US-China Trade War Resumption Poses Biggest Risk to Markets

The resumption of the trade war between the US and China poses a threat to the impressive market rally this year.

The S&P 500 dropped 2.2%, and the Dow Jones fell 2.1% within a week after US Pres Donald Trump followed through his proposal to hike tariffs on Chinese goods. The US increased the rate by 25% on some Chinese products valued at $200 billion.

Chinese officials have threatened to retaliate. The Chinese Commerce Ministry recently said in a statement that the worsening of trade tension does not benefit the two countries and the rest of the world.

Both sides are still engaged in negotiations. Larry Kudlow, Trump’s chief economic adviser, said a meeting between Trump and Chinese Pres Xi Jinping would most likely take place at the G20 economic summit in Japan.

Kudlow claimed that the trade talks had been proceeding well until Chinese officials backtracked two weeks ago. The President, who has been very optimistic about the progress in the negotiations, renewed his tariff threats after advisers told him the Chinese were changing their stand on some crucial elements of the potential deal.

Kudlow admitted US companies would also pay in the tax increase which is usually passed on to consumers, which was contrary to Trump’s suggestions that only the Chinese will pay the US-imposed tariffs. He added that “both sides will pay” as the economies of both nations will feel suffer some impact from the duties.

Meanwhile, some influential members in the ruling Communist Party in China have been calling for rethinking China’s overall strategy on the US, which they believe is the most important foreign relationship for the country and one that could shape its future economic direction.

One of them is Li Ruogu, China’s central bank former vice president. At a forum, Li said Beijing should consider America’s thinking more and adjust its policies to maintain the China-US relationship, which he believes is the cornerstone of its overall relationship with the West. He further warned that China’s failure to manage the talks carefully might affect its ties with other developed countries.