The stock market reaction to the past week’s China trade war developments looks more than a little strange. Wednesday of this week saw a bout of selling after the Trump administration merely identified targets for potential tariffs, while last Friday’s rally came as the first round of Trump tariffs on China actually took effect, turning threats to war.
In June, President Trump had directed the Office of the Trade Representative to come up with a list of $200 billion worth of Chinese imports that could face 10% tariffs, and trade officials produced that list late Tuesday. The threat of escalating Trump tariffs became more tangible, but the likelihood of tariffs didn’t change.
The market acted like what happened Tuesday was an escalation of the conflict, when it simply reflected the wheels of bureaucracy turning.
Still, the market downdraft on Wednesday was fairly modest. Wall Street still seems to be betting that this round of Trump tariffs will never take flight and that China won’t escalate its retaliation against U.S. multinationals. We’ll probably know whether Wall Street is right within the next several weeks, as the White House prepares to impose the new tariffs by Aug. 30.
The key upcoming moment for the China trade war will be when Congress wraps up its national defense authorization bill, which is expected to happen by the end of July. That legislation is now the main hurdle standing in the way of Trump’s May pledge to Chinese President Xi Jinping to get ZTE “back into business, fast.”
Trump’s commitment to lift sanctions that amounted to a death sentence for ZTE seemed to break a logjam in U.S.-China trade negotiations. Soon after, Trump touted a prospective trade deal with Beijing, tweeting that “China has agreed to buy massive amounts of ADDITIONAL Farm/Agricultural Products” and Treasury Secretary Mnuchin said the China trade war had been put “on hold” amid progress in negotiations.
If Congress hews to Trump’s wishes and drops the Senate provision mandating a ban on U.S. firms doing business with the Chinese communications equipment firm, U.S.-China trade negotiations could quickly resume and begin to demonstrate progress.
Beijing refuses to negotiate under duress, so there is a real risk the China trade war will escalate with more rounds of Trump tariffs. But a U.S. reprieve for ZTE and its 75,000 global employees may allow Xi to resume negotiations without losing face, despite the Trump tariffs already in place.
Yet if ZTE gets a new lease on life and there isn’t a nearly immediate thaw in the China trade war and threats of more Trump tariffs continue to fly, look out.
This may be the last off-ramp before a full-scale trade war that threatens to seriously damage business prospects for U.S. multinationals in China and severely disrupt technology supply chains.
The U.S. imported $506 billion in Chinese goods last year, meaning about half of Chinese imports would be affected by Trump’s latest tariff threat.
As Trump threatens a full-scale China trade war, Beijing vows to meet the U.S, blow for blow.
While Chinese targets are somewhat limited by its $130 billion in American imports, Beijing has other ways to retaliate, and that’s one of Wall Street’s big fears.
Beyond tariffs, U.S. multinationals could face other significant hurdles in China. Beijing could make life difficult for Dow Jones stocks like Boeing (BA), Caterpillar (CAT) and Apple (AAPL) via regulations.
China’s government also could hit Boeing sales, and likely Caterpillar, through its state-owned enterprises that can sway the market. Meanwhile, Beijing has been holding up the Qualcomm (QCOM) takeover of NXP Semiconductors (NXPI).
The way things are going, there’s little reason to expect China to blink in the face of Trump threats. BMW said this week that it will shift some SUV production from South Carolina to China in the face of Trump tariffs. Meanwhile, China’s currency is losing ground vs. the dollar, counteracting the impact of Trump’s threatened 10% tariffs on a wide range of consumer goods.
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