More Trade Threats Spook Investors

U.S. stocks traded down steeply Tuesday morning, and the Dow was on track to register its sixth consecutive day in the read after President Donald Trump threatened to aggressively escalate his trade war with China.

What Happened

Trump has reportedly asked the U.S. Trade Representative to identify an additional $200 billion of Chinese goods that could potentially be subjected to an additional 10 percent tariff. On Friday, Trump announced 25 percent tariffs on $50 billion of Chinese goods, prompting China to immediately retaliate with its own set of tariffs on $50 billion of U.S. goods.

Trump appears determined to escalate the trade war, reiterating his previous claims that China’s responses show “its determination to keep the United States at a permanent and unfair disadvantage.”

The Chinese Commerce Ministry said on Tuesday that if Trump carries through with his threat of additional tariffs, China “will be forced to strike back hard and launch comprehensive measures that match the U.S. move in quantity and quality.”

Why It's Important

Height Securities analyst Clayton Allen said Trump’s latest tariff threats clearly indicate his strategy in the trade war and expose his weakness to China.

“His strategy, now clearer than ever before, appears to hinge on the idea that the US has the upper hand by virtue of its larger import value, and continued threats to target those imports give the US significantly more leverage than China,” Allen wrote.

“This approach, while arguably correct in the near term, also exposes Trump's weakness: he must apply his leverage as soon as possible to avoid negative repercussions from a drawn-out trade dispute.”

The longer the trade war draws out, the more likely Trump will face domestic policy backlash and decreasing cooperation from China on North Korea and other international affairs.

What’s Next

Investors will be watching to see just how seriously the market takes Trump’s latest trade war threat and whether or not he's simply bluffing to gain leverage. Here’s a look at how the headlines were impacting the markets in early Tuesday trading:

• The S&P 500 was down 6 points, or 0.2 percent.
• The Dow Jones Industrial Average was down 313 points, or 1.2 percent.
• The iShares FTSE/Xinhua China 25 Index (ETF) FXI was down 3.3 percent.

Related Links:

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Analysts Weigh In On US-China Trade Developments