Markets Jittery Over U.S.-China Trade Fight

By Chris Arnold

Published April 4, 2018 at 1:56 PM EDT

Traders and financial professionals work on the floor of the New York Stock Exchange ahead of the opening bell. Investors' worries about a trade war increased Wednesday after China announced plans to retaliate against U.S. tariffs.

Updated at 4:27 p.m. ET

Fear and uncertainty over a growing trade dispute with China continued to weigh on investors Wednesday, with markets opening sharply lower before recovering by early afternoon.

The major U.S. indexes — the Dow, S&P 500 and Nasdaq — all fell more than 1 percent in morning trading but rebounded to close higher. The Dow Jones industrial average finished the day up 231 points, or 1 percent, and the S&P 5oo closed up 1.1 percent.

The turmoil followed Beijing's announcement on Wednesday of proposed countertariffs on some $50 billion worth of American products. This came hours after the Trump administration released more details on tariffs of about 25 percent on a range of Chinese goods, also worth $50 billion.

The U.S. trade sanctions would hurt Chinese imports of 1,300 categories of products, from medical equipment to machine tools and dishwashers. China targeted a more focused, smaller number of products including soybeans and airplanes. That is the thing about a trade fight: Both sides gets hurt. And investors don't know where all this is headed next.

"Of course I'm worried," said David Kotok, the chief economist and investment officer for Cumberland Advisors. "It's been a long time since we had a president and a White House and a policy that ratcheted up protectionism. We haven't had that in a lot of years. History is not kind to those who do it. History says all sides lose in trade wars."

Kotok said the Smoot-Hawley Tariff Act of 1930 helped turn a recession into the worst depression in U.S. history. And he suggested investors don't have a clear picture of "to what end are you heading?" And markets don't like that uncertainty.

Retailers don't like it much either. "Tariffs are taxes on consumers and a drag on the nation's economy," National Retail Federation President Matthew Shay said in a statement Wednesday. "This entire process creates uncertainty and makes it difficult for retail companies that must rely on complicated global supply chains. Tariffs threaten to hurt consumers, jeopardize job creation and increase the cost of doing business here in the United States."

Shay urged the Trump administration to work with trading partners to hold China accountable and to "advance targeted solutions and recognize the unintended consequences of protectionist trade policies."

Targeted is the key word there. Kotok said part of what makes markets nervous is that the list of products the Trump administration is targeting is "bewildering."

"What is it about a washing machine, made in China, that warrants a quota?" Kotak asked.

Another question analysts and economists are asking: Why fight these trade disagreements on so many fronts at once? This tariff tussle with China comes amid tariffs on steel and aluminum aimed at more countries, which upset several key allied nations, and it also takes place while the U.S. is renegotiating the North American Free Trade Agreement.

Larry Kudlow, the president's newly appointed top economic adviser, struck an optimistic note about NAFTA on Wednesday. "Don't hold me to the timing here, but I think you're going to see some positive news on NAFTA and maintaining NAFTA and reforming NAFTA, and I think the stock market is going to love that," he told reporters at the White House.

As for the scuffle with China, Kotok said he is hopeful that much of this is bluster from the Trump administration. Both sides have some time to negotiate before the proposed tariffs would go into effect. A solution to intellectual property issues and other concerns could be worked out, averting tariffs, he said.

But, he added, "hope is not a valid strategy" for investors. Selling stocks to manage risk is a valid strategy for professional money managers. And that is part of what is going on in the markets.

Notably, China's response so far has been measured. Beijing hasn't escalated the trade fight but has matched the tariffs the Trump administration is threatening with a list targeted goods of equal value. But analysts say China is signaling it's ready for a fight, if it comes to that.