WASHINGTON - President Donald Trump's efforts to calm investors while he launches a full-scale trade war with China showed signs of cracking, as one of his top advisers admitted the approach could damage the U.S. economy, a Goldman Sachs report predicted it might lead to higher interest rates and China vowed to impose tariffs on $60 billion in U.S. goods on June 1.
The rapid-fire succession of stark economic news spooked financial markets, with U.S. futures indicating drops of 1.2% at the open for both the Dow Jones industrial average and the Standard & Poor's 500 index.
Trump last week imposed a 25% tariff on $200 billion of Chinese imports to the U.S. and said he had begun plans to hit more than $300 billion in other Chinese goods.
On Monday, May 13, he warned China against retaliation on tariffs in a series of early morning tweets. But China showed it planned to counter his adversarial approach with their own penalties against U.S. companies.
Trump wrongfully suggested that the impact of the tariffs that took effect Friday could be mitigated by simply buying American-made products or those manufactured in countries not subject to the tax. He also claimed the tariffs would drive business away from China and warned that the situation "will only get worse" if a deal is not reached.
"Their (sic) is no reason for the U.S. consumer to pay the Tariffs, which take effect on China today," Trump tweeted. "Also, the Tariffs can be completely avoided if you by (sic) from a non-Tariffed country, or you buy the product inside the USA (the best idea.)"
Their is no reason for the U.S. Consumer to pay the Tariffs, which take effect on China today. This has been proven recently when only 4 points were paid by the U.S., 21 points by China because China subsidizes product to such a large degree. Also, the Tariffs can be.....— Donald J. Trump (@realDonaldTrump) May 13, 2019
Trump's comments about the effects of the tariffs clash with those of National Economic Council Director Larry Kudlow, who acknowledged that Americans will pay the price in an interview on "Fox News Sunday."
"It's not China that pays tariffs," host Chris Wallace said. "It's the American importers, the American companies that pay what, in effect, is a tax increase and oftentimes passes it on to U.S. consumers."
"Fair enough," Kudlow replied. "In fact, both sides will pay. Both sides will pay in these things."
The new tariffs largely affect business equipment, but they also apply to $40 billion in consumer products like air conditioners, furniture, clothing and spark plugs. The financial impact of the tariffs could be delayed because it will apply only to products that left China on Friday, which often take two or three weeks to arrive from Shanghai. But businesses often pass these costs on to consumers, which could drive up prices across the country.
..There will be nobody left in China to do business with. Very bad for China, very good for USA! But China has taken so advantage of the U.S. for so many years, that they are way ahead (Our Presidents did not do the job). Therefore, China should not retaliate-will only get worse!— Donald J. Trump (@realDonaldTrump) May 13, 2019
"Larger effects of tariffs on prices also imply a larger hit to real income and consequently to GDP," Goldman Sachs analysts wrote in a note to investors Monday. "Further escalation of the trade war could result in a hit to GDP as large as 0.4%, and if trade tensions sparked a major sell-off in the equity market, the growth impact could worsen considerably."
Trade experts and business groups have said Trump routinely misstates how tariffs work. Tariffs are taxes paid by U.S. companies that bring in products from overseas. So those costs are borne by companies like manufacturing firms, chemical producers and others that rely on Chinese products. This drives up the cost of Chinese products, which Trump has said will help U.S. competitors, but it also pushes up the cost for U.S. companies that use Chinese products as well.
After Trump expressed frustration with the pace of trade talks and threatened to impose steep tariffs on $200 billion in Chinese imports two weekends ago, negotiators were unable to avert the tariffs, and the talks concluded Friday without any announcement of an agreement. During negotiations, U.S. officials accused China of going back on prior details of the deal; China denied this.
"They were constructive discussions between both parties, that's all we are gonna say. Thank you," Treasury Secretary Steven Mnuchin said after the talks concluded.
This article was written by Taylor Telford, a reporter for The Washington Post.