U.S.-China tariff tussle sends stocks into a skid

With the U.S.-China trade war intensifying, shares of Illinois companies hid for cover Monday as analysts considered how deeply the conflict will affect the state and regional economy.

With a $3.4 billion annual business of shipping crops, construction equipment and machine parts to China, among other products, Illinois is vulnerable to any retaliatory tariffs. Meanwhile, the tariffs President Trump has imposed on goods shipped from China is threatening to raise costs for American consumers and companies.

In turn, that threatens to stoke inflation and keep the Federal Reserve from reducing interest rates, something investors hoped would happen this year.

So when China announced tariffs on $60 billion of American goods Monday, it delivered a shock to markets that sent them reeling. Lisa Shalett, chief investment officer at Morgan Stanley, called it “a wake-up call for global risk.”

The Dow Jones Industrial Average and the Standard & Poor’s 500 both lost about 2.4 percent, posting their worst session since Jan. 3. The Nasdaq Composite Index was off 3.4 percent.

Deerfield-based Caterpillar and Chicago-based Boeing, both with exposure to China, saw their shares decline more than 4.6 percent Monday. Other local companies taking a hit included Deere, down 6.3 percent, and RR Donnelley & Sons, down 7.1 percent. Both have large workforces in China.

Shalett said that when Trump and China President Xi Jinping started trading tariffs last year, the U.S. economy was strong while China’s was faltering. Now, she warned, the situation may be reversing and could make it harder for Trump to get the concessions he wants.

American companies “are facing higher costs—not just from tariffs, but also from more expensive labor and materials, which are contributing to shrinking profit margins,” Shalett said.

But economists at Northern Trust wrote in a research commentary that inflation still poses little threat while China faces an increase in bad loans that U.S. trade restrictions could worsen.

China’s Monday announcement followed a move by the U.S. on Friday to raise duties on $200 billion of Chinese imports to 25 percent, up from 10 percent. American officials did so after accusing China of backtracking on commitments it made in earlier negotiations.

Two days of trade negotiations between U.S. and Chinese representatives broke up Friday without any agreement. Both countries have indicated more talks are likely.

Illinois Farm Bureau President Richard Guebert Jr. issued a statement Friday decrying the trade war’s affects. “We are sitting on a huge inventory of grain while our export markets are diminishing,” he said. “Corn and soybean prices are depressed, combined with a delayed 2019 planting season due to heavy rains, and farmers are facing their sixth straight year of declining net farm income.”

He warned that farmers will need more federal subsidies if the situation persists. Trump on Monday said a new program to relieve U.S. farmers’ pain is “being devised right now” and predicted that they will be “very happy.”

The administration last year handed farmers aid worth $11 billion to offset losses from trade conflicts.

Top White House economic adviser Larry Kudlow said on Sunday that China has invited U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to Beijing. But nothing has been scheduled. Trump said Monday that he expects to meet Xi in late June at the G-20 summit in Osaka, Japan.

The two countries have given themselves some breathing room: The higher Chinese tariffs don’t kick in for 2½ weeks. The U.S. increases apply to Chinese goods shipped since Friday, and those shipments will take about three weeks to arrive at U.S. seaports and become subject to the higher charges.

On Twitter, Trump warned Xi that China “will be hurt very badly” if it doesn’t agree to a trade deal. Trump tweeted that Beijing “had a great deal, almost completed, & you backed out!”

The president has repeatedly insisted, most recently Monday, that increased tariffs on Chinese goods don’t hurt American consumers. But Kudlow, head of the president’s National Economic Council, acknowledged that U.S. consumers and businesses will bear some of the costs.

“Both sides will pay,” he told Fox News.

Contributing: Associated Press