- Markets Insider
- President Donald Trump seems poised to continue to escalate trade tensions with China.
- The White House said in a statement Thursday night that Trump was considering adding tariffs on $100 billion more in Chinese goods annually.
- Trump earlier this week proposed tariffs on $50 billion in goods, raising the potential total to more than $150 billion.
- China vowed to retaliate, saying Friday that the country would not rule out any options.
- Markets were jolted by the developments, with the Dow Jones industrial average dropping close to 600 points.
President Donald Trump on Thursday night threatened another escalation in a rapidly escalating trade battle with China, which then vowed to retaliate.
The developments jolted global markets. The Dow Jones industrial index dropped more than 700 points at one point Friday afternoon. It ended the day about 570 points down. Industrial stocks like Caterpillar and Boeing were among the Dow’s hardest hit, with shares of both companies declining more than 3%.
The White House said in a statement Thursday night that Trump was considering new tariffs on $100 billion worth of annual imports from China. That follows the Office of the US Trade Representative’s announcement earlier this week of plans for tariffs on $50 billion in Chinese products.
“In light of China’s unfair retaliation, I have instructed the USTR to consider whether $100 billion of additional tariffs would be appropriate under section 301 and, if so, to identify the products under which to impose such tariffs,” Trump’s statement said.
Responding on Friday, China’s ministry of commerce said it would immediately retaliate if the “arrogant” US imposed the sanctions. It said the country would not rule out any options.
On Tuesday, the US trade representative announced a list of roughly 1,300 Chinese goods worth $50 billion annually that would be subject to new US tariffs, which function as taxes on imports. The US also previously announced tariffs on Chinese steel and aluminum.
China responded to this week’s plans by announcing tariffs on $50 billion worth of American goods, including soybeans, the largest agricultural export to China from the US.
The tariffs would have consequences for a wide swath of American consumers and businesses.
The USTR has said the measures are retaliation for Chinese intellectual property theft. But they could also have serious consequences for businesses that use the goods from China – as well as consumers who buy those goods.
Larry Kudlow, Trump’s top economic adviser, sought to calm markets Friday afternoon at the White House, to little apparent avail. He said the US was not in a trade war with China.
What is a tariff?
- A tariff, in plain terms, is a tax on goods coming into a country.
- In the US, many tariffs are paid at the time of entry into the US via a customs broker or agent – along with other duties and fees that may apply to the import.
- The idea of a tariff is to push up the price of foreign goods to make the domestic alternative more attractive.
- In this case, Trump is attempting to get companies to use fewer Chinese goods and opt for items made in the US or imported from elsewhere.
Hans Mikkelsen, a Bank of America Merrill Lynch strategist, said the new taxes would shift the supply and demand for the various affected goods.
“International Trade 101 analyses the partial equilibrium effects of a tariff as driving a wedge between demand and supply curves, whereby the price goes up and the quantity down,” he said in a note to clients.
What does it mean for businesses?
- For many businesses that use Chinese goods to make their products, the cost to produce their items will increase.
- A more direct example comes from Trump’s recent tariffs on steel and aluminum imports. The Beer Institute – a trade group that represents beer manufacturers – said the 10% aluminum tariff would add $347.7 million in costs for American brewers.
- The higher costs could cause businesses to find other areas where they can save money, including in worker pay. Studies found that a steel tariff imposed by President George W. Bush in 2002 resulted in as many as 200,000 jobs lost in industries that use steel to make their products.