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Trump Says He’s Poised to Escalate China Trade War Within Hours

Joshua Gallu and Shawn Donnan

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President Donald Trump signaled he may escalate the trade war with China in the coming hours after the country’s latest round of tariffs, firing off a new demand that U.S. companies seek alternatives to producing goods in China.

“I will be responding to China’s Tariffs this afternoon. This is a GREAT opportunity for the United States,” Trump tweeted Friday, after China threatened to impose additional tariffs on $75 billion in American goods, including soybeans, cars and oil.

A meeting on trade took place around midday in the Oval Office, according to people familiar with the discussions. Trump is scheduled to leave late Friday for the G-7 summit in France, where trade tensions and their impact on the global economy are at the top of the agenda.

Trump added in a flurry of tweets that he “hereby ordered” American companies to start looking for alternatives to making products in China. It wasn’t immediately clear what legal authority the president would have to force such corporate decisions.

The president laced into China, saying “We don’t need China” and that the U.S. would be “better off without them.” He also took aim at the Federal Reserve over what he’s called its failure to lower interest rates to boost the economy and keep the dollar from becoming too strong, which weighs on exports.

U.S. stocks fell after Trump’s remarks, with the S&P 500 Index dropping 2.6% on the day. Technology stocks were hardest-hit. Treasuries rallied.

The angry set of tweets from Trump came after China announced its retaliation for new U.S. tariffs due to take effect Sept. 1 and Federal Reserve Chairman Jerome Powell repeated his concern that U.S. trade policy was contributing to a slowdown in both U.S. and global economies. They also reflected Trump’s growing frustration with the lack of progress in his trade battles with China, according to analysts close to the White House.

“The president has been increasingly frustrated in the last three months’’ with China after the May breakdown of talks that he believed were about to yield a deal, said Michael Pillsbury, a China expert with the Hudson Institute in Washington with whom Trump has consulted in the past.

QuickTake: How the U.S.-China Trade War Got to This Point

Trump’s most likely response, Pillsbury said, would be to raise tariffs from 10% to 25% on remaining imports from China that are due to start taking effect Sept 1. But he had other ways to increase pressure, Pillsbury added, including giving the final green light to sales of F-16s to Taiwan that have been signed off on by the State Department. The administration has notified Congress it intends to go ahead with the sale.

Derek Scissors, a China expert at the American Enterprise Institute who has also advised the administration, agreed that an increase in tariffs was the most likely course of action, though it could be staged to give China more time to respond.

Trump’s order to U.S. companies to abandon China would mean very little in the short-term, Scissors said. But the president does have other ways he could increase pressure on U.S. companies to stop doing business with China, particularly if he chose to invoke a national security emergency and ban tech companies from selling certain products to Chinese buyers.

“It’s worth the market being a little nervous that U.S. tech companies are involved with China and that they are providing China with dual-use technologies,’’ Scissors said. “That’s what the hawks are angry about. So the president can take action against those companies not by ‘I hereby order,’ but by starting a process where the direct pressure on them goes up.’’

China’s newest tariffs came earlier Friday in retaliation for Trump’s latest planned levies on Chinese imports, which have pushed U.S. stocks and commodities lower. The move takes aim at the heart of Trump’s political support -- factories and farms across the Midwest and South at a time when the U.S. economy is showing signs of slowing.

Trump reiterated his criticism of the Fed after Powell’s remarks were released earlier Friday morning: “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” Trump said in one of his tweets, referring to Chinese President Xi Jinping.

The news from Beijing rekindled concerns about the world’s two largest economies and a global growth outlook that’s already looking shaky.

Some of the Chinese countermeasures will take effect starting Sept. 1, while the rest will come into effect from Dec. 15, according to the announcement from China’s Finance Ministry. This mirrors the timetable the U.S. has laid out for 10% tariffs on almost $300 billion of Chinese shipments.

Read More: Trade War to Last Longer Than Fed Cut Boost: Analyst Roundup

China will put an extra 5% tariff on American soybeans and crude-oil imports starting next month. The resumption of a suspended extra 25% duty on U.S. cars will resume Dec. 15, with an additional 10% on top for some vehicles. With existing general duties on autos taken into account, the total tariff charged on U.S.-made cars would be as high as 50%.

The U.S. Chamber of Commerce called China’s move “unfortunate but not unexpected.”

“The fact of the matter is that nobody wins a trade war, and the continued tit-for-tat escalation between the U.S. and China is putting significant strain on the U.S. economy, raising costs, undermining investment, and roiling markets,” Myron Brilliant, the chamber’s head of international affairs, said in a statement.

After Trump gave the go-ahead earlier this month for tariffs on the almost $300 billion in Chinese imports that haven’t been hit by higher duties, China halted purchases of agricultural goods and allowed the yuan to weaken.

Possible Actions

Other than possibly raising the tariffs set to kick in Sept. 1, it isn’t clear what action Trump might take. Inside the White House, hawks have been pushing for a direct intervention in currency markets by the Treasury by pointing to a slowdown in U.S. manufacturing, which many economists have blamed on tariffs imposed by Trump and uncertainty surrounding his trade war with China.

Just how effective a Fed cut or an intervention would be is unclear. The relevant Treasury fund has $92 billion in it. Even if the Fed were to join in, as it has in past interventions, and match that amount, a $180 billion injection into a $5 trillion per day global foreign-exchange market might have a limited effect. It might also unnerve markets and have longer-term economic consequences.

Beyond that, the administration could raise further barriers to Chinese investment in the U.S. or target China’s energy supply by revoking waivers that allow Beijing to continue purchasing oil from Iran and Venezuela. Trump could also take steps to further isolate Huawei Technologies Co., which the U.S. deems a security threat, in its bid to supply 5G technology in the U.S. Or, Trump could take a harder line against Beijing over human rights and the autonomy of Hong Kong, where protests have raged for weeks.

Fentanyl Order

U.S. and Chinese negotiators have spoken by phone and are planning another call in coming days. People familiar with their intentions previously said that the Chinese delegation is sticking to their plan to travel to the U.S. in September for face-to-face meetings, which may offer a chance for further reprieve.

Trump also ordered mail carriers to search for deliveries of the drug fentanyl coming from China.

“Also, I am ordering all carriers, including Fed Ex, Amazon, UPS and the Post Office, to SEARCH FOR & REFUSE” deliveries of the illegal drug. It isn’t clear what the carriers’ responsibilities are in halting those shipments, which have helped fuel an opioid epidemic in the U.S.

Stopping shipments of illegal fentanyl that enter the U.S. is a job that typically falls to government agencies such as the Drug Enforcement Administration, Food and Drug Administration and Customs and Border Protection.

Illegal Chinese fentanyl is increasingly entering the U.S. through the Mexico border via drug traffickers instead of being sent directly. It’s unclear if Trump also wants to stop legal fentanyl, often used by cancer patients to treat pain, from entering the U.S. as well, which would cause an outcry from patients.

(Updates with market close in sixth paragraph.)

--With assistance from Saleha Mohsin and Justin Sink.

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net;Shawn Donnan in Washington at sdonnan@bloomberg.net

To contact the editors responsible for this story: Alex Wayne at awayne3@bloomberg.net, Joshua Gallu, Larry Liebert

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