Tuesday, May 29, was an incredibly volatile day on Wall Street. The Dow Jones Industrial Average dropped more than 392 points. This precipitous drop was caused by two main factors: political issues roiling Italy and the ongoing trade war between the United States and China that has been largely stoked by current US President Donald Trump.
The Dow dropped 1.6 percent or 292 points on Tuesday. In addition, the S&P 500 and Nasdaq both suffered significant losses by the close of trading on Tuesday. There are a number of different factors impacting markets and leading to this new volatility.
The most current threat to the economic order is the fact that Italy will be holding elections soon. The populist party in Italy is seen as hostile to EU projects which could mean massive problems with governing the body. Outside investors are worried about Italian debt and are currently hiking interest rates for the Italian government.
While these issues started in Italy and Europe they spread to the US almost immediately. One major worry of Wall Street is that Italy will eventually leave the European Union. Since Italy is currently the third biggest economy in the EU this would be a catastrophic blow for the continent-wide program. At one point Italy leaving the Euro seemed like a fantasy, but Brexit has financial markets across the globe worried.
Another major source of worry for markets is the fact that the administration of President Donald Trump announced new 25% tariffs on 50+ billion dollars worth of goods coming from China. This goes against statements made by his treasury secretary earlier in the month that the trade war with China was “put on hold”.
President Trump is playing with economic fire, and he thinks he’s not going to get burned. Last week, the Trump administration sent an economic delegation to China to make a deal. His trade sanctions started an economic sparing match, and that’s not good news for American consumers. The delegation wants China to reduce the trade deficit by $200 billion over the next two years. The trade deficit was $336 billion in 2017. And the U.S. delegation also asked China to stop taking U.S. intellectual property from the U.S. companies who sell that property in China. If China does what Trump wants, he will take away his tariff threat. That threat impacts about $50 billion worth of Chinese goods.
That sounds like an economic hardball at its finest, according to a BusinessInsider.com article. The head of the White House National Trade Council, Peter Navarro, is in charge of the negotiations. Navarro is not as cooperative and he is not as fair when it comes to negotiating as Larry Kudlow, Trump’s top economic advisor. The Chinese rejected Navarro’s offer. According to associate director of the Cato Institute’s Center of Trade Policy Studies, Simon Lester the delegation knew the Chinese would reject a deal like that.
Lester thinks the Trump administration is putting on a show so the Chinese will turn down the offer and Trump will enforce his tariff plan. There’s a big difference between what China will do and what the U.S. wants from China. And the Chinese are not backing down. A trade war with China will fuel inflation in the U.S., according to some economists and U.S. consumers will pay a heavy price for wanting to buy China products that other countries can’t produce.
After months of back and forth and threats from both sides, representatives in China and the United States are meeting this week to discuss strategies to avoid a brewing trade war between the two countries. The US delegation arrived in Beijing on Thursday for two days of talks in an effort to smooth things over between the world’s two largest economies. President Donald Trump sent two his top advisers to the negotiations, choosing Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer.
Earlier this year, Trump threatened a series of tariffs on imported Chinese goods and China responded with of list of their own tariffs equalling billion of dollars on both sides. In addition to deescalating tensions, the US delegation hopes to make progress in a few other key areas. US officials are hoping to convince China to buy more US goods in an effort to cut the $375 billion deficit. The goal of the talks is to come out of the deal with an agreement by China to purchase an additional $50 billion worth of goods per year. The US also hopes to gain access to more foreign markets through negotiations with China. Lastly, American companies operating in China want Trump to pressure the Chinese government to do more to protect the integrity of their intellectual property. Trump has previously cited this theft and counterfeiting of goods as a major reason for imposing the tariffs.