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Understanding Trump and Escalating Chinese Trade War

Understanding Trump and Escalating Chinese Trade War
(Florin Seitan/Dreamstime)

By    |   Tuesday, 28 May 2019 12:10 PM

Earlier this May, President Donald Trump raised tariffs from 10% on $200 billion worth of Chinese goods to a hefty 25%. This move and its implications caused massive swings in the Dow Jones Industrial Average, including a fluctuation of over 500 points within just a few days of the news breaking.

The United States and China are two of the most powerful economic engines in the world. Their reach extends everywhere.

As such, these two countries have a lot of impact on the financial health of global markets. But given the uncertainty in the headlines and unpredictability we’ve seen on both sides of the negotiating table, what should average Americans expect from the trade war?

What Does President Trump Want?

Initially, President Trump threatened to raise tariffs on $200 billion in Chinese imports. This was one of the first major volleys in a long trade negotiation process. In more recent news, Trump has expanded on his threat and now considers applying 25% tariffs on all remaining imports from China as well; the value of these additional imports is estimated to be $300 billion.

One of the hallmarks of the Trump administration has been a strict approach to China as it relates to trade. Though Trump has said, “I love China,” the administration has shown a stark willingness to embrace a hard line in trade negotiations.

The goal: a great trade deal. That’s what Treasury Secretary Steven Mnuchin and trade representative Robert Lighthizer have been focused on with recent trips to China. However, as part of these negotiations, Trump appears willing to threaten the Chinese with U.S. leverage in an effort to draw out the best deal possible for American interests.

The U.S. is looking for a fair trade deal with China in which China agrees to free and open trade but with certain restrictions. One common complaint from American companies and officials is intellectual property theft, which is when Chinese companies “knock off” American brands. The U.S. is also looking for equitable tariffs so that American products sold in China would enjoy similar advantages to Chinese products sold in the United States.

The road to this “ideal” trade deal, however, is littered with landmines.

What Are the Likely Results?

According to the Atlantic, citing Lighthizer’s public announcements on the process, a successful negotiation process with China would yield some of the following results:

  • Strengthening intellectual property theft guidelines
  • Engaging the Chinese to purchase a wide variety of American goods, including soybeans and semiconductors
  • Altering the supply chains that have made Chinese labor so inexpensive for far-reaching global companies like Apple

Failing these milestones, both sides can use their leverage to raise tariffs on each other’s goods. Therefore, there would be an increase in taxes for U.S. products sold in China and vice versa. As both countries jockey for negotiating power, the potential of increased costs for consumers is making headlines.

What Does This Mean for You?

Progress in Chinese-U.S. trade talks tends to be better for the global economic outlook, which in turn is better for international market confidence. Depending on what happens, you can expect a broad range of effects:

  • Changes in the stock market. The markets have consistently demonstrated that good news on the trade front means higher stock confidence and bad news means stock sell-offs. One headline even claimed that President Trump “wiped nearly $1.5 trillion off global markets” after a single tweet. However, if a successful trade deal goes through, it could buoy the market for months and become one of the greatest accomplishments of Trump and his administration.
  • Fallout from the trade wars. Trade wars have the potential to affect us all. According to research firm Oxford Economics, heavy tariffs have a tremendous lagging effect on global economic activity. This gets passed down to the consumers, who notice that effect in terms consumer price changes (e.g. flights are more expensive since their component prices increased). Given the popularity of Chinese produced goods in the U.S., consumers notice when economic policy changes with China. According to Oxford Economics, China raising tariffs on U.S. imports 8% to 25% would reduce the gross domestic product of the U.S. by 0.3% in 2020—a significant change when applied to an economy as large as the U.S.

After President Trump threatened to raise tariffs on Chinese imports, the Dow Jones Industrial Average lost 600 points (2.4%) and that for the S&P 500 sank 70 points (2.4%).

Consumers and ordinary investors should expect similar shifts every time there’s a new headline as it relates to trade negotiations.

Although these drops in economic activity are concerning, the long-term financial gain of a new trade deal with China could have far-reaching benefits that significantly outweigh these initial tumbles.

Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.

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The U.S. is looking for a fair trade deal with China in which China agrees to free and open trade but with certain restrictions.
trump, chinese, trade, war
Tuesday, 28 May 2019 12:10 PM
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