If neither China nor President Trump fear a trade war, Wall Street demonstrated once again that it does.
The three most-watched U.S. stock market indexes tumbled on Friday after two of the world’s largest economies escalated tariff threats. The blue-chip Dow Jones industrial average sank 572 points, or 2.3 percent, at the close of regular New York trading, while the tech-driven Nasdaq tumbled 2.3 percent, and the S&P 500 fell 2.2 percent.
“Risks appear to be rising in both the short and long term,” said Mark Hamrick, a senior economic analyst with Bankrate.com. Indeed, Treasury Secretary Steve Mnuchin acknowledged the potential for a trade war in a CNBC interview Friday afternoon, and White House spokeswoman Sarah Sanders said one would be easy to win under Trump.
Perturbed by duties China announced in response to U.S. plans to impose tariffs on $50 billion of its imports, from vaccines to aircraft-engine parts, the president said a day earlier that he wants levies on another $100 billion of the country’s products.
Trump “is upping the ante in a war of words that threatens to turn into something damaging to global growth,” Hamrick said. The Dow Jones and the S&P 500, which touched record highs in January, have since wiped out those gains. The Dow is down 0.9 percent so far this year, while the S&P 500 has fallen 0.4 percent.
Trump’s counterpunch against China, which would triple the original penalties, was prompted by the country’s “unfair retaliation” to measures intended to help balance a $375 billion trade deficit, the president said. “Rather than remedy its misconduct, China has chosen to harm our farmers and manufacturers.
China, which is a great economic power, is considered a Developing Nation within the World Trade Organization. They therefore get tremendous perks and advantages, especially over the U.S. Does anybody think this is fair. We were badly represented. The WTO is unfair to U.S.
— Donald J. Trump (@realDonaldTrump) April 6, 2018
Trump said he remains open to talks, a point his top economic adviser, Larry Kudlow, reiterated Friday morning.
Beijing hopes to resolve the dispute amicably, too. “We do not want to fight,” a spokesman for the Ministry of Commerce said Friday, but if necessary, “the Chinese side will dedicate itself to the end and will definitely fight back. It must adopt new comprehensive response measures, and at any cost, resolutely defend the interests of the country and the people.”
The Sino-U.S. conflict was initiated by the U.S., the spokesman added, calling it a “provocation.”
Concerns that a broad trade war would hurt the global economy have been growing since Trump’s decision last month to impose sweeping tariffs on metals imports, which he justified on national security grounds.
The China duties involve unfair trade practices, a different section of the law, but the White House has wide latitude under both. The president, who often bragged early in his tenure about the stock market’s performance, has brushed off concerns about its negative reaction to the tariffs.
“We are not in a trade war with China,” Trump reiterated in a Twitter post on Friday. “That war was lost many years ago by the foolish, or incompetent, people who represented the U.S.”
Economists, however, have cautioned that trade deficits aren’t necessarily a negative for a consumer-driven economy like that of the U.S. and businesses argue that tariffs are merely another form of taxation, one that’s likely to drive up costs for U.S. consumers.
“Caution is warranted as the two economic superpowers increase the stakes in these early trade skirmishes,” said Humberto Garcia, head of asset allocation for Bank Leumi USA. They “introduce considerably uncertainty, he said, “which markets traditionally find difficult to embrace.”
Indeed, Trump’s unexpected decision to order up another $100 billion in tariffs may prompt some investors to abandon hopes that the administration has a master plan on trade, said Chris Krueger, an analyst with Cowen Washington Research Group.
Others, however, will continue to look for data points that would bolster the argument that Trump’s tactics will lead to a smoother playing field for the U.S., he said.
Otherwise, Krueger said, “this impulsive unilateral escalation is so unimaginably reckless that it could place the global economic order in the balance.”
Retailers, who make up more than 10 percent of the U.S. economy, have been concerned not only by Trump’s bellicose stance toward China but his threats to pull out of the North American Free Trade Agreement, a pact on which they have built their existing supply chains.
“Tariffs are a tax on American consumers in the form of higher prices but they are also a tax on American jobs,” said Jonathan Gold, a vice president with the National Retail Federation. That could imperil an unemployment rate of 4.1 percent, the lowest in more than a decade.
“If tariffs ultimately lead to a reduction in imports and exports, that will put dockworkers and countless others in the supply chain out of work,” Gold said.
