WASHINGTON - President Donald Trump's efforts to calm investors while he launches a full-scale trade war with China showed signs of cracking Monday, as one of his top advisers admitted the approach could damage the U.S. economy, a Goldman Sachs report predicted it might lead to higher interest rates, and China vowed to impose tariffs on $60 billion in U.S. goods on June 1.
China's response, announced by its Ministry of Finance, said it targeted "U.S. unilateralism and trade protectionism."
The rapid-fire succession of stark economic news spooked financial markets. The Dow Jones industrial average and the Standard & Poor's 500 index are both down sharply in morning trading.
Dow was down 622 points around noon, while Nasdaq slid around 256 points.
While many business executives and investors had hoped that tensions between the United States and China would be resolved easily, the recent developments show how much each country is digging in for a long fight.
"Over the past week, hopes for at least a partial and temporary cease-fire between the two sides have given way to the prospect of a rapidly escalating and broadening economic conflict between the two countries," said Eswar Prasad, senior professor of trade policy at Cornell University.
Amid signs that investors were questioning his adversarial approach, Trump attempted to assuage the public in a series of Twitter posts. But some of his tweets contained typos and misspellings, suggesting that his comments had not been thoroughly vetted by White House officials and might not represent fully planned-out policy initiatives.
The dramatic escalation came last week after Trump imposed a 25 percent tariff on $200 billion of Chinese imports to the United States. He also told aides to begin plans to hit more than $300 billion in other Chinese goods. Trump has alleged that the Chinese government is ripping off American consumers and businesses by unfairly subsidizing Chinese companies, stealing intellectual property from U.S. firms and flooding global markets with cheap goods to put other companies out of business.
On Monday, he warned China against retaliation in a series of early-morning tweets. But China showed it planned to counter his adversarial approach with its own penalties against U.S. companies. The Chinese government said it would impose tariffs on U.S. imports starting on June 1, with the steepest penalties hitting textile products, certain kinds of beef and coffee, and technology such as microwave ovens, printers and solar batteries. The tariffs would range from 5 percent to 25 percent.
Chinese Foreign Ministry spokesman Geng Shuang said Monday that Beijing did not believe raising tariffs would solve "any problems," but he warned that China would be ready to defend itself.
"China will never succumb to foreign pressure," he said. "We are determined and capable of safeguarding our legitimate rights and interests. We still hope that the U.S. will meet us half way."
Shortly after the finance ministry announced the retaliatory tariffs, an anchorman for the state broadcaster read an official government commentary in a live prime-time segment addressed to the Chinese people.
"If we discuss, our door is always wide open; if we fight, we'll fight to the last," CCTV anchorman Kang Hui said to an audience that was likely in the tens, if not hundreds, of millions. "The U.S.-initiated trade war with China is just a hurdle in China's development process. It is no big deal. China must strengthen its confidence, overcome difficulties, turn crisis into opportunity, and fight to create a new world."
The nationalistic notes Kang struck quickly became the most searched subject on Chinese social media Monday evening.
U.S. agriculture companies could be hit hard by the new penalties, which would make their products more expensive for Chinese buyers. U.S. farm groups have already complained to the White House that they have been caught in the middle of Trump's trade skirmish and that the president had pledged to assist them. Trump has said he would seek an additional $15 billion in U.S. taxpayer money to aid farmers.
Trump has suggested that the impact of the tariffs on U.S. consumers could be mitigated by simply buying American-made products or those manufactured in countries not subject to the tax. He also claimed that the tariffs would drive business away from China and warned that the situation "will only get worse" if a deal is not reached.
"Their [sic] is no reason for the U.S. consumer to pay the Tariffs, which take effect on China today," Trump tweeted. "Also, the Tariffs can be completely avoided if you by [sic] from a non-Tariffed country, or you buy the product inside the USA (the best idea.)"
Trump's comments about the effects of the tariffs clashed with those of National Economic Council Director Larry Kudlow, who acknowledged that Americans will pay the price in an interview on "Fox News Sunday."
"It's not China that pays tariffs," host Chris Wallace said. "It's the American importers, the American companies that pay what, in effect, is a tax increase and oftentimes passes it on to U.S. consumers."
"Fair enough," Kudlow replied. "In fact, both sides will pay. Both sides will pay in these things."
After a tweet from an editor of the Global Times, a Chinese state-affiliated media outlet, suggested that China might cease purchases of U.S. agricultural products and reduce Boeing orders, the embattled aircraft manufacturing company signaled optimism in a statement Monday to CNBC.
"We're confident the US and China will continue trade discussions and come to an agreement than benefits both US and Chinese manufacturers and consumers," Boeing said.
The new U.S. tariffs largely affect business equipment, but they also apply to $40 billion in consumer products such as air conditioners, furniture, clothing and spark plugs. The financial impact of the tariffs could be delayed because they will apply only to products that left China on Friday; it typically takes two to three weeks for shipments to arrive from Shanghai. But businesses often pass these costs on to consumers, which could drive up prices across the country.
"The costs of U.S. tariffs have fallen entirely on U.S. businesses and households, with no clear reduction in the prices charged by Chinese exporters," Goldman Sachs analysts wrote in a note to investors Monday. It also said "the effects of the tariffs have spilled over noticeably to the prices charged by US producers competing with tariff-affected goods."
The analysts wrote that the tariffs could pose a double-whammy to the U.S. economy by driving up the cost of goods and potentially leading the Federal Reserve to raise interest rates to counter inflation. That could further slow the economy.
Trade experts and business groups have said Trump routinely misstates how tariffs work. Tariffs are taxes paid by U.S. companies that bring in products from overseas. So those costs are borne by companies like manufacturing firms, chemical producers and others that rely on Chinese products. This drives up the cost of Chinese products, which Trump has said will help U.S. competitors, but it also pushes up the cost for U.S. companies that use Chinese products. The tariffs could end up hurting companies and economic growth in both countries.
Trump imposed a series of tariffs on many Chinese goods last year and threatened to impose steeper penalties in January, but Chinese officials agreed to negotiate with him as a way to prevent more damage to their economy. Those talks began in earnest in December and continued into this year, with Trump at one point saying he predicted it could be the "granddaddy" of all trade deals.
But Trump expressed frustration with the pace of trade talks and threatened to impose steep tariffs on $200 billion in Chinese imports two weekends ago. China's vice premier, Liu He, came to Washington last week but those discussions didn't break new ground, and the tariffs went into effect early Friday morning. U.S. officials accused China of going back on prior details of the deal; China denied this.