U.S. Hikes Tariffs on China to 25 Percent as Trade Deficit Narrows, Negotiations Continue

Trump: “There Is Absolutely No Need to Rush”

On Friday, the U.S. hiked tariffs on China from 10 percent to 25 percent, a sharp increase worth more than $200 billion amid ongoing trade negotiations. At 9:00 AM EST, the world’s largest and second largest economies will resume talks.

“Talks with China continue in a very congenial manner – there is absolutely no need to rush – as Tariffs are NOW being paid to the United States by China of 25% on 250 Billion Dollars worth of goods & products,” President Trump tweeted early Friday morning. “These massive payments go directly to the Treasury of the U.S.”

Talks with China continue in a very congenial manner – there is absolutely no need to rush – as Tariffs are NOW being paid to the United States by China of 25% on 250 Billion Dollars worth of goods & products. These massive payments go directly to the Treasury of the U.S….

— Donald J. Trump (@realDonaldTrump) May 10, 2019

The Chinese vowed to retaliate.

“China deeply regrets that it will have to take necessary countermeasures,” China’s Ministry of Commerce said in a statement.

While Wall Street and D.C. have largely opposed President Donald Trump’s tariff strategy, it is clearly working to reduce the trade gap between the two nations.

On Thursday, the U.S. trade deficit rose only $0.7 billion to just $50.0 billion in March, less than expected and beating the consensus forecast. The historically narrow gap comes after two sharp consecutive declines in the trade deficit.

Year‐over‐year, the average goods and services deficit fell $1.9 billion, as average exports increased $4.7 billion and average imports increased by just $2.7 billion.

The politically-sensitive U.S. trade deficit with China fell $1.9 billion to $28.3 billion in March. Exports rose $1.4 billion to $10.5 billion and imports fell $0.5 billion to $38.8 billion.

In Shanghai, the SSE Composite Index (^SSE) closed +88.26, or 3.10% to 2,939.21. On Thursday, the Dow Jones Industrial Average (^DJI) closed −138.97, or 0.54% at 25,828.36.

But the U.S. economy has proven far more resilient than the Chinese economy throughout trade negotiations. In 2018, the U.S. economy grew 3.0% (Q-Q), an annual rate of growth that was elusive under the previous administration.

“Tariffs will make our Country MUCH STRONGER, not weaker. Just sit back and watch!” President Trump added in a tweet. “In the meantime, China should not renegotiate deals with the U.S. at the last minute. This is not the Obama Administration, or the Administration of Sleepy Joe, who let China get away with “murder!”

Tariffs will make our Country MUCH STRONGER, not weaker. Just sit back and watch! In the meantime, China should not renegotiate deals with the U.S. at the last minute. This is not the Obama Administration, or the Administration of Sleepy Joe, who let China get away with “murder!”

— Donald J. Trump (@realDonaldTrump) May 10, 2019

The Bureau of Economic Analysis (BEA) “advance” estimate for first quarter (Q1) 2019 gross domestic product (GDP) came in at a 3.2% seasonally-adjusted annual rate (SAAR). Real GDP rose 2.2% in Q4 2018 and by 2.2% in Q1 2018.

“The last trade deficit report coming in below -$50B was a bigger deal than expected,” Tim Anderson at TJM Investments said. He noted the narrowing of the trade gap added more than 1% alone to Q1 2019 GDP.

Meanwhile, the Chinese economy, which was already expected to slow in 2019, was feeling the pain from 15% tariffs. In January, before the tariff increase was postponed, an analysis firm specializing in the Chinese economy said a hike would be “excruciating.”

“If tariffs escalate further after 1 March, the added pressure on the Chinese economy will prove excruciating,” Shehzad Qazi, managing director of China Beige Book International told The Guardian.