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Trump’s Trade War Spooks Markets as White House Waits for China to Blink

President Trump is threatening to impose tariffs on $450 billion of Chinese goods in order to force Beijing to change what he has called “unacceptable” trade practices. Markets fell Tuesday in response.

WASHINGTON — President Trump’s threat to impose tariffs on almost every Chinese product that comes into the United States intensified the possibility of a damaging trade war, sending stock markets tumbling on Tuesday and drawing a rebuke from retailers, tech companies and manufacturers.

The Trump administration remained unmoved by those concerns, with a top trade adviser, Peter Navarro, insisting that China has more to lose from a trade fight than the United States. He also declared that Mr. Trump would not allow Beijing to simply buy its way out of an economic dispute by promising to import more American goods.

“President Trump has given China every chance to change its aggressive behavior,” Mr. Navarro said in a call with reporters on Tuesday. “China does have much more to lose than we do.”

In threatening tariffs on as much as $450 billion worth of Chinese goods, the administration is betting that Beijing will blink first. It’s a risky gamble by a White House that appears ready to forgo diplomatic negotiations in favor of punishing tariffs that could pinch consumers and companies on both sides of the Pacific.

The approach fulfills a frequent campaign promise by Mr. Trump. But it has spooked companies, investors and markets, which are increasingly worried that the United States has no other strategy to resolve a stalemate with China over its trade practices. Several rounds of trade talks with top Chinese officials in Washington and Beijing produced little agreement, and no additional official negotiations are scheduled, administration officials said.

On Tuesday, Mr. Trump suggested he was ready for a fight, saying China would no longer take advantage of the United States.

“China has been taking out $500 billion a year out of our country and rebuilding China,” the president said during a speech in Washington before the National Federation of Independent Business. “They’ve taken so much. It’s time folks, it’s time. So we’re going to get smart, and we’re going to do it right.”

Markets sank on Tuesday in response to Mr. Trump’s announcement late Monday that his administration was preparing to impose even more tariffs than he originally threatened if China continued with its plan to retaliate against the United States.

Mr. Trump is now threatening to tax nearly the total value of goods that China sent to the United States last year, which was $505.6 billion.

The benchmark Dow Jones index, the Standard & Poor’s 500-stock index and the tech-heavy Nasdaq composite all fell on Tuesday, following stock markets in Frankfurt, London, Paris, Hong Kong, Tokyo and mainland China. Investors moved money into assets that are considered safe havens, like 10-year United States Treasury bonds and the Japanese yen.

Shares of Boeing and Caterpillar, which are among America’s leading exporters to China, fell sharply on Tuesday, along with soybean futures. China is the world’s largest importer of soybeans, a key livestock feed, and Beijing has targeted American soybeans for retaliation with its own tariffs.

Soybean prices dropped more than 7 percent at times during the morning before stabilizing in afternoon trading. Prices are at their lowest level in more than two years, creating a politically delicate issue for Mr. Trump, who has strong support from rural voters in farm states but whose trade policies have angered farmers and lawmakers who represent them.

Senator Joni Ernst, an Iowa Republican, said in a statement, “These aggressive trade actions will continue to have damaging consequences, including an impact on our commodity prices and farm futures, and increasing anxiety among the agricultural and business communities in Iowa.”

But Mr. Navarro, who is among Mr. Trump’s most strident anti-China advisers, dismissed those concerns, saying the United States had no choice. He said that the White House had given China numerous opportunities to negotiate and alter policies that have cost Americans millions of jobs, and that the Trump administration was now prepared to impose tariffs on $450 billion of Chinese goods in order to force Beijing to bend.

“I think that the other side may have underestimated the strong resolve of President Donald J. Trump,” Mr. Navarro said. “If they thought that they could buy us off cheap with a few extra products and allow them to continue to steal our intellectual property and crown jewels, that was a miscalculation. We hope going forward there are no more miscalculations.”

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How China Became Trump’s Trade Nemesis

China’s explosive rise was a shock to the global trading system. For decades, Western economies like the United States have struggled with the growth of this economic powerhouse.

