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The truce was short-lived.

That truce was the agreement reached between President Trump and Chinese President Xi Jinping at the conclusion of the G20 Summit in Osaka, Japan on June 28 and 29. Trump and Xi met to restart discussions after the collapse of trade negotiations back on May 3. As part of their agreement, Trump agreed to not impose further tariffs against China as long as trade negotiations continued to move forward.

Trump has already levied a 25% tariff on $250 billion of Chinese goods imported into the U.S. But on Thursday, Trump announced he would impose a 10% tariff on an additional $300 billion of Chinese goods that will go into effect on Sept. 1. This latest escalation will mean that all the roughly $550 billion of Chinese goods imported into the U.S. each year will be subject to some form of tariff.

China’s response is unknown, but its options are limited. China has already imposed a 25% tariff on all the $120 billion of American goods it currently imports. In other words, China doesn’t have any American goods left to tariff.

In defending his escalation and breach of the truce, Trump cites a lack of progress by China in negotiations. Last week, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer met with Chinese officials in Shanghai. The next round of discussions is scheduled for early September in Washington, D.C.

Trump also contends China is not living up to its previous concessions to buy significant quantities of U.S. agricultural products and to crack down on the smuggling of fentanyl into the U.S. Fentanyl is a powerful opioid linked to nearly 32,000 of the total 70,000 drug overdose deaths in 2017.

This latest escalation by Trump is a massive shot across the bow to force China to sign a final trade agreement. But this strategy is not without risk. Despite a recent pullback in economic growth, Trump is counting on the U.S. economy to remain strong enough to offset the impact of this trade dispute.

Remember, the key factor in trade disputes is economic leverage. With economic strength lies the ability to both impose and absorb economic punishment. Even with the pullback in economic growth, Trump still maintains a sizable advantage in this battle of attrition between the world’s two largest economic powerhouses.

In the April-June second quarter, the U.S. economy grew at an annual rate of 2.1%. Yes, this was far below the first quarter rate of 3.1% and 2018’s overall pace of 2.9%. But the consumer spending component of growth, which accounts for two-thirds of all U.S. economic activity, surged by 4.3%. This was up from the anemic 1.1% growth rate in the first quarter and the strongest quarterly pace since late 2017. To Trump, this suggests American consumers have shrugged off their first quarter spending blues to start driving the economy into a higher gear.

China, however, is still reeling from 2018’s near 30-year low in economic growth. This year, China’s pace of growth is projected to be even lower.

As Trump attempts to tighten the screws on China’s economy, he must walk a very delicate balancing act. The U.S. economy is still strong but starting to show signs of strain from the impact of this dispute and a very weak global economy. The heart of the U.S. economy is the American consumer. And as this dispute continues to run its course, Trump is counting on the American consumer to carry an increasingly heavy weight on its collective shoulders.

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Mark Grywacheski spent more than 14 years as a professional trader in Chicago, where he served on various committees for multiple global financial exchanges and as an industry Arbitrator for more than a decade. He is an expert in financial markets and economic analysis and is an investment advisor with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment advisor with the U.S. Securities Exchange Commission.

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