Trump’s Trade War With China Drained Stock Market Value But New Negotiations Spark Change

The Dow Jones Index jumped 800 points on April 22 along with other indexes as President Donald Trump’s trade war with China is expected to de-escalate, but due to political uncertainty the market is bracing for more financial loss.

“Any news that brings about uncertainty, scares people to get out of the market until the situation is settled,” said Mohsen Bahmani-Oskooee, a distinguished professor of economics at the University of Wisconsin-Milwaukee. “Uncertainty comes from change in government, economic policy, tax policy and more; good news will make the market move up and bad news will hurt it.”

Market indexes represent the combined value of major companies such as Apple or Amazon that are listed publicly on the stock exchange. The value of these indexes changes day by day due to all kinds of variables such as federal policy, international incidents and more. However, uncertainty is the killer when it comes to the stock market.

The stock market fear gauge, the VIX index measures market volatility based on the S&P 500. The fear gauge closed at 52 a share on April 8 which is the highest the index has been since 2020. As of April 21 the index has been floating between the 20s and 30s, indicative of investor wariness, according to the TradingEconomics stock market chart.

“Volatility gives opportunity to some people if they are smart enough to read it, but more people tend try to get out, because they’re scared,” said Bahmani-Oskooee.”The only way you can fight uncertainty is through economic policy, you have to look at the source.”

President Trump’s economic policy focused on steep tariffs on foreign goods to stimulate domestic economic growth. The intention was to force American companies to centralize their businesses in America. However, after Trump’s tariff announcement on April 2 resulted in a 34% retaliatory tariff from China, the Dow Jones, S&P 500 and the NASDAQ lost $6.6 trillion combined in two days, according to the Wall Street Journal.

“The understanding from the average economist is that these tariffs will cause both a recession and inflation, which is called stagflation,” said Bahmani-Oskooee. “As prices start rising people here will cut back their spending such as prioritizing prescriptions over eating out, which then hurts the restaurant business and then increases unemployment as businesses close.”

The Penn Wharton budget model created by the University of Pennsylvania analyzed the broad economic impact of Trump’s tariffs on the U.S economy. The model finds that over the course of ten years the U.S will make close to $10 trillion in revenue which is a similar increase if the government increases corporate income tax from 21% to 36%, according to the study. 

Unlike the tax hike, the tariffs are projected to cause a significant amount of economic hardship for the average American. Long-run GDP will decrease by about 6% and so will wages by 5%, with middle income households expected to have a twenty-two thousand dollar lifetime loss, according to the study. 

The study says that the reduction in economic activity is more than twice as large as a corporate tax increase which would be similarly profitable for the federal government.

The current increase in market value is driven by a potential loosening of tariffs, particularly on China who is the third largest export market for the United States. Both countries’ economies have become more intertwined since the early 2000s. The United States has a $295 billion trade deficit with China which makes up the largest portion of the United States’ $1.2 trillion total trade deficit with over 100 countries, according to the Wall Street Journal.

Part of Trump’s goal with the tariffs was to decrease the trade deficit to stimulate domestic economic growth.

“We cannot live in isolation,” said Bahmani-Oskooee. “The U.S needs these trading partners and they need us; the U.S won’t be able to stimulate enough growth in 2 to 3 years to compensate.”