The Dow Jones industrial average and other major stock market averages are tanking Tuesday over President Donald Trump's latest threat of a full-scale trade war with China. Yet Trump's threat seems aimed at Capitol Hill, not Beijing.
Here's why: After escalating his threat to impose tariffs on another $200 billion worth of Chinese imports late Monday, Trump will meet with GOP senators on Wednesday and ask them to drop their opposition to his rescue of ZTE, the Chinese communications equipment firm driven out of business by U.S. sanctions.
If Trump really intended to launch a trade war, the last thing on his mind would be saving ZTE's 70,000 Chinese jobs.
A plunging Dow Jones, S&P 500 index and Nasdaq composite could help sway Republican senators to give Trump the flexibility he wants to strike a trade deal with China. But while the Dow Jones remained sharply lower at the close, the S&P 500 and Nasdaq pared losses.
Intraday on the stock market today, among Dow Jones components with big exposure to China, Caterpillar (CAT) lost 3.6% and Boeing (BA) 3.8%. Apple (AAPL) and Nike (NKE) slipped 1.6% and 1.8%, respectively. Intel (INTC) pared its loss to 0.5%. The Dow Jones itself fell 1.15%, undercutting its 50-day moving average and headed for a sixth straight decline.
Meanwhile, Deere (DE), which fares well when American farmers are thriving, has seen shares slide about 10% over the past five days. Qualcomm (QCOM), whose merger with NXP Semiconductors (NXPI) appears tied up in U.S.-Chinese trade negotiations, fell 1%.
Just a month ago, Trump was crowing about a China trade deal that would see China "buy massive amounts of ADDITIONAL Farm/Agricultural products" from the U.S.
Trump ZTE Deal Sparks Backlash
That deal only came close to happening due to Trump's pledge via a tweet to get ZTE "back into business, fast." As punishment for continuing to doing business with Iran and North Korea in defiance of U.S. sanctions against those regimes, the Commerce Department had ordered ZTE's U.S. component suppliers to cease doing business with the firm.
But Trump's leniency prompted a backlash. The Senate voted on Monday to attach a provision denying relief to ZTE to a must-pass defense funding bill. The White House has said it opposes the ZTE provision, but a Trump veto of a defense bill to save Chinese jobs would be awkward.
Trump Tariff Threat Aimed At GOP Senate
Rather than looking weak with a veto, Trump's threat of dramatically escalating tariffs is a show of strength that has scared investors and may also scare Republican senators into backing down.
Trump already showed his cards with the underwhelming China trade deal he touted last month. He has no stomach for a trade war that makes American farmers pay the price. He also reportedly told Apple CEO Tim Cook that he won't impose tariffs on Apple iPhones assembled in China. Trump had seemed set to sign onto a deal that would have done relatively little to narrow the massive U.S. trade deficit with China.
While the Trump administration has insisted that the enforcement action vs. ZTE was separate from talk talks, it's clear that Chinese President Xi Jinping didn't agree.
After Trump's leniency prompted a backlash and left the fate of ZTE hanging in the balance, Chinese trade negotiators frustrated their American counterparts seeking to finalize an agreement and win more concessions. That strengthened the hand of Trump officials who have advocated a hard line vs. China and had Trump's first round of threatened tariffs on $50 billion worth of high-tech Chinese imports all ready to go.
U.S.-China Trade War Starts July 6?
Any time such threats are made and deadlines are set, there's risk involved. Beijing has a reputation for refusing to back down from a threat. If talks go nowhere before a July 6 deadline for imposing 25% tariffs on $34 billion in Chinese imports, the trade spat may spiral into something more serious. Yet if Trump follows through on his ZTE rescue, the negotiating environment is likely to improve, and there's probably a deal Trump will accept, at least in the short term.
Any trade agreement is likely to please Wall Street, but it's sure to be just a cease-fire in what promises to be a longer term U.S. technological cold war with China.
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