Why Did Stocks Just Fall? Trump Stokes Trade War Fears

Major stock market indexes tumbled on Thursday following the Trump administration’s announcement that it would impose up to $60 billion worth of tariffs on Chinese products.

Three key indexes, the Dow Jones Industrial Average, the S&P 500 and the tech-heavy Nasdaq all lost more than 2% of their value, according to reports. The Dow lost more than 700 points in afternoon trading.

Markets reacted to fears that the tariffs could prompt a trade war, which has the potential to damage the U.S. economy, and cut down on Gross Domestic Product (GDP) growth.

The tariffs that Trump announced today will target up to 1,300 items produced in China, including aeronautics, high-speed rail, alternative energy vehicles, and high tech products, according to CNBC. It is also meant to punish China for what the administration has said is intellectual property theft from U.S. businesses.

Earlier in March, Trump said he would place a tariff of 25% on foreign steel, and one of 10% on aluminum imports. While China is the largest steel producer in the world, those tariffs will potentially affect metals produced in several countries. Similarly in January, the president announced tariffs on foreign-made solar panels and washing machines.

What are tariffs?

A tariff, sometimes called a duty,  is a tax typically imposed by one nation on another’s imports. (In some cases, tariffs can be levied on exports.) The tariff is generally calculated as percentage of the import’s total value, including freight and insurance charges.

In principle, governments impose tariffs to make their own products more competitive and affordable, and to generate revenues.

What’s a trade war?

A trade war is when countries engage in a tit-for-tat over tariffs. In response to U.S. tariffs on Chinese goods and services, China could impose tariffs of its own on U.S. steel, as well as other exports.

That could increase costs for U.S. consumers, and also reduce demand for U.S. exports, which could dent our economy, according to experts.

Over the last 20 years, the U.S. has entered into numerous trade treaties, the most famous of which is perhaps the North American Free Trade Agreement (NAFTA). These treaties, which are complex multilateral agreements that favor negotiations between all countries that sign, have reduced the threat of trade wars, in part by eliminating many tariffs on exported and imported products.

Trump has argued such agreements have flooded the U.S. with cheaper foreign-made goods, which make it difficult for U.S. manufacturers to compete.

In 2017, the U.S. signed a less comprehensive trade treaty with China, but Trump has said recently that products from China have cost the U.S. 6 million jobs, and have caused 60,000 factories to close. Economists reportedly dispute these figures.

China threatens retaliation

Chinese officials said they would take whatever action they deemed necessary to protect their interests in the face of new tariffs. That could include placing tariffs of their own on the $19.4 billion of agricultural products the U.S. ships to China each year, the majority of which is soybeans, according to reports.

A tariff, sometimes called a duty,  is a tax typically imposed by one nation on another’s imports.

“China absolutely won’t sit back and allow its legitimate rights and interests to be harmed and will take all necessary measures to protect” them, China’s Commerce Ministry said in a statement Thursday, according the Wall Street Journal.

Good to know: As the Trump administration announced the tariffs on China, it also said it would exempt trading partners including Argentina, the European Union, and South Korea from recent aluminum and steel tariffs.

How a trade war could affect you

Meanwhile, various businesses and trade groups expressed fears that the tariffs would increase costs for U.S. consumers, and could potentially result in job losses in the tech sector.

“Increased tariffs and trade wars risk the nearly 2.5 million American jobs associated with trade involving technology products,” Gary Shapiro, president and CEO, Consumer Technology Association, said in an emailed statement on Thursday.  “Such a move threatens U.S. economic growth and wipes out the benefits of our recent tax reform.”

The consumer technology industry represented more than 10 percent of the U.S. gross domestic product in 2017, according to the CTA.