It’s official: Donald Trump has escalated the trade war with China.
Last Thursday, in a characteristically derisive tweet, the President appeared to suggest that Steve Mnuchin’s efforts to negotiate with Beijing ahead of the expected imposition of duties on an additional $200 billion in Chinese goods were an exercise in abject futility.
“We are under no pressure to make a deal with China, they are under pressure to make a deal with us”, Trump said, before twisting a declarative into an interrogative as follows: “If we meet, we meet?”
Imagine if Ivan Drago had posed it as a question: “If he dies, he dies?”
On Friday, Bloomberg reported that Trump had already instructed aides to move ahead and those reports were confirmed over the weekend. On Monday afternoon, Trump said he would be announcing “something on China” after the market close.
Now, we have the official word from the USTR. The administration will slap a 10% tariff on $200 billion in goods starting on September 24 (so, next week). That rate will go to 25% starting next year.
“For months, we have urged China to change these unfair practices, and give fair and reciprocal treatment to American companies,” Trump said in a statement, adding the following:
We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly. But, so far, China has been unwilling to change its practices.
There was some debate ahead of the official announcement as to whether Trump would follow through on his threat to more than double the proposed tariff rate. That threat amounted to an escalation on top of an escalation, and was initially floated in late July, much to the chagrin of Beijing.
Early reports suggested the President had decided on 10%. The fact that he’s prepared to ratchet it up to 25% starting next year is doubly bad, both figuratively and literally. Literally in the sense that 25% is more than double 10% and figuratively because the timeline here clearly suggests that the White House doesn’t see (and perhaps doesn’t even want to see) a light at the end of this tunnel. It also appears to suggest that Trump will try and stave off a rise in consumer prices until after the midterms.
Do note that China has already promised to respond to this and they’ve already detailed how they’ll go about it. Unless something changes, this means that starting next week, Beijing will slap differentiated tariffs on some $60 billion in U.S. goods.
Two Fridays ago, Trump indicated that he would view any retaliatory measures as acts of aggression, perhaps justifying the imposition of tariffs on still more Chinese imports. That said, the fact that he’s taking a two-speed approach to the new duties (i.e., 10% tariff rate now, 25% starting later), makes it hard to see how he could apply levies to an additional list of Chinese goods without first ratcheting up the rate on the list associated with the duties announced on Monday evening.
In any event, this is obviously bad for risk sentiment and for markets, although it was well telegraphed. You can look forward to a lot of harshly-worded statements out of Beijing overnight.