After more than 4 months of calm
in the financial market, volatility returned to the markets yesterday. This is
after Donald Trump sent shockwaves on Sunday when he tweeted that the 25%
tariffs on Chinese goods will go into effect on Friday. This left many,
including the Chinese in shock because a deal was expected to be signed soon.
In the aftermath of the tweet, Chinese stocks had the worst day this year, with
the Shanghai shedding more than 5%. The Dow reacted by shedding more than 400
points before making a recovery.
How We Got Here
Before becoming president, Donald
Trump spent more than 30 years, talking about trade. He looked at the growing US
deficits with the rest of the world increase. These deficits grew as these
countries did less trade with the United States. This is because these
countries had trained their population to develop the products that the US was
best-known for. At the same time, many US companies like Proctor & Gamble
and General Motors moved to these countries to take advantage of their
education population and cheap labor.
Over the years, Trump warned that
the countries were taking advantage of the US. When he became president, he
spent his first year coming up with the tax reform. His goal was to make the
environment so good to force American companies to return to the country. The
corporate tax rate came to 21% even as he continued the deregulation policies.
In his second year as president,
he first announced new tariffs on steel and aluminum. These tariffs were broad
in nature and affected most countries, including the so-called allies like
European Union and Canada.
In his second act, the president
announced that he would place a 25% tariff on Chinese goods worth more than $50
billion. China reacted by retaliating on these tariffs. They targeted key
American goods like soybeans, corn, chips, and planes. After the $50 billion
tariffs, he announced another 25% tariff on Chinese goods worth more than $200
billion. The 10% tariffs came late in the year.
After meeting with China’s Xi,
the president shelved the additional 25% tariff with China so that negotiations
could continue. The deadline of this was in March, but another extension
happened when a deal could not be reached.
After months of delay, the
president announced that the tariffs will go into place. This is because he
viewed the Chinese as intentionally delaying a deal. He also started to
question how the deal will be beneficial to the US. He was also emboldened by
the overall performance of the US economy in the first quarter.
Trade War Impacts
There have been no major results
of the trade war to the US. Most American companies have continued to outsource
their operations overseas where the labor costs is low. In fact, a number of
companies like General Motors have announced that they intend to shut down
plants. In addition, the trade deficit between United States and its trading
partners has continued to rise. This will likely be continued because the US
does not export a lot of goods to the rest of the world.
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