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Trump warns China not to retaliate against tariff hike

14 May 2019

The Dow Jones Industrial Average opened down some 500 points, and was down 2.2% by midmorning. Similarly the Standard & Poor's 500-stock index had seen a drop of 2.5 percent, the Nasdaq Composite fell by 3.5 percent and 10 out of 11 market sectors were in negative territory as of 12 p.m. ET, with the only exception being utilities. What's more, Bank of America estimates that lower tax bills overseas account for about 0.7 percentage points of the margin increase.

The tech-heavy NADAQ stock index was down 1.3 per cent in early morning trading.

"Investors are increasingly anxious an anticipated second-half profit rebound may now evaporate as President (Donald) Trump's threat to tariff the remaining US$325 billion in Chinese imports would disproportionately target consumer products like iPhones, thereby posing a greater threat to the consumption-driven U.S. economy", said Alec Young, managing director of global markets research at FTSE Russell.

The result has been a volatile week-long roller coaster with no end in sight.

Last Thursday morning the Dow skidded 580 points, only to regain almost 470 by close of trading on Friday.

Following the latest US move, China's Commerce Ministry said it "deeply regrets" the tariff rise and would take "necessary countermeasures".

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Last week, the Trump administration raised to 25 percent - from 10 percent, previously - tariffs on a range of Chinese imports whose value totaled $250 billion past year.

China has announced tariff hikes on US$60 billion of United States goods in retaliation for U.S. moves. Yet now, planting soybeans with the overabundance already in bins and scant hope for sales to one of the biggest buyers in China, could raise the risk of a financial disaster.

Commenting on Twitter, Trump warned China to cut a deal soon or face even further damage. "It was 95 percent there and then my representatives, as you know, Secretary [Steve] Mnuchin and Bob Lighthizer, Ambassador Lighthizer, they went to China, and they were told the things that were fully agreed to we're not going to get anymore, they're going to unagree to them", Trump explained.

The president said Monday that that's not inevitable.

That's true to some extent, but China has a lot more manufacturing capacity than, say, Vietnam.

The "points" are a reference to the percentage increase in tariffs on Chinese goods, from 4 per cent to 25 per cent, compared to a more modest tariff hike the Chinese have recently enforced in the other direction.

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The president also introduced a new argument that consumers can avoid the tariffs by buying non-Chinese goods.

China targeted the most vulnerable agricultural industries early in the trade war, hitting soybeans and pork with high tariffs in the spring and summer of 2018. Thanks to modernized and streamlined investment laws, it is now easier for foreign companies to do business in China than at any time in contemporary history.

However, Beijing has apparently ignored the USA president's threat that the escalating trade war between the world's two biggest economies "will only get worse!".

Many companies including American ones are opening new production and distribution facilities in China so that they can sell directly to Chinese consumers.

The White House is also determined to impose a cost on Beijing for not clamping down on its own companies selling counterfeit products that knock off American brands.

Still, the two countries have given themselves something of an escape hatch: The higher Chinese tariffs don't kick in for 2½ weeks.

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Kudlow claimed that "both sides" would pay, saying that "Chinese will suffer GDP losses and so forth with respect to a diminishing export market and goods that they may need".

Trump warns China not to retaliate against tariff hike