Larry Kudlow, President Donald Trump's top economic adviser, said Sunday there is a "strong possibility" Trump will meet Chinese President Xi Jinping at the G20 economic summit in Japan next month and said he expects China to retaliate against the U.S. for its increase this week in tariffs on Chinese goods as Beijing has indicated it would. Mr. Trump also lashed out over the Mueller probe.
"The market reaction will ultimately depend on whether China and the US continue to negotiate, whether the remaining $325 billion of USA imports from China also get tariffed, how China retaliates, and what happens to the (section) 232 auto tariffs". The president also ordered tariffs to be raised on all remaining U.S. imports from China, valued at around $300 billion.
Prospects for a drawn out trade war between the United States and China sent S&P 500 futures sharply lower as trading resumed on Sunday, after Washington demanded concrete changes to Chinese law and Beijing said it would not swallow any "bitter fruit" that harmed its interests. "We see a significant risk for all Chinese imports to be subject to tariffs over the next month or so", said Michael Hanson, head of global macro strategy at TD Securities.
"We would like to see these corrections in an agreement which is codified by law in China, not just a State Council announcement".
The news comes on the heels of a recent decision by Trump to increase tariffs on about $200 billion worth of Chinese imports, from 10 percent to 25 percent. Kudlow said Sunday it could be "months" before more tariffs go into effect.
In a pair of Twitter messages, Trump also refloated a plan from Friday to redirect money generated by tariffs to buy up American agricultural products and "distribute the food to starving people" around the world - a suggestion that has already drawn skepticism. That's why many USA importers have little choice but to pay the tariff.
Trump has also threatened to impose import taxes on the remaining $300 billion in Chinese imports, a step that Kudlow estimated would take several months to implement.
Imposing those tariffs would impact a wide range of consumer goods - clothes, shoes, toys, and electronics such as iPhones - that have been mostly exempted so far and could prompt steep cost increases that many Americans would likely notice.
While supporters laud Trump as a tough negotiator, free-trade-minded Republicans have warned that the tariffs could do real damage to the economy, and many farmers - including Trump supporters - say the tariffs have hit their bottom line.
Independent economists, though, think the impact would be larger. Gregory Daco, an economist at Oxford Economics, estimates it would reduce USA growth by a half percentage point and cost 300,000 jobs.
Under that scenario, the renminbi was likely to fall between 5%-6% against the US dollar in the coming three months, said Hanson, as a shock absorber to the economic impact of heavier tariffs. "We may know more today or even this evening or tomorrow", he told "Fox News Sunday".
"Both sides will pay", Kudlow said when pressed on the issue. Kudlow said on Sunday that Chinese officials have invited U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to visit Beijing, though nothing has been scheduled.
Kudlow also said that Trump and China's President, Xi Jingping, may meet in late June at the G20 global conference in Japan.