Just as the financial markets were beginning to the digest the first round of trade tariffs that were imposed, the U.S. President Trump kicked off the week announcing a new round of potential tariffs on imports from China.
This sent the markets into a nervous frenzy with risk appetite waning despite the fact that no one knows whether President Trump would follow through on his new threats to impose fresh tariffs on Chinese manufactured goods.
The fresh threats comes just a few weeks after news reports suggested that China and the United States were taking a reconciliatory tone against the first round of tariffs that were imposed on China which was later followed by China’s own tariffs on imports from the United States.
Furthermore, the steel and aluminum tariffs that were announced previously were underway after the one-month exemption expired against Canada, Mexico and the Eurozone.
The Eurozone, for its part has filed a complaint to the World Trade Organization against the United States. The latest threats of tariffs which could potentially amount to $200 billion worth of goods imported from China saw the markets giving a nervous reaction.
The reaction was best seen in the U.S. equity markets with the Dow Jones Industrial Average seen almost giving up the gains notched during the previous months of the year. The exception was the UK’s FTSE100 which gained while the Pound sterling hit a fresh seven month low.
Reports from the Financial Times showed that despite the threats, the U.S. administration was not actively seeking any talks with their Chinese counterparts. A senior member of the White House apparently said that after giving China nearly a year to discuss and address the U.S. complaints, failure to make any headway since a year resulted in no more discussions being planned.
The uncertainty comes just after China’s ruling party held its annual event earlier this year where promises were made to open up China’s markets including increasing foreign shareholders to a majority stake in key industries such as automobiles and insurance.
Economists continue to remain divided, but most agree that Trump is expected to play hard until the U.S. mid-term elections in an effort to put his “America First” campaign. However, this is also expected to put some of the key industries at risk.
India, which was also hit among other countries by the new tariffs retaliated by raising import taxes on luxury two-wheelers from the U.S. This was seen pushing some of the key stocks in the sector lower.
The uncertainty surrounding President Trump’s rhetoric on trade was also echoed by various central bankers, especially from the G7 economies. Almost all central bank chiefs including the U.S. Federal Reserve Chairman, Jerome Powell have cited the “trade uncertainty” as a key risk that could derail the central banker’s efforts towards moving their respective economies to an era of higher interest rates.
Mario Draghi, the ECB President recently said in his speech in Portugal that the global trade uncertainty remained a key factor. He also mentioned higher oil prices due to increased geo-political risks as another factor that could derail the central bank’s goals of moving towards policy normalization.
While it is still unclear, the baseline narrative is that economists and analysts remain divided on the impact of the new tariffs, if and when the U.S. administration hits China with. China, on its part is said to be preparing with retaliatory tariffs on the U.S. manufactured goods while also admitting that this would not benefit the global economy.
For the moment, the uncertainty has given way to higher volatility in the financial markets, which is also another cause for concern among policy makers.
