The United States and China are raising tariffs on tens of billions of dollars’ worth of each other’s imports, escalating a trade war, spooking financial markets and casting gloom over the prospects for the world economy.
China on Monday increased tariffs on $60 billion of U.S. goods. The move came after President Donald Trump pushed up tariffs on $200 billion in Chinese imports from 10% to 25% Friday — the same day that U.S.-China negotiations ended without a breakthrough or any specific plan for further talks.
The events have cast doubt on the conventional wisdom, dominant just 10 days ago, that the world’s two biggest economies were edging toward a compromise on trade.
The renewed hostilities sent stocks tumbling around the world. The Dow Jones industrial average was down more than 600 points, or more than 2%, in midday trading Monday.
Here’s a look at what’s happening:
WHAT WENT WRONG?
For weeks, the talks seemed to be making slow but steady progress, and financial markets had priced in a peaceful resolution to the trade dispute. But on May 5, President Donald Trump suddenly expressed frustration at the pace of talks and vowed to raise tariffs. The next day, Treasury Secretary Steven Mnuchin and the top U.S. trade negotiator, Robert Lighthizer, said that China had been reneging on commitments it made in earlier rounds of negotiations. They wouldn’t identify the specific issues.
WHAT ARE THE U.S. AND CHINA FIGHTING ABOUT?
The United States accuses China of resorting to predatory tactics in a drive to give Chinese companies an edge in advanced technologies such as artificial intelligence, robotics and electric vehicles. These tactics, the U.S. contends, include hacking into U.S. companies’ computers to steal trade secrets, forcing foreign companies to hand over sensitive technology in exchange for access to Chinese markets and unfairly subsidizing Chinese tech firms.
Trump has also complained repeatedly about America’s huge trade deficit with China — a record $379 billion last year — which he blames on weak and naive negotiating by previous U.S. administrations.
Last July, Trump began gradually slapping tariffs on Chinese imports. After Friday’s tariff increase, the United States now is imposing 25% taxes on $250 billion in Chinese goods. Beijing has counterpunched by targeting $110 billion worth of American imports, focusing on farm products such as soybeans in a deliberate effort to inflict pain on Trump supporters in the U.S. heartland. On Monday, it raised tariffs on $60 billion of those U.S. imports, including batteries, spinach and coffee.
Until the blowup of the past week, the two countries appeared to be making progress. China was expected to beef up protection for trade secrets and offer foreign companies wider access to the Chinese market.
But stumbling blocks remained — even before the U.S. raised tariffs last week.
U.S. officials are insisting that any deal be strictly enforced so that China lives up to its promises — something they say Beijing has repeatedly failed to do in the past. Also unclear is what would happen to the U.S. tariffs on Chinese imports. China wants them lifted; the U.S. wants to keep tariffs as leverage to pressure the Chinese to comply with any agreement.
WHAT ARE THE PROSPECTS FOR A RESOLUTION?
Cloudier than they were. Both countries still have an incentive to reach a deal. China’s economy is decelerating; the International Monetary Fund expects Chinese economic growth to slip from 6.6% last year to 6.3% in 2019 and 6.1% in 2020. The trade war with the United States has hurt Chinese exporters and eroded business and consumer confidence.
The trade tensions have also rattled financial markets, jeopardizing a U.S. stock market rally that Trump sees as a vote of confidence in his economic policies. And China’s retaliatory tariffs are inflicting pain on American farmers, a key part of Trump’s political base.
Still, business groups and congressional Democrats are insisting that Trump, having taken U.S.-China relations to the brink, hold out for a deal that requires the Chinese to genuinely change their behavior, reform their economy and open up to foreign companies.
Chinese President Xi Jinping runs a one-party state and doesn’t have to answer directly to voters. But he, too, faces pressure not to cave in to American demands.
Both countries have indicated that more talks are likely. Top White House economic adviser Larry Kudlow said on Sunday that China has invited U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to Beijing. But nothing has been scheduled.
Kudlow said that Trump and Xi may meet in late June at the G-20 summit in Osaka, Japan.
The two countries have given themselves some breathing room to negotiate. The higher Chinese tariffs don’t kick in until June 1. And the U.S. tariff increases don’t apply to Chinese goods shipped before Friday. Shipments take about three weeks to cross the Pacific Ocean by sea, giving negotiators more time to reach a settlement before importers may have to pay the increased charges.
WHAT IS THE ECONOMIC FALLOUT?
Even before the latest tariff increases, forecasters at the IMF and World Bank had downgraded the outlook for the global economy. The U.S.-China standoff is reducing global trade and creating uncertainty for companies deciding where to buy supplies, locate offices and build plants, paralyzing investment.
The latest tariff increases could intensify the economic pain. Moody’s Analytics says that fallout from the higher U.S. tariffs could reduce U.S. economic growth — 2.9% last year — by 1.8 percentage points a year from now. And it could shave Chinese growth to around 5%. Moody’s called the higher tariffs “a game changer for the global economy.”