In the US, the Nasdaq and the S&P both closed down 0.5% after having tumbled earlier. The Dow Jones finished down 0.3%, having lost almost 1.8% earlier in the day.

By Trump escalates trade war with China

Posted on May 7, 2019

By day’s end the market had corrected after the latest salvo in Trump’s trade war. On 5 May local time, he vowed to raise tariffs from 10% to 25% on some US$200 billion worth of Chinese products. He also said he would introduce new tariffs.

Later on 6 May, Chinese authorities confirmed they would still send officials to meet with Trump on 8 May for a new round of negotiations. There was a school of thought that they would scrap the talks after Trump’s rhetoric about more and higher tariffs.

Chinese delegates will arrive in the US capital for talks on Wednesday

CNBC reported that China initially intended to send a delegation of around 100 people but has since scaled this down. It is not yet known whether Vice Premier Liu He, known as ‘the closer’ because he has authority to negotiate directly on President Xi Jinping’s behalf, will be part of the group that travels to Washington.

Analysts said it was significant that the delegation was still committed to the talks with the US. This news sparked the market recovery after stock markets in the US, Europe and Asia had all slumped earlier in the day.

Geng Shuang, a Spokesperson for China’s Ministry of Foreign Affairs, said that Beijing was still committed to negotiating with the US. “As a matter of urgency, we still hope that the US and China will work together to move toward each other … to reach a mutually benefiial and win-win agreement,” he told a news briefing.

Trump struck a defiant tone on Twitter yesterday. “The United States has been losing, for many years, 600 to 800 Billion Dollars a year on Trade. With China we lose 500 Billion Dollars. Sorry, we’re not going to be doing that anymore!,” he wrote.

In a two-part tweet posted on 5 May, Trump said China had been paying a 25% tariff on US$50 billion dollars worth of high tech goods and 10% on another US$250 billion worth of goods. “These payments are partially responsible for our great economic results,” he continued. He then vowed to impose a tariff of 25% on an additional, currently untaxed US$325 billion worth of goods.

“The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!,” he concluded.

Trump’s claim that “China has been paying tariffs to the US” was slammed as misleading and overly simplistic given the costs of the tariff are often borne by consumers of Chinese-made goods and that US producers can raise prices in the face of reduced competition from China.

Trade war had been calmer before Trump’s tweets

Before Trump’s fiery tweets, tensions in the trade war seemed to have dissipated somewhat.

In late April, Chinese President Xi Jinping addressed world leaders at the Belt and Road forum and promised to bolster protection of intellectual property rights in China, facilitate foreign investment, avoid competitive devaluation of the national currency and reform state subsidies. The speech was largely read as an attempt to assure Trump that reforms were on track and to address the major concerns raised by the US during trade talks.

Analysis from the FXTM Research team highlighted the unexpected nature of Trump’s change of course.

“This latest development once again demonstrates how Trump’s tweets can be a wild card for any attempt to formulate a lasting outlook on global growth, as trade tensions remain a key overhang for markets,” it said.

“What remains to be seen is whether Trump’s wielding of the tariff hammer at a stage of negotiations where the majority thought a new trade agreement with China was close, could be a ploy to jawbone an immediate resolution to the drawn-out trade talks that have dictated market sentiment for close to a year. This development has also served as a reminder of the threat investors still carry when it comes to being blindsided from a set of completely unexpected tweets.”