China has announced it will impose 84 per cent tariffs on US goods imports from tomorrow, as the war of words and levies between the world’s two largest economies escalates. The new measures – 50 per cent on top of the 34 per cent already imposed by Beijing’s finance ministry – are a like for like increase for the 50 per cent increase levied by Trump overnight, taking the US’s total tariff on Chinese goods to 104 per cent. The FTSE100 – which was already down more than 2.3 per cent this morning – plunged even further to 3.6 per cent following the midday news.
Beijing had vowed a ‘firm and forceful’ response to Trump’s additional tariffs yesterday, declaring, ‘The Chinese people’s legitimate right to development is inalienable’. Hours before today’s announcement, Beijing released a 28,000-character white paper on trade with the US, which says it has the will and means to ‘fight until the end’, warning that the US will ‘reap what it sows’. As well as the increase in tariffs, the finance ministry also announced export controls on a further 12 American companies and that six more companies had been added to its ‘unreliable entities’ list – banning them from doing any business with China.
Both Trump and Xi Jinping seem determined to take their countries to the economic brink
Closer to home, the UK’s long-term borrowing costs surged this morning to their highest level in a quarter-century. Yields on 30-year UK government bonds rose sharply this morning, peaking at 5.51 per cent – their highest level since 1998. Investors are betting the Bank of England – which this morning warned that the trade war has left the world exposed to a financial and economic crisis – will move faster and further on cutting interest rates when the monetary policy committee meets next month.
Yesterday Rachel Reeves reiterated her commitment to her ‘ironclad’ fiscal rules, insisting her target of reducing borrowing as a share of GDP within five years is ‘non-negotiable’. Yet the rise in UK government bond yields makes it increasingly hard to see how this can remain the case. If her fiscal headroom is wiped out, the chances of tax rises or spending cuts at the Autumn Budget increase significantly.
One (tiny) sliver of good news is the announcement today that the government is pushing ahead with a £50 billion agreement to bring a Universal Studios theme park to Bedfordshire. The resort is expected to open in 2031, creating 28,000 jobs. ‘At a time of global change, this investment is a vote of confidence in Britain as a place to do business,’ Reeves said. The involvement, however, of one of Trump’s most-loathed media companies could further inflame tensions (‘corrupt’ and an ‘illegal arm of the Democrat party’, is how Trump described Universal’s parent company Comcast earlier this year).
Global markets, meanwhile, continue to grapple with the introduction of the highest US import duties since the 1930s. The 20 per cent levy on EU exports sent the pan-European Stoxx 600 down more than 4 per cent. Germany’s Dax index dropped 3.7 per cent, with Joerg Kukies, the finance minister, warning before China’s retaliatory announcement that Germany – already in a technical recession – risks a prolonged economic downturn.
The Hang Seng index in Hong Kong plunged as much as 4.3 per cent; Tokyo’s Nikkei dropped nearly 4 per cent. On Wall Street, the S&P 500 was down yesterday by more than 2 per cent. Shares in drugmakers were particularly hit after Trump spoke of a ‘major’ new tariff on pharmaceutical imports. AstraZeneca dropped over 4 per cent; GSK fell 3.2 per cent.
Safe-haven assets have offered little shelter. Gold climbed as much as 0.9 per cent, briefly hitting a new all-time high, while US Treasury bonds – typically the safest investment in a crisis – suffered a dramatic sell-off. The 10-year yield jumped 41 basis points this week, reflecting investor anxiety over the dollar’s reliability. ‘The fire sale of Treasuries is extraordinary,’ Calvin Yeoh of Blue Edge Advisors told Bloomberg. ‘This is like ice sculpting in a forest fire – whatever looked good a second ago is now gone.’
As tensions rise and retaliatory rhetoric mounts, investors are beginning to look beyond the immediate trade skirmishes. Hedge fund manager Ray Dalio warned the world may be witnessing ‘a once-in-a-lifetime breakdown of monetary and geopolitical orders’.
Both Trump and Xi Jinping seem determined to take their countries to the economic brink. If so, Reeves’s fiscal rules may not be the only things that are broken in the coming months.
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