The trade war between the United States and China is escalating. This increase has gone on to raise intense backlash from Wall Street and the international community. The US Trade Representative, Jamieson Greer, announced that the administration is currently engaging in discussions with approximately 50 countries to address various trade-related matters. This action further realizes one of President Trump’s core aims — to change the rules of trade. It is narrow in scope, explicitly targeting non-tariff barriers that impede US exports.
Whether from coast to coast, the new administration is playing the stormy seas at the moment. Now several financial heavyweights, such as Goldman Sachs and JPMorgan Chase, are predicting that an escalation of the current trade conflict could send both the US and world economies into recession this year. In addition, these warnings have raised investor concerns, creating a risk averse market atmosphere.
White House’s Tariff Strategy
Here are three pieces of advice for avoiding common pitfalls and maximizing the potential of your Executive Order, straight from the White House themselves. According to news reports, all Chinese imports might be subject to tariffs of at least 104%. Needless to say, China is incensed about this move. In a sign that no compromise is coming, the Commerce Ministry yesterday reiterated its vow to “fight to the end” in the escalating trade war.
Amid these developments, Kevin Hassett, Director of the National Economic Council, noted that the administration is managing “a massive number of requests for negotiations” from various nations. This indicates a concerted effort by the White House to not only address tariffs but engage with allies to create a more favorable trade environment.
Greer pointed to the administration’s commitment to good faith negotiations. In addition to embracing the president’s plan, he said, “We need to accelerate discussions—now—with our partners in the administration.” This approach would go a long way toward defusing some of the tensions caused by foreign regulations that interfere with and even prohibit US exports.
Wall Street’s Reaction
Investors had been keeping a close eye on tweets and other pronouncements from the White House, looking for signs that would suggest trade policy somewhere could change. As more uncertainty becomes clear, market participants have understandably responded with caution. The VIX index, Wall Street’s fear gauge, rose 5%, a sign of increased anxiety among traders.
Jamie Cox, managing director at Harris Financial Group, commented on the market conditions: “The market is wound up for a face-ripping rally.” This feeling is indicative of the nervousness that has embodied these last few turbulent trading days. On a related note, Michael Block of Third Seven Capital had some interesting commentary on how easily positive news—no matter how small—can move the markets. As he noted, yesterday the market participants were able to rally the markets by full percentage points within hours. This increase was driven by the mere expectation of ‘good news.’
Right now companies in the S&P 500 are trading at historically low price-to-earnings ratios, when they close below 17. For some investors, this represents a perfect opening to pick up shares they feel are undervalued. In his recently released annual letter to shareholders, Jamie Dimon, the CEO of JPMorgan Chase, expressed his concerns about Trump’s tariffs. He further cautioned that these tariffs would increase consumer prices and hurt the global economic recovery.
Global Implications
The effects of US-China trade tensions reach far beyond US borders. The European Union said it is prepared to match US offers and negotiate with the United States. They’re looking to boost their imports of U.S. liquefied natural gas. This willingness to compromise and negotiate reflects a recognition of the possible economic catastrophe coming from ongoing trade wars and other unresolved trade conflicts.
Peter Navarro, Trump’s chief trade adviser, provided the most rose-colored take on the market’s course. He told some people it’s “finding the bottom now.” He expects the recovery will begin with defaulting companies, like those in the S&P 500, coming out of recession first. Navarro asserted confidence in the future economic landscape: “Dow 50,000. I guarantee that and I guarantee no recession.” His statements show a strong departure from the doom and gloom otherwise expressed recently by other financial executives.