Stocks plunge on signs of trade war
Investors sell some of US market’s biggest winners — and NZ also feels the pain
Stockmarkets plunged around the world after US President Donald Trump slapped sanctions on goods and investment from China, and the Asian powerhouse economy retaliated.
The Dow Jones industrial average dropped more than 700 points as investors feared that trade tensions between the world’s largest economies would escalate.
In New Zealand the S&P/NZX 50 Index closed down 0.99 per cent yesterday afternoon.
Investors sold some of the US market’s biggest recent winners. Among technology companies, Microsoft fell 2.9 per cent, Alphabet, Google’s parent company, fell 3.7 per cent and online retailer Amazon slid 2.3 per cent. China has announced plans for reciprocal tariffs on US$3 billion ($4.2b) of imports from the US, including products from steel to pork, after the Trump Administration move to order levies on a range of Chinese goods. In a statement yesterday, hours after Trump instructed US Trade Representative (USTR) Robert Lighthizer to slap tariffs on at least US$50b in Chinese imports, China’s Commerce Ministry said it plans a 25 per cent tariff on US pork imports and recycled aluminium, and 15 per cent tariffs on American steel pipes, fruit and wine.
China will also pursue legal action against the US at the World Trade Organisation, the statement said, and called for dialogue to resolve the dispute.
Trump signed an executive memo instructing Lighthizer to come up with a proposed list of products that will face higher tariffs within 15 days. The move sent US equities tumbling, with the Dow Jones Industrial Average falling 724 points, almost 3 per cent, its biggest drop in six weeks. Futures signalled losses greater than 2 per cent on Japanese indexes.
“This is an opening gambit by China, signalling that the imposition of tariffs by the US will elicit what Beijing views as a proportionate retaliatory response,” said Eswar Prasad, a former chief of the International Monetary Fund’s China division and now a professor at Cornell University in Ithaca, New York.
“China has the ability to inflict significant economic harm on US exporters of certain goods and can also use other overt as well as covert actions such as supply chain disruptions to hurt US manufacturers.”
The US will impose 25 per cent duties on targeted Chinese products to compensate for the harm caused to the American economy from China’s policies, according to a fact sheet released by USTR. The proposed product list will include items in aerospace, information and communication technology and machinery. USTR will announce the proposed list
If Trump really signs the order, that is a declaration of trade war with China. Wei Jianguo, China Centre for International Economic Exchanges
in the next “several days”, according to the fact sheet.
“This has been long in the making,” Trump said, adding that the tariffs could affect as much as US$60b billion in goods. “We have a tremendous intellectual property theft situation going on” with China affecting hundreds of billions of dollars in trade each year, he said.
As he signed the tariffs order, Trump told reporters, “This is the first of many.” China’s Ministry of Commerce has cautioned against the US taking measures “detrimental to both sides”.
The nation strongly opposes such unilateral and protectionist action, and will take “all necessary measures” to firmly defend its interests, the ministry said in a statement on its website.
“If Trump really signs the order, that is a declaration of trade war with China,” said Wei Jianguo, former vice commerce minister and now an executive deputy director of the China Centre for International Economic Exchanges, a governmentlinked think tank.
“China is not afraid, nor will it dodge a trade war,” Wei said. “We have plenty of measures to fight back, in areas of automobile imports, soybean, aircraft and chips. On the other hand, Trump should know that this is a very bad idea, and there will be no winner, and there will be no good outcome for both nations.”
Chinese Premier Li Keqiang said this week that the nation will further open its economy, including the manufacturing sector, and pledged to lower import tariffs and cut taxes. In opening manufacturing further, China won’t force foreign companies to transfer technology to domestic ones and will protect intellectual property, he said. Bloomberg Economics estimates a global trade conflagration could wipe US$470b off the world economy by 2020.
Policy makers across the world are warning of a brewing trade war that could undermine the broadest global recovery in years. Meanwhile, business groups representing companies ranging from Walmart to Amazon.com are warning US tariffs could raise prices for consumers and sideswipe stock prices.
Even central banks, which normally stay above the fray of trade spats, are weighing in.
“A number of participants reported about their conversations with business leaders around the country and reported that trade policy has become a concern,” Federal Reserve Chairman Jerome Powell said this week, while cautioning that trade issues haven’t changed the Fed’s outlook.
The Bank of England warned that increased protectionism could have a “significant negative impact” on global growth.
Trump also directed Treasury
I just worry if it gets really ugly, they may go for the nuclear option. Robert Manning, Atlantic Council in Washington
Secretary Steven Mnuchin to propose new investment restrictions on Chinese companies within 60 days to safeguard technologies the US views as strategic, said senior White House economic adviser Everett Eissenstat.
This followed a seven-month investigation by USTR into allegations China violates US intellectual property, under the seldom-used section 301 of the 1974 Trade Act.
The initial Chinese response may not be as severe as many fear but the conflict could easily escalate, said Robert Manning, an expert on USChina relations at the Atlantic Council in Washington.
“What you’re probably going to get from the Chinese is a low-key response to try to negotiate their way out of it,” Manning said.
“I just worry if it gets really ugly, they may go for the nuclear option.” He that option would be to sell a “couple hundred billion” in US Treasuries, which would tank markets and raise US interest rates.
Trump tried to make it clear he wasn’t trying to provoke China or its leader, President Xi Jinping. “I view them as a friend. I have tremendous respect for President Xi,” Trump said.
But, the US’ trade deficit with China is “the largest deficit in the history of our world”, he said.
The President’s action brought rare praise from Senate Democratic Leader Chuck Schumer, ordinarily a foe of the Administration.
The President is “exactly right” to pursue the tariffs, Schumer said.
“I want to give him a big pat on the back,” the New York senator added. “I’m very pleased that this Administration is taking strong action to get a better deal on China.”
Trump’s actions represent a “seismic shift from an era dating back to Nixon and Kissinger, where we had as a government viewed China in terms of economic engagement”, said White House trade adviser Peter Navarro.
“That process has failed,” Navarro said. “The problem is that with the Chinese in this case, talk is not cheap. It has been very expensive for America.”
The Trump Administration is also increasingly signalling it will exclude allies such as the European Union and Brazil from tariffs on steel and aluminum, suggesting the US is more interested in raising pressure on China, the world’s biggest producer of both commodities.