Trump's China grudge match may be spinning out of control
A president torn between his love of tariffs and booming markets faces the risk of uncontainable escalation.
NEW YORK — Donald Trump the Dow Man and Donald Trump the Tariff Man found themselves back on a collision course Monday as U.S. markets tanked and fear of a full-scale trade war between the world’s two largest economies reemerged with a vengeance.
The Dow Jones industrial average plunged more than 700 points, or 2.7 percent, in afternoon trading, after a flurry of belligerent tweets from President Trump — and quick retaliation from China in the form of new tariffs — threw gut punches at hopes for a deal between the two nations.
The sell-off framed a central conflict inside the White House — and seemingly within the president’s own mind. Trump loves a booming stock market, which he tracks obsessively, and views it as an indicator of success on par with his approval rating. At the same time, he loves his power to unilaterally impose tariffs, and sees winning tough concessions from China as key to his 2020 reelection bid.
But those two political imperatives are once again at odds. And Wall Street traders and economists say that if Trump doesn’t make a deal, and moves forward with a threat to slap 25 percent tariffs on everything China exports to the U.S., he could further rattle markets, tip the economy toward recession and lose his best ticket to re-election.
Worries are also growing that Trump and Chinese president Xi Jingping may have fundamentally, miscalculated, allowing their trade talks to become a political duel with a logic of its own.
“Investors have always assumed that these are rational actors who will eventually realize that it’s in nobody’s best interest to escalate this any further,” said Megan Greene, chief economist at Manulife Asset Management. “But that could turn out to be wrong.”
Speaking to reporters at the White House Monday, Trump expressed high confidence in his approach. “We’re in a very good position and I think it’s only going to get better,” Trump said of the trade fight so far. “We’re taking in tens of billions of dollars, I think it’s working out very well.”
But it doesn’t look that way to all Americans. Pain is already building in key 2020 swing states in the Midwest, including Iowa and Wisconsin, where retaliatory tariffs on soybeans, corn, sorghum and pork are slamming farmers. Steel and aluminum tariffs are also hitting industrial Midwest states critical to Trump’s reelection, including Ohio and Michigan.
“Trump the Dow Man and Trump the Tariff Man can co-exist for a while but at a certain point they can’t,” Greene said. “The Dow is down around 2.5 percent now, but I think it’s got to be down around 10 percent for Trump to feel significant pressure…. So far the tariffs have been angled away from the consumer. But if he goes ahead with the rest of the tariffs, the consumer will really feel the pinch.”
Inside the White House, top Trump advisers remain divided as they have been since the early days of the administration. Hardline China hawks like trade adviser Peter Navarro and U.S. Trade Representative Robert Lighthizer continue to argue for staying tough on China until they capitulate, viewing the U.S. as in a stronger economic position.
They are bolstered by influential pro-Trump conservatives outside the administration calling for a defining showdown with a Chinese government they say is exploiting the world economic order.
“This is not a trade war. This is an economic war they’ve been running against us for 25 years and Trump is now engaged and it’s as dead serious as it ever gets,” said former Trump White House strategist Steve Bannon. “This is not just about trade, it’s far deeper than that. It’s about a fundamental restructuring of the economy. Trump’s thought this through and markets will eventually respond more positively.”
On the other side are more moderate, free trade-friendly voices like top economic adviser Larry Kudlow and Treasury Secretary Steven Mnuchin, who continue to nudge the president toward making a deal that will calm markets and spare consumers and U.S. exporters from more pain. China often aims its tariff retaliation at political hotspots in the U.S.
Some of the differing views spilled out over the weekend as Kudlow acknowledged in a Fox News interview that — despite Trump’s recent claim that tariffs are paid “directly” to the U.S. Treasury by China — it is U.S. businesses and consumers who bear the extra costs. “In fact, both sides will pay,” Kudlow said, adding that he did not disagree with the notion, supported by data, that burden of tariffs imposed by Trump falls mainly on the U.S.
At the White House on Monday, Trump suggested otherwise, arguing that it was Beijing that would bear the brunt of the confrontation. “We do much less business with China than they do with us,” Trump said.
Trump began the day with tough tweets saying that China will be “hurt very badly” if it doesn’t make a deal. China then ignored Trump’s warning not to retaliate and fired its latest salvo just before markets opened in New York, saying it would raise tariffs next month on $60 billion in products the U.S. exports to China.
The back-and-forth left Wall Street investors, who have long assumed the two sides would make a deal, wondering whether Trump and Xi are now locked in a political grudge match that could blow a hole in the global economy before it is resolved.
“The market has been inclined to think that we were past all this and now it appears that we are definitely not past all this,” said Eric Winograd, senior economist at asset management firm AllianceBernstein. “And even if a tentative deal is eventually reached it has to shake confidence that this will ever really be behind us. The value of a deal seems lower than in the past because it will seem fundamentally political. And if Trump sees it as in his political interest to restart the trade war, he will.”
Trump is banking on the idea that the U.S. is in a stronger economic position to withstand the impact of a full-scale trade war. One of his tweets cited 3.2 percent growth in the first quarter as evidence that his trade policies are working. Despite Monday’s sell-off, markets remain higher for the year after recovering from the last China scare that hit in December and January.
One Republican who spoke with Trump recently said the president is now less concerned about market volatility than in the past, thanks to strong economic fundamentals in the U.S.
“He doesn't have a knee-jerk reaction because when you look at the overall trends in the last 2.5 years, we've had more highs than lows and there's a lot of other positive developments — like unemployment and wage growth — that factor in as well,” said one former White House official.
But economists generally expect the U.S. economy to slow over the course of the year as the impact of tax cuts fade, major fiscal deadlines loom in Washington and the constant fear of bruising trade battles eventually erodes business and consumer confidence. And Wall Street analysts cite a recent return to sharp volatility as an indicator markets are vulnerable to a much sharper sell-off should talks between the U.S. and China completely collapse.
The president's re-election team has also argued internally that he's unlikely to lose support within the agricultural industry by continuing to press for changes in China's trade practices. Echoing comments made by Republican Sen. Tom Cotton, Ark., over the weekend, one senior Trump campaign official said American farmers are "patriots" who recognize that this isn't a case where "instant gratification is possible."
“There is no denying that the Trump economy is booming, unemployment is at generational lows, and wages are rising,” said Tim Murtaugh, commucations director for Trump’s 2020 campaign.
"A deal with China to end their bad behavior would provide even more long-term benefit to the economy. It’s also important to remember that China could solve all of this tomorrow by agreeing to stop stealing intellectual property, forcing the transfer of technology, manipulating currency, and dumping steel into the market,” he added.
After the Dow Jones industrial average dropped 712 points by early afternoon, stocks trimmed their losses some after Trump said he would meet with Xi Jinping at the G-20 summit in Japan next month. Many comments from both sides in the trade dispute have been timed to impact markets in both countries.
But as he spoke to reporters, Trump presented himself as unfazed by the drama unfolding on the trading floors of Wall Street.
“We’re in a very good position and I think it’s only going to get better,” he said.
Article originally published on POLITICO Magazine