US stocks opened sharply lower on Monday after Donald Trump threatened to raise tariffs on all Chinese imports to 25 per cent, sharply ratcheting up pressure on Beijing to make concessions in trade talks and sending global equities markets sliding.
The US president made the threat in a number of tweets on Sunday and Monday just a few days ahead of a make-or-break round of trade negotiations scheduled to begin on Wednesday.
Levies imposed on Chinese goods over the past year as part of the trade war with Beijing were “partially responsible for our great economic results” and had “little impact on product cost”, Mr Trump wrote on Sunday.
He added that the current 10 per cent tariffs on $200bn of Chinese goods would rise to 25 per cent on Friday, and that $325bn of additional Chinese goods that were currently “untaxed” would “shortly” be subject to tariffs of 25 per cent.
“The Trade deal with China continues, but too slowly, as they attempt to renegotiate. No!” said Mr Trump.
On Monday he added: “The United States has been losing, for many years, 600 to 800 Billion Dollars a year on Trade. With China we lose 500 Billion Dollars. Sorry, we’re not going to be doing that anymore!”
The tweets wrongfooted investors who had been growing optimistic that a trade deal was on the cards, and ruptured the calm that had descended over global markets since December’s turmoil.
The US stock market slid 1.5 per cent on opening, following European and Asian bourses downwards. The Eurofirst 300 index was down 1.5 per cent — heading for its worst one-day performance since December — while China’s CSI 300 index of major Shanghai- and Shenzhen-listed stocks closed down 5.8 per cent, marking the worst day since February 2016.
“This is the most significant escalation of the US-China trade war to date,” said Aditya Bhave, an economist at Bank of America. “The immediate market response suggests that the latest escalation of the trade war was a complete surprise to investors. This means that markets could be in for a bumpy ride before a trade deal is reached.”
Nervous about the implications for a still-vulnerable global economy, investors headed for safer assets like highly rated government debt. The 10-year US Treasury yield slipped 4 basis points to trade at 2.49 per cent, while the dollar and the Japanese yen rose against every other major currency on Monday.
China’s onshore renminbi, which is permitted to trade 2 per cent either side of a daily midpoint set by China’s central bank, fell 0.7 per cent to Rmb6.784 per dollar, its lowest level since January.
The aggressive tweets from Mr Trump marked a big shift in rhetoric on the negotiations and raised the possibility that this week’s round could be delayed or cancelled by Beijing. Mr Trump had previously been upbeat in his remarks about the state of the talks in recent weeks.
Liu He, China’s vice-premier and top trade negotiator, was originally due to fly to Washington on Monday, leading a 100-strong negotiating team comprised of officials from the Ministry of Commerce and other government agencies. “Mofcom is livid,” said a person familiar with Beijing’s reaction to Mr Trump’s latest threat. “They are tired of getting ambushed.”
Mr Liu may now fly later in the week for a shortened trip with a much smaller delegation, according to two people briefed on internal discussions in Beijing. “A delay rather than a cancellation of Liu’s trip is more likely as the Chinese want to keep negotiations going but cannot not respond [to Trump’s threat] too softly,” one of the people said.
On Monday afternoon, a Chinese foreign ministry spokesman said Mr Liu’s team was still “preparing to travel to the US for the trade talks”.
The spokesman declined to specify on what timeframe Mr Liu’s team was travelling to the US, or whether the team would make the original date.
Mr Liu cancelled a trip to Washington last September after a similar reaction by Mr Trump, and Chinese officials have often said that they will not negotiate with “a knife at our throat”.
Hu Xijin, editor of Global Times, a nationalist newspaper, suggested on Twitter that Mr Liu would cancel his trip to Washington following the tweet by Mr Trump. “Since @realDonaldTrump has made this kind of threat, I think Vice Premier Liu He will very unlikely go to the US this week,” Mr Hu said in a tweet. “Let Trump raise tariffs. Let’s see when trade talks can resume.”
US business groups, which have mostly been pushing for a deal to end the trade war, reacted with dismay to Mr Trump’s threat of a new escalation. “We urge the president to refrain from imposing these additional tariffs and instead focus on negotiating and concluding the trade deal with China,” said Rick Helfenbein, president of the American Apparel and Footwear Association.
The National Retail Federation said Americans would pay for the tariffs through business disruption, higher prices and lost jobs.
But there was an opposite reaction from at least one of Mr Trump’s political opponents. “Hang tough on China,” Chuck Schumer, the top Democrat in the US Senate, wrote on Twitter. “Don’t back down. Strength is the only way to win with China.”
Mr Liu is set to arrive in Washington for a crucial round of negotiations with Robert Lighthizer, the US trade representative, and Steven Mnuchin, the US Treasury secretary, this week. People familiar with the talks have said the goal of the session was to finalise an agreement, setting the stage for a “signing” summit between Mr Trump and Xi Jinping, the Chinese president, possibly in the middle of June.
Mr Liu and Mr Lighthizer have been locked in negotiations since Mr Xi and Mr Trump agreed to try to find a way out of their trade war after the G20 summit in Argentina last summer.
However, finding a solution has proved difficult. Both US and Chinese officials have repeatedly delayed the timing of a deal in order to push for better terms. Originally, Mr Trump had hoped the negotiations would have been wrapped up by March.
Among the biggest sticking points in the talks is the fate of existing US tariffs on Chinese goods, which Beijing would like to see erased. Washington would like to retain them, in part so that it can keep pressure on China to comply with the deal.
But negotiators have also been haggling on the extent of Chinese concessions on structural economic reforms, with the US side grappling with the reality that Beijing will only go so far in reining in industrial subsidies, intellectual property theft and its barriers to market access for a variety of industries. It is also unclear how far China will go in committing to large-scale purchases of US goods.
Mr Trump’s intervention on Sunday could simply be a classic negotiating strategy to heighten the stakes ahead of the final round of talks, and reassure China hawks in Washington that he will not settle for a weak deal. But they might also point to the US president feeling less pressure to strike a deal because of the recent rise in equity markets and the strong labour market data, which has diminished fears of a slowdown in the US economy. This could make it more likely that the talks with China could fall apart entirely.
Mike Pompeo, US secretary of state, told Fox News before Mr Trump’s tweets that for the US to prevail against China, it would require a “serious concerted effort [and] a president like President Trump, who is prepared to push back against China, whether that be on trade or their military build up or the theft of our intellectual property”.
He added: “We need a president who will be serious in protecting America against the challenges that China presents”.
Last week, Joe Biden, the former vice-president who has launched a campaign for the Democratic presidential nomination in 2020, challenged the idea that China should be viewed as competition to the US. This drew a rebuke from Mr Trump and renewed a debate about whether engagement or confrontation was the most effective policy towards Beijing.
With additional reporting by Hudson Lockett in Hong Kong and Robin Wigglesworth in New York