“If you look at what’s happening with trade in China, it hasn’t been fair for many, many years.” When President Trump rails against China, he says things like, “Our country is being taken advantage of,” or, “We lost years ago by presidents and others allowing this to happen.” He’s probably referring to the past four decades, when China has grown faster than any major economy in history and gone from a poor, developing country to an economic powerhouse that is challenging America’s spot at the top of the international food chain. “Its emergence as a global power was so sharp and so extreme, faster than the world can handle, in some ways faster than China can handle.” The U.S. and other Western nations kick-started much of China’s rise by opening up trade. What they haven’t figured out is how to get this fundamentally different economic system to play by free market rules. A pivotal moment came in 2001 after 15 years of negotiations. China joined the World Trade Organization, which sets the rules for free and fair trade between member countries. “All of the countries that were in the club at the time put enormous demands on China for what they needed to do.” The Chinese committed to sharply lower tariffs and reduced some of the government’s role in how business gets done. But they argued then, as they still do now, that China is a developing country and so should be held to less stringent free trade standards. The hope was that these first steps would lead to even more sweeping changes. “Why did we assume that? The experience of communism was through the lens of the Soviet Union and its satellite states, which was ultimately not a success. And so the presumption was, China’s going to want to become like us, more market oriented.” “After China joined the W.T.O. in 2001, you saw this enormous surge of Chinese exports to everywhere in the world, and to the United States in particular.” “They were kind of an elephant hiding behind mice with respect to other countries in global trade negotiations at the time.” The U.S. and other countries complained that China was not opening its markets enough, and keeping the value of its currency artificially low to make Chinese exports more attractive. “China has been making great strides using tools that are really not acceptable under the global trade system.” China has continued to operate as a centrally planned economy. The government owns, influences or subsidizes major industries, giving them an artificial competitive edge. There are heavy restrictions on foreign investment, and foreign companies are pressured to share their technologies. “China has become more market oriented, but dating back to probably 2007, 2008, I think it was recognized that China wasn’t on the path to become more like us. And so then countries began to think about, well, what do we do instead?” “Some view the rise of Asia-Pacific with suspicion and fear. America doesn’t.” Enter the Trans-Pacific Partnership, initiated by Bush, signed by Obama. “When implemented, It won’t just boost trade and support jobs in our 12 countries. It will help set stronger rules for trade across the Asia-Pacific.” Put less politely, It was also supposed to be a bulwark to China’s growing economic power. “The idea was that China would want to join this great trading pact, and so they would have this incentive to reform their economy.” “This is the one that President Trump ripped up on his third day in office.” “The first one is withdrawal of the United States from the Trans-Pacific Partnership.” “I had seen the erosion of popular and congressional support for trade for many years. But I’d never seen anything like Donald Trump.” “Our founding fathers understood trade much better than our current politicians, believe me.” Trade is generally accepted by economists as win-win for countries on the whole. But Trump says that China is winning and the U.S. is losing. “He and people in his administration argue that past approaches to dealing with China haven’t worked. It’s not actually that profitable to negotiate with them. We need to focus on this much bigger trade measure, and then we can really hit them with a very aggressive, forceful action.” “He seems intent on generating a moment of crisis.” “We put a $50 billion tariff on, then we put a $100 billion tariff on. And you know at a certain point, they run out of bullets.” But dynamics have changed. Today, China sees its economy as strong enough to withstand almost anything the U.S. can throw at it.

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China’s explosive rise was a shock to the global trading system. For decades, Western economies like the United States have struggled with the growth of this economic powerhouse.CreditCredit...Johannes Eisele/Agence France-Presse — Getty Images

Mr. Navarro said a trade clash would hurt China much more than the United States, given that the value of China’s exports to the United States was nearly four times the value of what the United States exports to China.

For weeks, the United States and China had appeared close to a deal that would have forestalled tariffs. Top advisers like Steven Mnuchin, the Treasury secretary, and Wilbur Ross, the commerce secretary, had advocated a deal that could avoid the devastating effects of a trade war, and spent hours in negotiations with Chinese officials.

