better partner from their perspective than Trump, someone with a more traditional approach to free trade than Trump has, and they would much rather wait it out and see whether Trump gets re-elected. My concern is this move that Trump has taken will really slow the economy down and play into Chinese hands.”
While Fed Chairman Jerome Powell cautioned Wednesday that the central bank’s rate cut didn’t necessarily signify the start of a long series of reductions, he noted that policymakers were learning about the effects of trade disputes in real time.
“There isn’t a lot of experience in responding to global trade tensions,” Powell said. “It’s something that we haven’t faced before and that we’re learning by doing. With trade tensions, which do seem to be having a significant effect on financial market conditions and on the economy, they evolve in a different way, and we have to follow them.”
Trump has threatened new China tariffs before and pulled back, but if they go into effect, “it would hurt American consumers and threaten further harm to U.S. businesses and workers,” said the Business Roundtable, which represents CEOs of the 200 largest U.S. companies. “Rather than escalating tariffs, both countries should focus on negotiations to address long-standing structural issues in China and to take tariffs down.”
The National Retail Federation, the trade group for an industry that contributes $2.6 trillion a year to the U.S. economy and supports overhauling America’s trade relationship with China, cautioned that the new tariffs would also hurt the job market.
“We are disappointed the administration is doubling-down on a flawed tariff strategy that is already slowing U.S. economic growth, creating uncertainty and discouraging investment,” said David French, vice president for government relations. “The tariffs imposed over the past year haven’t worked, and there’s no evidence another tax increase on American businesses and consumers will yield new results. We urge the administration to bring our allies to the table and find new tools beyond tariffs.”
