The Trade War between China and the US has escalated in a war of words and tariffs. Last Friday the market sold off because of increasing tariffs and inflammatory tweets. China announced new tariffs of 5% and 10% on $75 billion worth of US goods and 25% tariffs on imported autos. Trump countered by announcing retaliatory measures and raising current tariffs on $300 billion of goods from 10% to 15% effective September 1st, as well another $250 round of tariffs expected raised from 25% to 30% effective October 1st. This latest round of tariff escalation caused a 3% down move across the broader indexes on Friday and worries that a trade deal isn’t in the near future.

Trump Tweet Caused a Market Sell Off

Trump’s anti China rhetoric flared on Twitter and stoked investor fears of additional trade war escalation. Trump stated US companies should leave China and repatriate factories stateside, while emphasizing the US economy would be better off without China. The market didn’t like this and market pundits have come to the conclusion a trade deal may not be in the near future and the best we can hope for is no additional escalation.

Trump Tweets

Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far…. ….better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing… …your companies HOME and making your products in the USA. I will be responding to China’s Tariffs this afternoon. This is a GREAT opportunity for the United States. Also, I am ordering all carriers, including Fed Ex, Amazon, UPS and the Post Office, to SEARCH FOR & REFUSE,….

Trump Twitter

Fast forward to Monday, Trump makes a strong claim at the G7 that China contacted his administration and they are willing to restart negotiations. At the G7 press conference with French President Macron, Trump was being very adamant that the Vice Premier of China had direct talks with his administration. Chinese officials denied this claim and said they never contacted the Trump administration. The claim of trade talks resuming shot the market up 1% on Monday and was a big reversal from S&P 500 futures indicating a 300 plus point fall for the Monday open.

World Markets Are Down MTD

It appears Trump is losing negotiating ground in the trade war, as it becomes more apparent China’s tolerance for pain is much higher and longer. China isn’t constrained by term limits and their leadership have the ability to wait out an election cycle or two and negotiate better terms with a different administration. They have also used currency devaluation as a countermeasure to make their exports look more attractive to foreign buyers. The US Dollar and Chinese Yuan depreciated an additional 1% since the currency pair broke a critical $1 to 7 reminbi level.

We are heading into an election year and Trump’s success or failure will be determined by how the economy is doing heading into election day. If he doesn’t get a deal done with China and escalates this trade war further, he will drive our economy into a period of slowing to no growth. All this while China sits back and waits for election season to roll around in the US. Meanwhile, China’s currency depreciates further and trade swings more in their favor.

Yuan Devaluation
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