Share prices on Wall Street have surged to record levels after Donald Trump boosted hopes of an imminent trade deal with China.
The US president raised expectations that Washington was poised to abandon plans to increase tariffs on a fresh range of Chinese goods this weekend when he tweeted: “Getting VERY close to a BIG DEAL with China. They want it, and so do we.”
Trump made the comments before a meeting with his advisers to decide whether to go ahead or delay the imposition of duties on $160bn (£120bn) of Chinese consumer goods – including video game consoles, computer monitors and toys – from Sunday.
The two-sentence tweet prompted speculation that two months of negotiations, which would involve Beijing agreeing to import more US agricultural products and safeguard American intellectual property rights, were heading for a successful conclusion. In return, the US is considering reducing tariffs by up to 50% on more than $350bn of Chinese imports.
The roots of the dispute come from US president Donald Trump’s “America first” project to protect the US’ position as the world’s leading economy, while encouraging businesses to hire more workers in the US and to manufacture their products there.
Trump complains of a large trade deficit with China, which he views as a symbol of the US’s decline as a manufacturing powerhouse. Chinese imports to the US totalled $539.5bn last year, while $120.3bn was sold the other way – leaving a trade deficit of $419.2bn.
The president has accused Beijing of “unfair” trade policies, including allowing the theft of US companies’ intellectual property. The threat of import tariffs on Chinese goods is being used as leverage in talks where Trump is seeking changes to Beijing’s trade policy.
Tariffs have been imposed by Washington on some Chinese goods sold in the US for about a year. They came on top of broader tariffs used by Trump that have hit China and other trading partners such as the EU, Canada and Mexico, on goods including steel and aluminium.
In May 2019 the US president further ratcheted up existing import tariffs of 10% on $200bn (£153bn) of Chinese goods sold in the US to 25%, hitting everything on a long list of products. Trump has previously warned that 25% tariffs could be slapped on a further $325bn of goods – which would mean all Chinese imports being covered by tariffs.
However, talks in November 2019 aimed at easing tensions were welcomed as the beginning of a thaw in the trade war between the two nations.
Despite false dawns in the past, the hint that a deal was in prospect had an immediate impact on share prices, with the S&P 500 index hitting a record intraday high of 3,176.28 in early trading in New York.
The Dow Jones industrial average and the Nasdaq also rose amid optimism of a de-escalation in a trade conflict that has been steadily worsening since Trump announced his first set of protectionist measures in 2018.
Trade analysts said that while it was customary for the president to state that China was eager for a trade deal, it was unusual for him to say that the US also wanted an agreement.
Share prices rose because Wall Street believes a breakthrough in the trade talks will remove one of the most important barriers to faster global growth in a year when Trump will be battling for re-election. Stocks were also boosted by Wednesday’s decision by the US central bank, the Federal Reserve, to keep interest rates on hold.
Stock markets are likely to fall sharply if two months of talks aimed at producing an interim trade deal collapse and Washington goes ahead with a fresh tranche of tariffs this weekend. China has warned of retaliation in that event.
A spokesman for China’s commerce ministry said earlier this week: “The two sides’ economic and trade teams are maintaining close communication.”
In August, China said it would impose tariffs on $75bn of US goods in two batches. Tariffs on the first batch kicked in on 1 September, hitting US goods including soybeans, pork, beef, chemicals and crude oil.
The tariffs on the second batch of products are due to be activated on 15 December, affecting goods ranging from corn to small aircraft. China also said it would reinstitute an additional 25% tariff on US-made vehicles and 5% tariffs on auto parts that had been suspended at the beginning of 2019.
Willie Delwiche, an investment strategist at Baird, said it was too early to say the trade war was over. “What Trump is saying and what China is responding to would suggest that maybe we are more at a status quo level of a detente than at further deterioration in relationships.
“We want to see evidence that things aren’t deteriorating and if tariffs are getting delayed or rolled back, that’s evidence.”
Joe Saluzzi, of Themis Trading, warned that share prices would fall if a deal failed to materialise in the coming days.
“The market is definitely pricing in a trade deal, no question about it. You’ll probably get a ‘sell the news’, since it’s already priced in. If there is no deal, that will be a big problem on Monday.”
