The American stock market has been enjoying its bull run, the longest on record, as the risk of recession begins to dissipate. Investors were relieved that the US-China trade war was about to end – until today. The U.S. market benchmark index – S&P 500 – has gained about 309% since bottoming out at 676.53 points in March 2009 during the subprime financial crisis or Great Recession.
On Sunday, the most powerful man on planet Earth dropped a bombshell. President Donald Trump announced through his favourite toy, Twitter, that tariffs on US$200 billion of Chinese goods will increase to 25% from 10% on this Friday. In addition, the U.S. president has also threatened to slap 25% levy on an additional US$325 billion of Chinese goods “shortly.”
Investors and economists were caught with their pants down as the Trump administration has repeatedly claimed that trade talks with Beijing were going well. The unpredictable Trump had initially threatened to increase the tariffs at the start of the New Year 2019, but postponed his decision after China and the U.S. agreed to sit down for trade talks.
Donald J. Trump
✔@realDonaldTrumpFor 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars….
Donald J. Trump✔@realDonaldTrumpFor 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars….
….of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!
Since January, the impression has been such that the U.S. and China were close to a trade deal. In fact, as early as Friday, 2 days before Trump’s new threats, Vice President Mike Pence said that Trump remained hopeful that he could strike a deal with Beijing. Chinese Vice Premier Liu He was supposed to bring a large delegation to Washington on Wednesday to iron out a trade deal.
But with President Trump’s latest move to escalate the trade war with China, Premier Liu He will likely cancel the pre-planned trip whereby he would lead a 100-person delegation to the U.S. for the final round of talks. Some said the frustrated Trump has already decided to continue the trade war, and his latest warning was simply to send a message to Mr. Liu to not come to the U.S. with more “empty offers.”
Apparently, the U.S. and China still could not agree on how to solve the intellectual property theft and forced technology transfers. More importantly, both nations could not agree whether tariffs should be removed or remain in place as a way to ensure Beijing sticks to its commitments. To maintain the tariffs would be a slap in the face of Beijing as it means the Chinese are untrustworthy.
Donald Trump has also complained that the talks on a US-China trade deal are moving “too slowly”. Hence, the president could be sending a warning that the Chinese should not drag its feet further, as such delay strategy will continue to record trade deficits on the American side. There were reports that US has become increasingly frustrated by China’s attempt to row back on earlier commitments made over a deal.
While all eyes are on whether Chinese Vice Premier Liu He would fly to Washington or not (on May 8), the stock market is no impressed with the latest development – sending Dow Jones Industrial Average futures to an opening decline of more than 450 points. Similarly, the Shanghai composite, Shenzhen composite and Shenzhen component all plunged more than 5% each.
Oil prices tumbled by more than 2% as Trump’s tweet pulls down the global financial markets. To add salt to the injury, the Wall Street Journal reported that Beijing is actually considering canceling all trade talks with Washington, suggesting that the temporarily suspended “trade war” would most likely continue again as China refuses to be intimidated by the U.S.
The WSJ said Beijing had been surprised by the new threats launched by the U.S. president. It could be Trump’s poker game – even his arrogance – to get more from China thinking the Chinese could be squeezed, without any consideration that such tactics would be seen as President Xi Jinping losing face, not to mention making China look subservient to the U.S.
The Trump administration’s aggressive demand that the U.S. retains a unilateral ability to reimpose tariffs without retaliation if it doesn’t think China is holding to the deal has also frustrated Beijing. This will not be the first time China walks away from the negotiation table. Chinese officials cancelled a trip in late September 2018 in similar circumstances.