US-China trade war sends US markets into free fall

US markets were in free fall last night as the trade war between the world’s two biggest economies notched up a level.

The Dow Jones Industrial Average fell by 639 to 25,309 by lunchtime US time after China retaliated yesterday to President Trump’s latest tariff hike on $200bn worth of goods with its own tariff increase.

Not to be outwitted, China hit back with tariffs worth $60bn.

The markets were not amused by this trade war escalation triggered after Trump claimed last Friday that Beijing ‘broke the deal’ the two sides had reached after reneging on earlier promises made a few months ago.

The markets didn’t like the new threat, with US indices falling to their lowest levels for two months. The ripple effect was felt across the globe with stock markets in the UK and Europe all closing down several percentage points.

In the US, it was the country’s biggest exporters that felt the heat: Boeing Co. and Caterpillar Inc. both fell more than 3%, while Intel Corp. and Nvidia Corp. lost at least 1.8%.

So did raw material prices as agricultural products are caught in the cross-fire of these two trading giants. Soybeans were down 2% while cotton prices fell by more than 3%.

In this latest round of tit for tat, China has raised tariffs on more than 5,000 US products, with the new rates ranging from 5% to 25%. Tariffs will be imposed mainly on basic foodstuffs from beef to cooking oil to tea and coffee.

China’s latest tariff increases followed the US the putting up tariffs on a wide range of Chinese industrial and consumer imports, ranging from handbags to railway equipment, hoping to make US products cheaper for shoppers.

As one market trader said: “What did on earth did Trump expect them to do? Of course the Chinese would retaliate. I’m surprised the markets are so surprised.”

And did President Trump really think they were going to take any notice of his tweet telling them not to retaliate? ”

Of course the Chinese took notice. As People’s Daily, the official newspaper of the Chinese Communist Party, announced: “No one should expect China to swallow bitter fruit that harms its core interests… and never surrender to external pressure.”

Quite. So what to make of this latest round in the trade war? Hard to tell who is winning so far, although it does look as though Trump has the upper hand. He doubled tariffs to $200bn while the Chinese responded with $60bn.

But that could just be for the hors d’ouevres. A more worrying question for the American administration is whether China will carry through with threats to sell US Treasuries. Now that would really hurt: 10-year Treasury yields were at their lowest levels since March.

There’s also a more damaging row brewing in the US surrounding the perception. Until now, Trump has been able to carry public opinion with him to carry out the trade war because of his claim that China’s trade surplus with the US is the result of unfair practices and theft of intellectual property.

Now there is infighting between Trump and his own economic adviser, Larry Kudlow, over the purpose of the war over the impact on consumers. Trump has denied that imposing tariffs will hurt US shoppers while Kudlow has warned that both sides will suffer.

Yet Trump is also now telling US consumers to buy products made by companies hit by tariffs which will be moving from China to Vietnam, or other Asian countries. Really? Does he expect shoppers to check the origin of their goods? That sounds like desperation. He needs to go back and reread the Art of the Deal, the book that made him a household name, before firing the next shot.

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