U.S. stocks faced a shaky morning on Tuesday after trade tensions between the U.S. and China rose. U.S. Trade Representative Robert Lighthizer said on Monday that the Trump administration will increase tariffs on the USD 200 Billion in Chinese goods early Friday.
The tensions sent the Dow Jones Industrial Average spiraling down by over 350 points or 1.2%. Meanwhile, the S&P 500 fell by 39.87 points or 1.36% and the Nasdaq Composite slipped by 124.92 points or 1.55%.
Lighthizer announced U.S. President Donald Trump’s decision after Trump tweeted that he would raise current tariffs of 10% to 25% by Friday. He also threatened to impose an extra 25% levy on another USD 325 Billion of Chinese goods.
Trump’s threats sent the Dow Jones plunging by as much as 377 points Monday morning. However, markets quickly recovered throughout the day as investors were optimistic that the two parties could reach a resolution.
Lighthizer’s announcement quickly diminished investor’s hopes. The U.S. and China have been back forth for the past year now. The tensions were strong between the two parties early on when Trump initially imposed the tariffs early in 2018. Then, throughout the year, investor fears began to subside after Trump and Chinese President Xi Jinping said they were close to reaching an agreement.
Despite Trump and Xi’s positivity late last year, investors were still anxious because a formal agreement wasn’t reach between the two parties. Now, Trump’s tweet over the weekend resurfaced investor’s fears from last year.
A full-blown trade war would shave off 45 basis points from global economic growth, while China’s GDP would take a hit of between 1.2% and 1.5%, Keith Parker, a strategist at UBS, said in a note, according to CNBC.
He also said the S&P 500 could swing 20% higher or lower, depending on whether tensions escalate or de-escalate. “We still see a trade war as low probability given the next tranche of tariffs would hit US consumer goods, but nevertheless it would have a big negative impact.”
“I remain hopeful that a deal comes and we won’t see new tariffs on Friday,” said Peter Boockvar, Chief Investment Officer at Bleakley Advisory Group. “But it’s clear the level of mistrust between the two sides will last for years and some of the tariffs will remain as part of the enforcement tools.”