The US trade war with China was elevated to the next level last Friday when the US President raised tariffs and suggested China made changes and pulled out of some promises. China has now countered with a retaliatory move on US goods which resulted in US equity markets coming off hard – very hard.
The Trump administration still hopes it can salvage a trade agreement but both the US and China are now taking strong stances that will not change overnight. President Trump is now looking past China and suggests that he will not spare Canada, Germany and Mexico with regards to the 25% tariff on goods imported to the United States.
China shot back at the US by adding 25% to $60 billion of US goods exported to China which includes oil products as well as agriculture and other goods. Trump has already threatened to put 25% on $325 billion, which passed the Friday deadline – but have not been applied as yet. The President said he has not decided whether to levy the duties.
The Dow sell-off, now down 1,200 points since President Trump announced tariffs hikes last week, has damaged companies that are doing business in China. Names like Intel, Apple, and Caterpillar all dropped by more than 10 percent in US trading since May 5 when Mr Trump sent out a tweet about tariffs. This 1,200 points equates to 4% which is a strong drop – the concern is further falls in stocks.
We at Classiarius still feel that the trade war has structural issues that cannot be fixed in 2019 nor 2020, it will take years of negotiations. China will likely announce increases in imports of US goods but such announcements will be temporary fixes and not long-term solutions to this problems. The US trade deficit with China is over $500 billion and is only slowly tilting back to the US – it will take years to correct this imbalance.