As the second quarter of the economic year begins, US stocks opened at their lowest level since the crash of 1929 which triggered the Great Depression. According to RT, “the S&P 500 index fell 2.2 percent after the first trading session in the second quarter. This was only ever worse 89 years ago, when it fell by 2.5 percent. Back then, it was a selloff that triggered the Great Depression – the worst economic crisis in US history”.
Tech stocks remain volatile in light of consumers and investors losing confidence in social media and search engine companies in the wake of the global Cambridge Analytica scandal and a similar loss of confidence being felt in the wake of Donald Trump’s attacks on Amazon. The tech heavy NASDAQ was down by 2.74% at the close of trading. But even beyond the tech sector, across the board, stocks were down with the Dow plunging 1.9%.
But while the Trump versus Amazon row and the lingering Facebook/Cambridge Analytica scandal have taken their toll, the primary root of the current stock dip is China’s imposition of 25% import tariffs on major US goods, particularly in the agricultural sector. China has warned that this is only the beginning in what will be tit-for-tat retaliatory tariffs against all those which the US implements on Chinese imports. The current 25% tariffs China has announced are technically in retaliation for Donald Trump’s tariffs on steel and aluminium. When Trump’s broader $60 billion tariffs on an assortment of Chinese goods, including hi-tech hardware take effect, China’s next retaliatory move will be even greater than the 25% tariffs that went into effect on the 2nd of April.
If the US announces tariffs based on the 301 investigation, we will certainly take countermeasures of equal proportion, scale and intensity: Cui Tiankai, Chinese ambassador to the US pic.twitter.com/kUkuawzhPT
— Global Times (@globaltimesnews) April 3, 2018
While Trump’s trade war is only in its early weeks, the effect is being felt not only on the stock markets but in currency markets. The price of gold continues to rise while the US Dollar (USD) is fairing poorly. Last week’s introduction of the Petroyuan was the opening salvo in a wider global war against USD hegemony. As China is the world’s largest energy consumer, global commodities markets are beginning their long-term pivot towards trading in Yuan as China has made it clear that like every world-leading economy before it, China will soon demand large scale trade take place in its domestic currency. All of this is happening as China is pulling back on once heavy investment on US soil, including in the property development markets in many big cities including the once popular Chinese investment destinations in California.
With China cutting its purchases of US Treasury bonds and pivoting towards Yuan based international trade, the USD’s Petrodollar/reserve currency safety net is being eroded. While the Yuan is clearly being prepared to float on the open market, so long as it remains pegged to the USD, investors will likely continue to flock to gold during this interim period in which the USD declines but the Yuan is not yet ready to float.
As China is more self-sufficient than the US combined with having a larger and stronger domestic market, while also enjoying a healthy trade, including in energy with the Russian superpower, it is American businesses and consumers that will feel the pinch of the trade war first and most prominently. The US stock market’s dive is merely the beginning of trends which will see the power of US consumers limited due to the combination of a declining USD and an increase in prices of everyday goods as a result of anti-Chinese import tariffs.
In the medium term, as the US businesses that rely on reasonably priced Chinese goods feel the pressure to increase costs and cut staff, there will likely be further negative developments in the US economy in terms of employment and the related further dip in American purchasing power. While Trump paints himself as the consummate businessman, the powerful US Chamber of Commerce has stridently opposed the Trump tariffs.
Trump’s style of playing geopolitical games of chicken on issues ranging from security to the economy is neither winning Trump respect nor sympathy from the wider world. In an age where China promotes the win-win mentality of pragmatic negotiations in order to reach deals which are mutually beneficial to all parties involved, Trump has become the epitome of a bullying zero-sum aggressor who has no respect for other nations and no respect for the US business community that has made its pro-free trade feelings absolutely clear.
Pushing the world to the brink in a trade war is as irresponsible as doing so in a military conflict. Nothing good can come out of such childish tactics and ultimately the first victims have been American investors, followed shortly by American businesses, workers and consumers. If Donald Trump thinks that China will somehow roll over and beg to compromise in the face of aggressive tariffs, he is mistaken. China was willing to negotiate in good faith prior to the implementation of tariffs. Now that Trump has thrown China’s good faith into the gutter, China will be waiting for the US to climb down from its economically regressive position of arrogance and bullying. The more US businesses and consumers are hurt by the tariffs, the more likely Trump is to give in to the demands not of Beijing but of his own business base.