The stock market dropped 470 points on Tuesday following news that the Trump administration would likely be drastically raising tariffs on Chinese goods.
U.S. Trade Representative Robert Lighthizer told reporters that the U.S. will increase tariffs on Chinese imports on Friday.
The chaotic week for the market began on Monday when President Trump announced that the U.S. would be placing a 25% tariff on Chinese goods and add tariffs to $325 billion in other goods.
On Monday, Trump tweeted, “The United States has been losing, for many years, 600 to 800 billion dollars a year on trade. With China we lose $500 billion. Sorry, we’re not going to be doing that anymore.”
The news that China and the U.S. may not come to an agreement by the week’s end rattled the markets.
According to Keith Parker, a strategist at UBS, “A full-blown trade war would shave off 45 basis points from global economic growth, while China’s GDP would take a hit of between 1.2% and 1.5% … we still see a trade war as low probability given the next tranche of tariffs would hit US consumer goods, nevertheless it would have a big negative impact.”
There is still an outside chance that a deal may be made. According to economists at Barclays, the potential deal may rest on the appearance of one man: Chinese Vice Premier Liu. They wrote, “All eyes will be on how China responds … an absence of Liu in Washington D.C. would raise the likelihood of the 25 % tariff hike being implemented by the U.S. this Friday, in our view, while it is also possible that President Xi may call President Trump directly, which could prevent the tariffs from being raised.”
As I wrote yesterday, trade wars are dangerous.
Tariffs serve as a tax on both countries and raise costs for consumers.
For example, in 2002, former President George W. Bush placed a 30% tariff on Chinese steel — the results were a calamity for American workers. According to the Consuming Industries Trade
Action Coalition, the tariff resulted in the loss of 200,000 jobs in businesses that buy steel. This led to $4 billion in lost wages and the loss of more jobs in these industries than there were people employed in the entire steel industry.
Contrary to popular belief, the U.S. does not get most of its steel from China — in fact, it’s not even in the top 20. The U.S. imports 90% of its steel from Canada. The U.S. is only the 26th largest market for Chinese steel.
It is true that tariffs can for a short time help industries. However, it comes at the expense of other industries. More expensive steel and aluminum make producing goods such as washing machines and cars more expensive.
Those costs are then passed on to consumers.
What Lies Ahead if No Deal Is Reached
If a deal is not reached by the end of the week, the results could be devastating. It is true that both countries have been in a small-scale trade war for the past year, however, this is a massive escalation in tariffs. Hopefully both countries can reach a deal that lowers tariffs and holds the Chinese accountable for their illegal trade tactics.