Trump’s tweet triggers trade tariff tit-for-tat

Xi Jinping “had a great deal, almost completed, & you backed out” (sic.), tweeted Donald Trump after Washington more than doubled duties on $200bn of Chinese imports at the end of last week. On Monday the US president tweeted that “China should not retaliate – will only get worse”. But two hours later Beijing announced $60bn of its own tariffs on imports of American goods ranging from foodstuffs and chemicals to toothpaste, effective from 1 June.
The new tariffs wiped more than $1trn off global stocks on Monday. The MSCI All World index, covering both developed and emerging markets, has slipped by 5% from its 2019 peak in early May, while emerging-market stocks have lost a tenth. The White House is now considering imposing further tariffs on $325bn of Chinese goods – almost all remaining Chinese imports.
A muted impact – for now
For all the disruption to supply chains, the short-term impact of the latest tariffs is likely to be small, according to Paul Krugman in The New York Times. Trade policy enjoys an “amount of mind space” that is “disproportionate to its actual economic importance”. Tariff hikes are comparable to any other tax increase – not great for the economy, but still likely to cost “only a fraction of a percent of GDP”.
In 2018 tariffs had an “economy-wide” net cost to the US of just 0.04% of GDP, says The Economist. The immediate effects on China will be similarly minor, Bo Zhuang of TS Lombard says in the Financial Times. As the Middle Kingdom has developed its domestic economy, the relative importance of exports to the US has fallen sharply in recent years to just 4% of GDP.
The long-term threat
Markets have been predicting for months that for all the “theatrics”, the economic interests of both sides meant a deal was inevitable, says Arthur Kroeber of Gavekal Research.
But with their economies now in better shape, Trump and Xi are responding to “deeper storylines”. The Communist Party has tied its legitimacy to “standing firm against US aggression”, while US policymakers on all sides agree that “China is a major threat requiring firm pushback”. Clashing narratives make a deal much more difficult to reach.
The upshot could be that tariffs and trade disputes become the new normal, says Michael Mackenzie in the Financial Times. The struggle between the world’s two largest economies could run “well into the next decade”, marking a “profound change” for investors after decades of globalisation.
One flashpoint could be US Treasury debt, which has ballooned under Trump. Beijing is the world’s largest holder of American debt, but if it chooses to run down its investments as a “slow-burn” retaliation then US finances and the dollar could ultimately come under pressure.
“Trade wars are very hard to trade,” says Stephen Gandel on Bloomberg. But the best bet is probably to just “stay put”. In this era of easy money, geopolitical turbulence will encourage central banks to keep interest rates at rock-bottom levels, providing a “cushion” for stockmarkets.