But after the Chinese refused to commit to a target for reducing their trade surplus with the United States or limit industrial subsidies, Mr. Trump rejected those proposals. And his resolve only hardened after lawmakers, including Democrats, criticized him as being weak on China when he agreed to help ease penalties on ZTE, a Chinese telecommunications company accused of violating American sanctions.

That decision has triggered a huge fight between the White House and Congress. On Monday, the Senate passed legislation that would reinstate penalties on ZTE and rescind a Commerce Department deal that allowed the company to stay in business in exchange for paying a large fine and agreeing to a series of management and compliance changes. The White House has vowed to remove that provision before the bill becomes final, and Mr. Trump is expected to meet with lawmakers on Wednesday to discuss the fate of ZTE.

The president’s approach has irritated some of Mr. Trump’s own advisers, including Mr. Mnuchin, who has been frustrated by the process of the China talks, according to an official familiar with his thinking. Mr. Mnuchin has tried to explain in recent meetings how China is likely to respond to America’s threats and the impact that retaliation could have on financial markets and the economy.

He has also been trying to persuade Mr. Trump not to proceed with harsh restrictions on Chinese investment that would limit China’s ability to do business in the United States. The Treasury Department is expected to release a proposal this month. Mr. Mnuchin, who is leading the effort, has been trying to convince Mr. Trump that the restrictions are unnecessary, given pending legislation that would expand national security reviews performed by the Committee on Foreign Investment in the United States.

In late May, Mr. Mnuchin helped orchestrate a meeting between the president, top White House advisers and Republican lawmakers, where the Treasury secretary asked lawmakers to help make the case that legislation would be a more targeted way to police Chinese investment, three people with knowledge of the meeting said. But Mr. Navarro and Robert E. Lighthizer, the United States trade representative, who were also in the meeting, objected to that approach. The president ultimately overruled Mr. Mnuchin, saying that he supported the congressional legislation but that it alone wasn’t enough.

The decision to proceed with tariffs is a victory for hard-liners in the administration, like Mr. Navarro and Mr. Lighthizer. They had argued that the United States should not back down from trying to force China to make more fundamental changes to its economy, even if such measures would cause short-term pain for American businesses and consumers.

On Tuesday, Mr. Navarro minimized the divisions between administration officials, saying the United States’ negotiating process had not wavered and was “linear.” He said the idea of dropping the trade case in exchange for purchases — something the Chinese had offered the Americans in negotiations — had always been a “nonstarter.”

In his remarks Tuesday morning, Mr. Navarro took aim at China’s internal plan to develop cutting-edge industries like robotics, new-energy vehicles, advanced rail and shipping, and aerospace. He said the country could not be allowed to dominate technologies that would be an important source of jobs and growth for the United States in decades to come.

China has engaged in unfair practices, including cybertheft and “information harvesting,” to obtain technological secrets from the United States that would allow China to pull ahead in these industries, Mr. Navarro said.

“It is important to note here that the actions President Trump has taken are purely defensive in nature,” he said.

There is broad agreement that China has engaged in unfair trade practices that have hurt American companies. But Mr. Trump’s resort to tariffs as his primary negotiating tool has prompted swift condemnation from retail, technology and manufacturing companies, who said the approach could hurt American consumers and companies more than the White House realized.

Jose Castaneda, spokesman for the Information Technology Industry Council, called the escalation of trade tensions with China “irresponsible and counterproductive.”

“We appreciate President Trump’s efforts to protect the United States’ ‘crown jewels,’ but tariffs are simply the wrong way to do it,” he said. “The White House needs to work with our allies to create lasting change with China. Too many jobs and livelihoods are at stake to get this wrong.”

Matt Priest, the president of the Footwear Distributors and Retailers of America, said it was difficult to see how tariffs on an additional $200 billion of Chinese goods wouldn’t “negatively impact all Americans of every walk of life.”

“The president claimed that trade wars are easy to win, but what our industry has always known is coming true: Trade wars are costly, unnecessary and do harm to the American economy,” he said.

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