Today, stocks fell sharply out of fear of a trade war between the United States and China. On Thursday, President Trump announced that he has asked the United States Trade Representative to consider $100 billion in trade tariffs against China, in addition to the tariff he proposed earlier in the week on 106 US products. US and global markets plunged. The S&P 500 fell 2.2 percent and NASDAQ fell 2.3 percent. Today the major averages closed at the lowest they had all week due to the persistence of volatile trading throughout the day as a result of Treasury Secretary Steven Mnuchin revealing the possibility of a trade war with China.
Many have warned that a trade war could be hazardous to the health of the global economy. Benoit Coeure has warned that if the US and China were to adopt protectionist trade policies, the global economy could experience “severe shocks”. The economist has also said that changes in tariffs could result in a 2.5% baseline reduction in the United State’s economic forecast. The Trump administration would be wise to use history as a guide as it pushes for increased tariffs on China. The US pursued protectionist trade policies with the Smoot-Hawley Tariff Act of 1930, which unintentionally increased the economic strain on the nation and prolonged the Great Depression. While the circumstances in 1930 are not the same as today, the negative consequences that this trade war had on the United States should be a point of concern for the trump Administration, especially considering the impact that these discussions have already had on the performance of the stock market.