Stock markets around the world have sold off sharply after Donald Trump threatened to raise the stakes in the simmering US-China trade war. Here are the answers to key questions about the rumbling dispute between the world’s two largest economies.
What is Trump threatening to do?
In two tweets posted on Sunday afternoon the president accused China of trying to renegotiate the trade deal being hammered out between Washington and Beijing after months of talks.
Trump threatened to ratchet up existing import tariffs of 10% on $200bn (£153bn) of Chinese goods sold in the US to 25% on Friday. He also warned that 25% tariffs could be slapped on a further $325bn of goods in future – which would mean all Chinese imports being covered by tariffs.
What tariffs are in place already?
Tariffs have been imposed by Washington on some Chinese goods sold in the US for about a year, as part of the ongoing dispute over trade. They come on top of broader tariffs used by Trump that have hit China and other trading partners such as the EU, Canada and Mexico, on goods including steel and aluminium.
The Trump administration imposed 25% tariffs on $50bn of Chinese technology goods in June 2018, covering aerospace goods, automobiles, communications tech and robotics, in a bid to hinder Beijing’s “Made in China 2025” initiative to boost its manufacturing and technology base.
The White House then imposed tariffs of 10% on $200bn of goods in September, on a wider range of products including food ingredients, construction materials, bike parts and burglar alarms. These are the tariffs that could be increased to 25%.
China has retaliated with $110bn-worth of tariffs on US goods, including agricultural produce such as soya beans, as well as cars, luggage, electronics, housewares and food.
Trump has threatened to raise the tariffs before, but agreed a truce late last year with China’s president, Xi Jinping, to allow officials more time to negotiate a solution to the trade dispute.
Why have markets reacted badly?
Stock markets had been lulled into a false sense of security. Hopes for a trade deal and the US Federal Reserve backing away from raising interest rate have powered financial markets to the highest levels for six months – making them more vulnerable to bad news.
Although there was always a risk the trade talks would break down in acrimony, the rapid shift from the White House comes after several weeks of both sides suggesting that the talks had been going well.
Renewed tariffs and retaliatory measures would likely serve as a drag on global trade, damage corporate earnings and hinder economic growth – with potential for a further decline in US equities by 10%-15% as a consequence, according to the Swiss bank UBS.
What does Trump hope to achieve?
The roots of the dispute extend to Trump’s “America first” project to protect the US’ position as the world’s leading economy, while encouraging businesses to hire more workers in America and to manufacture their products there.
Trump complains of a large trade deficit with China, which he views as a symbol of America’s decline as a manufacturing powerhouse. According to US Census Bureau data, Chinese imports to the US totalled $539.5bn last year, while $120.3bn was sold the other way – leaving a trade deficit of $419.2bn.
The president has accused Beijing of “unfair” trade policies, including allowing the theft of US companies’ intellectual property. The threat of import tariffs on Chinese goods is being used as leverage in talks where Trump is seeking changes to Beijing’s trade policy.
Is a peace deal still possible?
While Trump’s tweets could suggest trade talks have hit a brick wall, analysts said the threat likely represents a shift in negotiating strategy.
The president is well-known for ramping up the rhetoric in trade negotiations, and has previously said he can only secure new trade deals by threatening or imposing tariffs on trading partners. Analysts expect that the tensions could linger as the US gears up for elections next year.
The threat could extract additional concessions, although that is highly risky. Contrary to Trump’s claims that tariffs have boosted the US economy, analysts said they had hit growth over recent months and that an escalation could inflict greater damage.
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