Markets drop sharply as China implements new tariffs against U.S.

Who would have thought a potential trade war would cause investors to sell?

U.S. markets plunged today as China announced that it was implementing tariffs on $3 billion worth of American goods, mostly in agriculture and steel production. The Dow was down nearly 600 points today an hour before markets closed, and the NASDAQ was down about 210 points, or roughly 2.92%.

Investors are skittish that a festering trade skirmish will grow into a full on trade war. Even though these Chinese tariffs weren’t directed at high-tech goods, investors expect that any trade fight will ultimately hit the sector the hardest, since American exports to China are predominantly in areas like aircraft, machinery, and electronics. Tech stocks were almost universally down today except for a handful of smaller players.

China’s proposed tariffs are 15% on 120 categories of goods including dried apples, frozen strawberries, unshelled chestnuts, sparkling wine, and various types of stainless steel piping and casings. The Chinese are going to levy a higher 25% tariff on pork products and aluminum scrap coming from the United States. The tariffs were implemented today, and are retaliation to the Trump administration’s announcement that it would place tariffs on steel and aluminum imports. China has not yet responded with a retaliatory tariff for Trump’s tariff on $60 billion of electronic goods, which have not yet been brought into force.

Increasing tariffs is an unusual event in a world that has made free trade agreements a major force for diplomacy over the past three decades. China joined the World Trade Organization in 2001, but market liberalization has lagged, and there are increasing constituencies in the United States and in other Western nations to reverse these trade agreements and cut a new deal.

Much as the United States is preparing a fusillade of techniques to slow down Chinese trade, the Chinese government is also attempting to use various powers to fight back. Qualcomm is still waiting for approval from China’s government for its acquisition of NXP Semiconductors, a massive deal at the heart of one of America’s most prominent technology leaders. China is also considering creating Chinese Depositary Receipts to mobilize local dollars and “buy back” local tech behemoths like Alibaba and Tencent, potentially creating a new trillion dollar local asset market.

On the American side, U.S. Trade Representative Robert Lighthizer was quoted last week saying that a computer algorithm would try to select goods that maximize the harm to China’s trade, while minimizing the damage to American consumers. That’s gradient descent into trade oblivion.

It’s a multidimensional game, with both sides using tactics that would have been completely dismissed by policymakers just a year or two ago. Expect more gyrations in the markets in the coming weeks as we learn more about Trump’s proposed electronics tariffs, and the Chinese response to them.