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China has hit back hard against Donald Trump’s “bullying” tariffs, raising fears that the escalating trade war could trigger a global recession and prompting fresh turmoil in financial markets.
Beijing retaliated on Friday with punitive 34% additional tariffs on all goods imported from the US – mirroring the US decision and exacerbating a sell-off on global stock markets.
Almost $5tn (£4tn) has been wiped off the value of global stock markets since Trump’s Rose Garden address on Wednesday evening, analysts calculated.
In the UK, the FTSE 100 index of leading shares closed more than 7% lower than Monday – its worst week’s trading since late February 2020, when anxiety about the Covid-19 pandemic was gripping the markets.
The dramatic escalation in trade hostilities between the world’s two largest economies magnified concerns among investors about the risks to global growth.
The chair of the US central bank, the Federal Reserve, warned the trade war would mean “higher inflation and slower growth”, as Jerome Powell resisted Trump’s calls to cut interest rates.
The International Monetary Fund (IMF) also warned the escalating trade war was likely to hit global economic growth. The tariffs “clearly represent a significant risk to the global outlook at a time of sluggish growth,” said the IMF managing director, Kristalina Georgieva.
China’s retaliation came after Trump imposed 34% tariffs on Chinese goods, which were already subject to a 20% levy, taking the total levy to 54%. He also imposed hefty tariffs on neighbouring countries in south-east Asia including Vietnam, Cambodia and Thailand, through which billions of dollars of Chinese exports are processed on their way to the US.
Trump responded on his social media platform Truth Social on Friday. He said: “CHINA PLAYED IT WRONG, THEY PANICKED – THE ONE THING THEY CANNOT AFFORD TO DO!”
The UK chancellor, Rachel Reeves, said ministers would continue to negotiate with Washington, in the hope that the 10% levy on UK exports could be lifted. The UK is offering a series of concessions, including a cut to the £1bn-a-year digital services tax for some of the biggest tech firms.
“We want to do everything in our power, and we’ll continue to do everything in our power to get the best possible deal for British industry, working closely with them to protect prosperity and jobs here in the UK,” she said.
Financial markets are now pricing in a further three interest cuts from the Bank of England by the end of this year, as they weigh up the risks of weaker growth, as some analysts warned that a slowdown could force Reeves to raise taxes in her autumn budget.
“I would have thought the central expectation now must be that if she is sticking to her fiscal rules, she’ll need to increase taxes in the autumn by possibly some significant amount,” said Paul Johnson, the director of the Institute for Fiscal Studies.
On Wall Street, the tech-focused Nasdaq index entered bear market territory – meaning it has lost more than 20% of its value since the sell-off began. It was down more than 3% on Friday alone. The S&P 500 was down 4.8% by lunchtime in New York.
Oil prices also declined sharply, as experts reassessed their projections for global growth, with Brent crude down 7% at about $65 a barrel.
The IMF’s Georgieva appealed for calm. “It is important to avoid steps that could further harm the world economy. We appeal to the US and its trading partners to work constructively to resolve trade tensions and reduce uncertainty.”
There was little sign of such moderation in China’s trenchant response to the Trump tariffs, however.
The country’s state council tariff commission said the US approach was “not in line with international trade rules, seriously undermines China’s legitimate rights and interests, and is a typical unilateral bullying practice”.
Despite fears his trade war will send prices higher for Americans, Trump also called on the independent Federal Reserve to cut interest rates, urging Powell, “CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!”
In a speech in Arlington, Virginia, on Friday, however, Powell suggested the outlook was still too uncertain to make decisions about the direction of monetary policy.
“It is too soon to say what the appropriate policy stance should be. I understand the uncertainty that people feel, but it’s a process that we are going through.”
But he gave a blunt assessment of the likely effects of Trump’s policies. “While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected,” he said. “The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
The president has promised voters his “Liberation Day” policies will bring jobs and investment pouring back into the US.
But investors fear the higher prices that are likely to result will depress consumer demand in the US, and put the brakes on export-dependent economies worldwide.
The market meltdown has also been fuelled by Trump’s unpredictability, which makes it impossible to forecast whether he will negotiate away some of the tariffs in exchange for concessions – or double down.
On Friday alone, Trump posted a message insisting “MY POLICIES WILL NEVER CHANGE,” followed four hours later by another statement in which he said he had had “a very productive call” with the Vietnamese leader, To Lam, who Trump claimed had offered to reduce that country’s tariffs.
The US secretary of state, Marco Rubio, shrugged off the chaos on Wall Street on Friday, appearing to suggest it was all part of the administration’s plan for reshaping the US economy.
“Markets are crashing because markets are based on the stock value of companies who today are embedded in modes of production that are bad for the US,” he claimed.
Still, in the UK, some economists suggested the tariffs may have only a modest impact.
James Smith, an economist at the analysts ING, said: “The overall hit from tariffs on Britain’s GDP is perhaps only 0.2% or so. Certainly not enough to decisively change the outlook for UK growth. And remember there are some decent tailwinds for growth this year, notably from government spending.”
The investment bank JP Morgan said it now sees a 60% chance of the global economy entering recession by the year end, up from 40% previously.
