On Sunday, President Trump tweeted an escalation to his trade war with China, warning tariffs would more than double, from 10% to 25%. By Tuesday, stocks were sent tumbling, and companies scrambling. The Dow Jones Industrial Average dropped 472 points Tuesday, it’s worst day in four months. Grain futures hit their lowest mark in more than 40 years. Companies weren’t given much in the way of warning, with tariffs due to increase Friday. They’ll have to decide whether to eat the tariffs themselves or pass the costs on to consumers.
Trump’s escalation comes amid a five-month truce between the world’s two biggest economies, and as the U.S. and China appeared close to a deal. However, Administration officials say China has been backtracking from earlier commitments. In a Washington Post op-ed, former chief strategist Steve Bannon urged the president to “follow his instincts and not soften his stance against the greatest existential threat ever faced by the United States.” Trade advisor Peter Navarro, and others, see no deal as preferable to any deal, and some fear the president will cave, again.
Every action has an equal and opposite reaction, so Beijing played hardball this week as well. State-run newspaper, People’s Daily, warned the U.S. they would not back down in the face of Trump’s threats. “When things are unfavorable to us, no matter how you ask, we will not take any step back. Do not even think about it,” an editorial stated on Tuesday. Reports indicate that President Xi Jinping vetoed concessions proposed by his negotiators. Vice Premier Liu He will fly to Washington for last-minute talks on Thursday, however.
American producers and consumers are already feeling the heat from Trump’s tariffs, and retaliations from Beijing. This is particularly true in Republican-leaning areas, by design. For instance, consumers coughed up an extra $82-92 apiece for washers and dryers, one of the first sets of products subject to protective tariffs. Trump’s steel tariffs have cost an estimated $900,000 in extra costs per job saved. Agriculture has been especially hard hit— China stopped buying soybeans entirely. An escalated trade war could hurt the economy and put the president’s re-election at risk.
Businesses, bankers, and investors are bracing for the worst on Friday. “Fasten your seatbelt and don’t hold your breath,” Bank of America wrote on Monday. Still, this president is nothing if not unpredictable. A trade truce with Beijing seemed unlikely, until it happened in December. Staying in office is the top priority for any politician, so President Trump may yet bow to political, if not electoral pressure. The economy is his best asset going into the 2020 election, something Chinese negotiators understand as well.