Yesterday, President Trump ordered his administration to consider tariffs on $100 billion worth of Chinese imports. The Trump administration had already hit $50 billion worth of Chinese goods with 25% tariffs earlier this week. This is set to worsen the China trade dispute.
The Chinese government is also turning up the heat in the trade spat. Beijing responded with tariffs on $50 billion worth of US imports.
There hasn’t been an official response from Beijing to President Trump’s newest tariff proposal. Government offices are closed today for a national holiday in China.
However, China’s state news agency Xinhua announced on Friday that Beijing is committed to defending its interests “against new U.S. actions.”
That means the Chinese government’s response won’t come until Monday at the earliest. At this point it seems unlikely that Beijing will back down.
China-US trade tensions have scope to rise further
China cannot match President Trump’s proposed tariffs with tariffs of its own. China imported about $130 billion worth of US goods last year. Beijing has already proposed tariffs on $50 billion on those imports. That only leaves about $80 billion worth of goods that can be hit with tariffs.
However, the Chinese government does hold about $1.2 trillion worth of US Treasuries as part of its foreign exchange reserves. It could deploy this as a bargaining chip in its trade dispute strategy.
Finally, the United States imported about $506 billion worth of Chinese goods. The Trump administration has proposed $150 billion worth of tariffs on Chinese goods. So, the US government can target another $356 billion worth of goods with additional tariffs.
Accordingly, there is still scope for a sizable escalation in trade tensions. Moreover, a full-blown trade war remains a distinct possibility.
Markets showing signs of stress as China trade dispute worsens
This flurry of activity happened after the US markets closed on Thursday. However, the markets have taken note and the futures for the Dow and S&P 500 are down 1.15% and 1.00%, respectively as I write this.
The US versus China trade dispute devolving into a full-blown trade war is a potential game changer for the world economy and financial markets. A major trade war could easily plunge the world into recession.
Many large investors prefer to get out of markets heading into the weekend when headline risk increases. Accordingly, investors should get ready for a hectic trading day and may want to consider closing positions ahead of the weekend.