Donald Trump’s threat to increase tariffs on goods imported from China by the end of the week, and to expand those tariffs to cover billions of dollars in consumer goods, sent the stock market on a whirl on Monday. The threat came after months of Trump declaring that trade negotiations between the U.S. and China were making “great progress” and claiming that negotiations were very close to an end. China has responded by saying it will give “no more concessions” to Trump. The Dow Jones Industrial Average opened over 200 points lower on Tuesday, primarily over concerns about trade.
If Trump were to impose these tariffs, they would be a regressive tax, paid for by consumers every time they purchase imported shoes, clothing, or electronics. The resulting price increases also bring a risk for inflation. In addition, the trade war between the U.S. and China threatens to unravel the political balance around the world, with effects that can be felt from Venezuela to North Korea.
The threat from Trump didn’t just roil the stock market. According to CNN, U.S. businesses that depend on China for manufacturing or parts were thrown into confusion over the future of their supply lines. The tariffs stand to make costs higher for many companies on parts or products they have already sold to retailers or consumers, leaving them to absorb a tariff that can more than erase their total profit. Many traders had already factored a successful completion of the U.S.-China trade deal into their economic estimates; now they are working to factor it out.
Trump’s view of economics, international trade, and tariffs is not only extraordinarily simplistic—it can’t even be said to be a particularly conservative one. It’s just Trump’s view. And as The Hill reports, even Republicans are upset with Trump’s unpredictable approach to negotiation. Trump had been passing along the same “We’re almost there” message behind the scenes that he was providing in public, leaving senators and representatives blindsided by the sudden threat to increase the pressure.
And as the South China Morning Post reports, Trump’s threats are not generating any promise to compromise on the part of Chinese government negotiators. Instead, Chinese state media announced that China was done making concessions, “Things that are unfavourable to us, no matter how you ask, we will not take any step back. Do not even think about it.”
NPR reports that Trump’s erratic, tariff-heavy approach to negotiations has been so controversial that it has sparked arguments among Trump’s negotiating team—including arguments that were conducted in front of Chinese negotiators. Early Trump advisers, including Gary Cohn, left his team because of the disagreement over tariffs, but that doesn’t mean those advisers who remain feel that Trump is handling this negotiation well.
While the U.S. stock market recovered most of its losses after a Monday roller coaster, Markets Insider reports that the threats from Trump are continuing to ripple through world markets. The increased tension between the U.S. and China is driving a slump in world equity markets and raising the “fear gauge," as the VIX Index of market volatility is called, that signals concern about the global economy. The VIX has risen by 20% since Trump renewed his threats.
An inability to secure a trade deal, and an increasingly hostile relationship between the U.S. and China, provides little incentive for China to act in accordance with U.S. concerns on other issues. That includes continuing to apply pressure to North Korea, or restraining territorial claims in the South China Sea. It also includes dealing with Venezuela, where Chinese companies have made a profit, even if their projects have largely produced few results.
Trump has made his ability to deal with China one of his biggest issues since he first started his presidential campaign in 2015. At rallies Trump has repeatedly referred to the trade deficit with China as the United States “being raped.” Trump first imposed tariffs on $50 billion of Chinese products in June 2018. A month later, Trump added 10% tariffs on $200 billion more.
Since Trump imposed tariffs, the U.S. trade deficit with China has steadily increased.