US, China Announce New Tariffs: Wall Street Reacts

The big story on Wall Street in 2018 has been an international trade war, which ramped up this week after President Donald Trump said Monday that he will slap 10-percent tariffs on an additional $200 billion in Chinese imports starting Sept. 24.

China returned fire on Tuesday, announcing new tariffs ranging from 5-10 percent on $60 billion in U.S. goods.

Better Than Feared

U.S. investors have mostly shrugged off the trade war up to this point, and the S&P 500 traded higher by another 0.4 percent percent Tuesday. The latest round of tariffs by the U.S. and China may have been on the mild side compared to expectations. Trump had previously said he wanted to impose 25-percent tariffs on the $200 billion in Chinese goods, but Height Securities analyst Clayton Allen said the 10-percent initial rate is likely a compromise on Trump’s part.

“We understand that there was some disagreement within the administration about the ability to target the full $200 billion in imports and impose the high 25-percent tariff rate that Trump requested, and we believe the lower 10-percent initial rate was a compromise to achieve the highest possible tariff value (nearly $200 billion),” Allen said in a Tuesday note. 

Trump said the 10-percent rate will increase to 25 percent Jan. 1, 2019.

According to Goldman Sachs analyst Andrew Tilton, the Chinese retaliatory tariffs are also less aggressive than expected. Goldman had previously estimated an average rate of 13 percent on the $60 billion in U.S. goods.

Trade War Fallout

Tilton said the direct GDP impact from the latest round of tariffs will likely be very low, but that doesn’t mean investors can completely write them off.

“In the short term, the main impact of the tariffs would likely be via increased uncertainty about the business and trade environment given risks of further escalation (potentially causing firms to defer investment in manufacturing capacity, for example) and on sentiment (potentially affecting consumer spending both directly and possibly through equity market wealth effects),” Tilton said. 

If equity markets are any indication, the U.S. appears to be winning the trade war with China.

Year-to-date, the SPDR S&P 500 ETF Trust SPY is up 8.9 percent, while the iShares FTSE/Xinhua China 25 Index FXI is down 9.7 percent.

Related Links:

Trump's Bailout For Farmers Caught In The Trade War: What You Need To Know

Trump's Trade Strategy: Pros And Cons