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Trump's Latest Trade War Tirade Should Worry Investors, Pt. 1

The trade war between the United States and China has been a defining feature of the economic and financial landscape during the past year. U.S. President Donald Trump and his Chinese counterpart, Xi Jinping, have been the principal actors in the drama. They have engaged more than once in blistering exchanges fiery rhetoric, only to walk back from the brink each time with words of diplomatic conciliation.

This time it is different. With China calling Trump's latest bluff earlier this month and escalating its own retaliatory tariffs in response, the White House has dug in for a fight that has little prospect of ending anytime soon.

As the U.S. presidential election draws ever closer, an increasingly isolated Trump may find himself in a no-win scenario. That could be bad news for investors.

Raising the stakes

Earlier this summer, Trump seemed to be moving toward a somewhat stable trade conflict posture. He was not ramping up tariffs aggressively, but the war continued to simmer. Then, in early August, he set the pot boiling once again with a raft of new threats.

If Trump's latest aggressive turn was surprising, China's response was downright shocking. As we discussed in a previous research note, Beijing opted to allow its currency, the yuan, to float. The result was a brief bout of financial turmoil. Trump initially struck back hard, rhetorically speaking, apparently abandoning the advice of his closest trade advisors in favor of his own intuitive approach.

Evidently, no one in the White House believed the Chinese government could be so intransigent. Stephen Moore, a trusted ally of the White House who served as Trump's economic adviser during the 2016 presidential election, gave voice to the administration's increasingly obvious state of perplexity:

"We're learning that maybe China has a higher pain threshold than we thought here. They don't seem to care that this is having extreme negative effects on their economy. It's kind of a mutually assured destruction game right now."

Bluffing the wrong player

On Aug. 13, it appeared that Trump had caved to the pressure of stock market turmoil and Chinese intransigence, at least in part. The administration announced a delay to some of its tariffs planned to take effect in September. Denting consumer spending during the Christmas shopping season was apparently a major concern, as reflected by the 21-page list of products now exempt from the tariff hikes until Dec. 15. Products such as cell phones were given a reprieve, offering a boost to iPhone maker Apple Inc. (NASDAQ:AAPL), among others. Even Trump's justification of the move came across as defensive and half-hearted:

"We're doing this for Christmas season, just in case some of the tariffs would have an impact on U.S. customers. So far they've had virtually none."

But, if anyone thought the trade war might have reached -- at least a temporary -- stalemate, they were proven sorely mistaken last week as Trump once again reinvigorated his push to increase tariffs. Unsurprisingly, China responded in kind with a host of new tariffs of its own across $75 billion-worth of U.S. goods.

Doubling down

Rather than backing down again, Trump has apparent opted for escalation. Indeed, on Aug. 23, the president took to Twitter to deliver a blistering offensive in which he not only excoriated Chinese trade practices, but seemed to command American companies to join in the trade war:

"Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won't let that happen! We don't need China and, frankly, would be far better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA. I will be responding to China's Tariffs this afternoon. This is a GREAT opportunity for the United States."

This was but the first barrage of the day, and Trump was far from finished. During the afternoon of Aug. 23, he delivered further Twitter salvoes, in which he announced a new ramp-up in tariffs in response to China's latest moves:

"China should not have put new Tariffs on 75 BILLION DOLLARS of United States product (politically motivated!). Starting on October 1st, the 250 BILLION DOLLARS of goods and products from China, currently being taxed at 25%, will be taxed at 30%. Additionally, the remaining 300 BILLION DOLLARS of goods and products from China, that was being taxed from September 1st at 10%, will now be taxed at 15%. Thank you for your attention to this matter!"

Until next time

Unsurprisingly, Trump's moves to raise existing tariff rates, while also threatening U.S. companies with exposure to Chinese markets and supply chains, did not go over well with the market. Stocks swooned badly. It is likely to get worse before it gets better. Investors who have not yet adopted defensive postures should move quickly to do so.

In our next entry, we will discuss the other ramifications of Trump's latest trade war escalation, and how a loss of control of the governing narrative may further amplify volatility -- and the risk of a global downturn.

This article first appeared on GuruFocus.