U.S. President Donald Trump has a reputation as a tough negotiator, and his latest move to raise the ante on tariffs with China makes that abundantly clear.
As the talks between the U.S. and China to end the current trade war that the countries are involved in have progressed, President Trump had shown uncharacteristic patience, at least until Sunday. Not so long ago, he held off on his plan to raise tariffs on Chinese imports, provided that the talks moved along, but that’s fully back on the table now.
Trade deals are complex enough, but when the deal is between two economic superpowers such as the United States and China, and when there are some big issues that need to be resolved by any successful agreement, this is bound to take a lot of time.
Some trade negotiations take years to resolve, and some just don’t get resolved at all. There is a lot to talk about, and the sides will tend to not want to give up what they see is too much, especially Donald Trump, who even seems to enjoy being tough to deal with and has his reputation to uphold.
If there has been a sense of urgency to get this deal done, it hasn’t been very apparent. While we have had reports that things are indeed progressing at least at a minimally satisfactory level, Trump no longer things so and is ready to escalate the war on Friday.
Trump Raises the Stakes
Trump’s current plan is to look to put more heat on the Chinese by raising the rate on the $200 billion worth of tariffs from the 10% that were put in place as the ante in this poker game to 25%. If that were not enough, he’s also threatening to slap a 25% tariff rate on $325 billion worth of Chinese imports that aren’t currently taxed.
$50 billion worth of high-tech goods were already getting taxed at 25%, but the new plan is to greatly increase the scope of all this, to a total of $575 billion at the 25% rate, presumably to help motivate China to give more up at the table.
By reading Trump’s remarks, we might think that this money is coming from China, although that’s not how tariffs work. It is American consumers that pay these tariffs, money that flows from their pockets directly into the U.S. Treasury.
The President would argue that these Chinese imports are underpriced for various reasons, and the tariffs raise their sticker price and allow American-made goods to be more competitive, but this only matters if the price on the imports goes up so much as to give a price advantage to the U.S. goods that would be bought instead.
People would then bear the burden of paying an uncompetitive price for domestic goods when they do this, essentially taking money out of their pockets and giving it to the American producers and their supply chain.
This is seen as a good thing by a lot of people, especially Trump and his camp, but this leads to a lot of inefficiency, because people end up paying more than they would otherwise in a free market. The effect here is similar to what we see with monopolies, only spread out among a lot more companies. Often times though, people just buy the imports anyway, which ends up just leading to a new form of tax, as pure of a tax as you will ever see.
Trump has expressed his pleasure with the revenues raked in from these tariffs, but this is not found money by any means, and it all comes from additional domestic taxation. A more proper way to describe this is that they are planning on raising the additional tax that Americans pay for these Chinese imports from 10% to 25%.
Both situations serve to punish not only the Chinese but the American consumer as well, who actually takes the brunt of the blow. This should not be popular at all if people understood things properly. Trump is probably hoping that this will help and not hurt his chances of re-election in 2020, and it just might, given that so many people mistakenly think that Trump is helping us here in the short term. It might help in the long run but we need to be clear about our paying a price for this, and a pretty big one.
The pain doesn’t just end with Trump’s tariffs though, as countries don’t take such things sitting down, meaning an escalation of counter-tariffs by the Chinese. This end of the stick is pointy as well and while this does punish Chinese consumers in the same way as American tariffs punish Americans, the counter-tariffs also punish American companies by reducing exports to China.
In Trade Wars, Both Sides Lose the War
Trade restrictions like this are a lose-lose situation, as they clearly hurt both sides, and their only real value is to be used as a pressure tactic to get a better deal at the negotiating table. Trump’s original tariffs were influential in getting the two countries to more seriously look to hammer out a new deal, but at the same time, China isn’t some small country who can be pushed around like some countries can, and they especially don’t like to be intimidated.
This is the battle of the titans in fact, the world’s two largest economies doing battle head-to-head, with trillions of dollars on the table. It may have been wiser for Trump to have just threatened to increase tariffs if more progress is not made soon, but he decided to take action this coming Friday instead.
We learned this on Sunday, and by the time the futures market opened on Sunday evening, Trump’s tweets earlier in the day caused indices to gap down big. Almost 500 Dow points simply vanished, and we stayed around this range for the rest of the night.
When the NYSE opened on Monday morning, we were still down the 500 points. The New York market did not take this anywhere near as seriously as the off-market futures traders did, and we spent the rest of the trading day recovering, bolstered by news that the Chinese were still coming to Washington for more talks as planned.
By the time the trading day was over, we had gained back all but 66 of these lost Dow points, with the Dow only losing a quarter of a percentage on a wild day. The other two major indices pared their losses to only around a half a point, so overall, while this was a negative day, it wasn’t that bad.
After the bell, we heard more from the American camp that things weren’t going as well as we thought with the negotiations, so this wasn’t just a pure negotiating ploy, and there really may have been a need of sorts to turn up the heat or do something different. We may have even hit an impasse such as what we saw with the Trump/Kim talks where serious movement may be needed to get things moving toward a conclusion more.
While the initial damage from this news was nowhere near as bad, we did see over 200 points disappear in a few minutes once this further news hit the street. This took away almost half of the recovery that the regular session mounted.
The news is in though so it’s not a matter of this being put into place doing a lot more damage, as the threat priced most of this in within a blink of an eye at 6PM ET on Sunday night. We’re still a fair bit higher than we were then, which is pretty typical when these stories hit, the ones that cause panic that is. The panic wanes, and some people see the lower stock prices as a good deal, ones that may not be so concerned about the story du jour, or ping-pong matches between Trump and the stock market, but are instead focused on periods of time of a much longer duration.
This money still seems to be on our side though, as it has been throughout 2019, but if things get even worse, this could change and then we’d see what a real pullback looks like again.
We did get another taste of just how important the markets see this deal, where merely rumors of struggles are enough to move prices like nothing else has lately. None of this indicates that a trade deal won’t be reached, and in fact, this all may make it even more likely to get done and sooner as well. It could also skew things more toward failure, which is the concern.
In the meantime, we’ve at least been given a much better glimpse into these negotiations, and people will continue to watch the situation closely and not hesitate to act on any meaningful tidbits that we will continue to pick up along the way.