U.S. – China Trade Tensions Re-Escalate                                                                                                                                                                                                     View in Browser May 8, 2019 Market Reaction: U.S. – China Trade Tensions Re-Escalate By: Shawn Snyder, Head of Investment Strategy, Citi Personal Wealth Management Key Thoughts After months of cooling, U.S. – China trade tensions appear to be rising once again with President Trump stating that the tariffs on $200 billion of Chinese goods will rise from 10% to 25% on Friday. In addition, the President also stated that $325 billion of additional Chinese goods remain untaxed, but will be shortly, taxed at a rate of 25%. Citi’s economists continue to believe that the probability of a “trade war today and a trade deal tomorrow” remain high. However, if not resolved in the second quarter of this year, they believe that there is a possibility that the timetable for a U.S. – China trade deal may be extended into the 2020 Presidential electoral year. They have also highlighted that as the Chinese economy stabilizes (there are tentative signs that a mix of Chinese stimulus is starting to support the Chinese economy), that China may be less willing to make concessions. It’s possible that the Administration is attempting to once again use tariffs as leverage to put more pressure on China to make their desired concessions. If so, that may suggest that the tariffs could be removed if a deal can be reached. A key question will be how financial markets react to the news. If the U.S. stock market’s reaction is contained to a fairly minor pullback (say 5% or so), then this likely increases the odds that the Administration will continue to use the tariffs as leverage. However, should equity markets react more strongly, one could envision a scenario where the Administration retreats from implementing the threat. Importantly, this will likely take some time to play out. Citi’s economists still think that a partial rollback of tariffs is likely, starting with the tariffs on the $200 billion of Chinese goods. However, China may have to decide between keeping the 25% tariffs on the initial $50 billion of goods for an extended period or face 25% tariffs on nearly all of its exports to the U.S. Lastly, we feel obligated to point out that China is not paying tariffs to the U.S. While the U.S. Treasury is indeed collecting billions of dollars in duties (U.S. customs duties rose by $8 billion in the final three months of 2018), the duty is almost always paid directly by the importer of the good, which is usually a domestic (U.S.) firm. The Chinese government pays nothing. 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