The stock market should be peppy this year, as sharp cuts in the corporate tax rate goose profits. Instead, it can’t seem to shake the gloomy feeling that something bad is about to happen.
That’s probably because President Trump is now putting into practice the protectionism he promised as a presidential candidate. In the two days following Trump’s announcement of new 25% tariffs on $50 billion worth of Chinese imports to the United States, the S&P 500 stock index fell nearly 5%. The weekly decline of 6% was the worst since January 2016. Since markets anticipate future activity, this seems to be a portent of trouble looming–and there’s good reason to think it is.
The same day Trump announced his new China tariffs, China announced retaliatory measures involving tariffs on just $3 billion of US imports to China. That relieved markets at first, as stocks stabilized. But those Chinese tariffs weren’t in response to Trump’s latest targeting of China. They were in response to the steel and aluminum tariffs Trump announced on March 8, which were much less significant. China is now waiting to see which of its products will be subject to the new 25% tariffs, with a list due by April 6. At that point or soon after, another set of tariffs from China is virtually certain—and it will probably apply to a lot more than $3 billion worth of US imports.
“It’s guaranteed there’s going to be another announcement, and it’s guaranteed it’s going to be much larger than what China just announced,” says Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for International and Strategic Studies in Washington. “The message from China is that it’s not going to be cowed into submission by American threats, and that it can outlast the United States in any trade war.”
Trump’s tariffs are meant to address a problem many trade experts agree is legitimate: China has, in fact, cheated on trade deals in many ways. The government subsidizes many firms that compete globally, allowing them to offer products well below market value. China often requires western firms to share key technology as a condition of doing business in China. It also resorts to outright theft of trade secrets from companies in developed nations.
But experts don’t agree that unilateral tariffs, imposed by the United States alone, are the right way to address the problem. One of the main reasons is that tariffs invite retaliation. The United States has a large trade deficit with China—which apparently drives Trump crazy—but American companies still export $130 billion worth of goods and services to China each year. Those producers are now vulnerable to tariffs that will make their offerings more expensive in China and cut into sales.
Trump’s steel and aluminum tariffs have become something of a sham, which may offer insights into the way his China tariffs evolve. Trump’s initial idea was to hit all steel and aluminum imports with a tariff. But in his official announcement, he exempted Canada and Mexico from the tariffs and said other importers could apply for exemptions. The Trump administration has now issued exemptions for 67% of all steel imports and 55% of all aluminum imports, according to the American Action Forum. That obviously weakens the protection those tariffs were supposed to offer to domestic steel manufacturers. As a result, US Steel’s (X) stock has plunged 23% since the day Trump announced the tariffs. Nucor’s (NUE) stock is down 9%.
Going after a lot of American producers
One country not likely to get an exemption from the steel and aluminum tariffs? China. Steel imports into the US from China totaled $1.1 billion in 2017, according to S&P Platt’s, while aluminum imports from China totaled $3.3 billion—for $4.4 billion, combined. So new Chinese tariffs on about $3 billion worth of US imports is of magnitude similar to the US action that preceded it.
Instead of targeting a couple of key industries, as the United States did, China spread its $3 billion in tariffs across dozens of product categories, affecting American producers throughout the country. “The purpose of choosing those specific products is they will touch a lot of small American producers, all of whom will complain to the media and the US government,” says Kennedy. “They’re trying to create broader anxieties in the American economy about continuing this trade action.”
If forthcoming Chinese tariffs are proportional to Trump’s duties, they’ll have 15 times of the tariffs China just announced. That’s the trouble markets are bracing for. Once China retaliates, Trump will have to decide whether to raise the stakes further with additional tariffs, or explain away whatever harm comes to American exporters and leave it at that.
Trump, for all his tough talk, may not appreciate one particular Chinese advantage, should broader trade wars develop: China can probably endure a lot more pain than the United States. China, after all, is essentially a dictatorship in which the government controls the media and much of the economy. The United States is not, obviously, and the stock market will render prompt and unfavorable judgment on Trump’s tariffs if a trade spat mushrooms into something more like a war. It might be prudent to prepare for collateral damage.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman