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Intimations of New US-China Trade War Leave Market in Limbo

U.S. markets broke even on Monday as investors await hints about what the White House may do to retaliate against China over Covid-19.

MANHATTAN (CN) — U.S. markets broke even on Monday as investors await hints about what the White House may do to retaliate against China over Covid-19.

The Dow Jones Industrial Average began the morning with a 250-point drop but the index picked up speed in the final minutes of trading, gaining two dozen points by closing. The Nasdaq, kept afloat by the strength of its tech stocks, increased 1.2% at the close. 

“President Trump is very clear: we’re going to hold those responsible accountable, and we’ll do so on a timeline that is our own,” Secretary of State Mike Pompeo said on ABC’s “This Week” program.

The remarks came as President Donald Trump has further latched onto a theory suggesting Covid-19 did not originate from contamination in Chinese wet markets but because of a mishap at a bioweapons lab in Wuhan.

Trump’s position is at odds with those of virologists who suggest that the novel coronavirus passed from bats to humans via an intermediary animal in an overcrowded wet market in Wuhan, China — similar how the Sars outbreak in 2002 was blamed on the transmission between horseshoe bats — which can serve as hosts for a slew of diseases — and civets in a wet market.

Blaming China for hiding the origins of Covid-19 and hoarding medical supplies after the outbreak, White House officials have promised retribution. The exact nature — and timing — of the U.S. response remains to be seen. 

Tariffs are the most obvious action the administration could take, but they also could be the costliest. The 2018-19 U.S.-China trade war slowed the economy to 2% growth, under the 3%–4% the president had anticipated. 

Much like what was done with aluminum and steel, Trump could determine other industries are vital to U.S. national security and mandate manufacturing remain domestic.

“Trump’s view of national security is quite expansive,” said Gary Hufbauer, a nonresident senior fellow at the Peterson Institute. “At some point it becomes more and more like a joke if you put, say, toys and furniture in that list, but what about cell phones?”

Raymond Hill, a senior lecturer in finance at Emory University’s Goizueta School of Business, dug into the possibility of Trump inducing U.S. businesses to pull up stakes in China and focus on domestic manufacturing, like he did with Ford. He noted that Ford eventually recommitted to its plan of building a plant in Mexico, after initially backing down because of Trump .

“Tariffs would impose a huge restriction on trade, which would be very damaging to our economy over a long period of time,” said Hill.

Also in flux is the status of the Phase One deal, in which China agreed to purchase an additional $200 billion agricultural products and other items from the United States over the next two years. 

“Trump keeps talking about the wonderful trade deal with China on agricultural products, but I’m not sure that deal even exists anymore,” he said.

Another avenue open to Trump, Hufbauer suggested, is the symbolic act of suspending the Foreign Sovereign Immunities Act, thus letting private citizens sue China for reparations over the Covid-19 pandemic. Other administrations have tinkered with the act to allow exceptions for torture cases to proceed against other countries.

Missouri’s attorney general last month sued China, laying responsibility for the Covid-19 pandemic at the feet of the communist government. The likelihood of that suit, or others like it, are considered slim by many legal experts.

Investors’ nerves, already frayed from the teetering economy, are likely frayed by the potential for another trade war.

“It’s really important to recognize that the president now seems to want to raise tariffs with 30 million people unemployed,” said CNBC personality Jim Cramer on Monday. “So there we are: That is 1932.”

Markets abroad also took a hit, partly over the budding trade war. Markets in Asia fell Monday as tensions rose, with Hong Kong’s Hang Seng index losing more than 4.1%, South Korea’s Kospi dropping nearly 2.7%, and India’s Sensex down almost 6%. Japan’s Nikkei and Chinese markets were closed on Monday for holidays.

European markets also were rattled by escalating tensions between the United States and China. Germany’s DAX closed 3.6% down for the day, while France’s CAC fell more than 4.2%. The pan-European Stoxx 600 lost 2.6%.

“For markets, the true threat is that the diplomatic war of words could quickly spiral into a de facto Cold War on trade,” Boris Schlossberg of BK Asset Management wrote in an investor note. “It’s this political risk with its myriad economic implication[s] amidst the devastation of the pandemic that the market may be completely underestimating.”

About 3.5 million people worldwide have been confirmed infected by Covid-19, according to data from researchers at Johns Hopkins University, and more than 247,000 have died. In the United States, more than 1.1 million people have contracted the novel coronavirus and 68,000 have died.

However, recent Trump administration estimates suggest total cases and deaths in the United States could soon spike.

Modeling released Monday suggests that in early June Covid-19-related deaths could reach 3,000 a day starting in June. While attributed to the Center for Disease Control & Prevention, this agency has disavowed the report. Logos for the Department of Homeland Security and Federal Emergency Management Agency are stamped on the report.

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