Trump Escalates Trade Tensions with China, Announces New Tariffs

President Donald Trump is ramping up trade measures against China. In a social media post on Thursday, Trump stated that the flow of drugs remains at an unacceptably high level and blamed China for this issue, announcing an additional 10% tariff.

The new tariff will be added to the previous 10% tariffs imposed earlier this month and is set to take effect on March 4. This move adds another layer to Trump's previous trade and investment measures, heightening the risk of escalating tensions between the two countries.

The latest tariffs will take effect just one day before Chinese President Xi Jinping attends the country's biggest political meeting of the year, where he is expected to unveil his 2025 economic plans. According to economists, the additional tariffs will push the average U.S. import duty on Chinese goods to around 33%, which could put pressure on China's economic growth.

Beijing had previously responded to Trump's tariffs and other measures with targeted countermeasures, stating that it could take stronger retaliatory actions if necessary. This has raised questions about whether China will maintain its cautious stance following Trump's latest move.

On the other hand, some economists suggest that China may announce additional stimulus packages to offset potential damages caused by the tariffs, which could support domestic consumption and investment. According to Societe Generale economist Michelle Lam, China would need to introduce between 500 and 700 billion yuan in additional stimulus to counter the possible effects of the tariffs and achieve its growth target.

As markets assess the risk of a potential trade war between the world's two largest economies, they will also be closely watching whether China announces further stimulus measures.

Fed Study Questions U.S. Trade Data, Warns of Greater Tariff Impact

As President Trump announces new tariff measures, concerns are resurfacing about rising inflation and potential economic slowdowns in the U.S. A new study by the Federal Reserve Bank of New York suggests that the effects of these tariffs could be more significant than many expect.

The study indicates that, despite the tariffs imposed during Trump's first term, U.S. imports from China have declined much less than official U.S. statistics suggest. This implies that the economic impact of the new tariffs on the U.S. might be greater than the data indicates.

The key point of contention lies in the discrepancy between U.S. and Chinese trade data. According to U.S. figures, imports from China fell by $66 billion between 2018 and 2024. However, Chinese data shows that exports to the U.S. actually increased by $91.2 billion over the same period. Depending on which data is more accurate, the narrative around the tariffs could shift.

Additionally, Fed economists warn that if the Trump administration proceeds with ending the previously postponed "de minimis" exemption, the negative economic impact could deepen.

The "de minimis" rule exempts imports valued under $800 from tariffs---a threshold that was raised from $200 in 2016, leading to a surge in such shipments. If this exemption is removed and Chinese sellers pass on the cost to consumers, tariffs will directly burden U.S. households.

Economic Risks Rise as Tariffs Threaten Consumer Spending

Both economists and American households broadly agree that Trump's tariff policies could exacerbate price pressures and have significant consequences for consumers.

A Bloomberg survey of U.S. households confirms that tariffs are fueling inflation concerns. Nearly 60% of American adults believe tariffs will lead to higher prices, with half of Republican respondents sharing this view.

According to the Peterson Institute for International Economics, if Trump implements his proposed tariffs on China, Canada, and Mexico this year, the average American household could face over $1,200 in additional annual costs.

Furthermore, a recent note from Goldman Sachs indicates that if the delayed 10% tariff on Canadian oil is enforced, it would not boost domestic production but would add approximately $170 in extra costs per household.

Thus, while tariffs may accelerate inflation, they also risk suppressing consumer spending---the driving force of the economy---and ultimately stalling growth.

U.S. Economy Grew at a Solid Pace, but Inflation Remains Stubborn

A report released by the U.S. Bureau of Economic Analysis on Thursday showed that the U.S. economy grew at a solid pace in the final quarter of last year, though inflation remained more persistent than expected.

Gross domestic product (GDP) increased by 2.3%, in line with previous estimates. Growth was supported by a 4.2% rise in consumer spending.

Meanwhile, the core personal consumption expenditures (PCE) price index--- the Federal Reserve's preferred inflation gauge, which excludes food and energy costs--- accelerated from the previously estimated 2.5% to 2.7%. The increase primarily reflected higher service costs.

Throughout the past year, strong job and wage growth helped sustain consumer spending despite high inflation. However, looking ahead, economists expect a softening in job growth to weigh on consumer spending while inflation remains elevated. As a result, economic growth is projected to slow from last year's average of 2.8% to 2.3%.

Additionally, U.S. Treasury investors are increasingly pricing in the possibility that the Fed may soon have to shift its focus from inflation risks to growth concerns. Bond yields have fallen to their lowest levels of the year, and Morgan Stanley has pointed out that if this sentiment continues to build, the 10-year Treasury yield could drop below 4%--- a scenario that could trigger losses for the U.S. dollar.

U.S. Labor Market Still Resilient, But Cracks Begin to Show

According to a survey released by the Philadelphia Fed on Thursday, nearly one-third of U.S. workers are now worried about job losses--- the highest level in at least two years. The survey also indicates that households are increasingly relying on borrowing, taking on additional jobs, or cutting back on spending to make ends meet.

While high inflation and interest rates continue to soften the labor market, Trump's efforts to reduce the federal workforce and his immigration policies are adding another layer of risk.

A separate report released Thursday showed that jobless claims rose last week, likely driven by layoffs at high-profile companies and federal agencies. Initial claims for the week ending February 22 increased by 22,000 to 242,000--- the highest level since October 2024.

In Washington, D.C., jobless claims rose to their highest level since March 2023, likely reflecting federal layoffs. However, several more labor market reports will be needed to fully assess the net impact.

Overall, the U.S. labor market is cooling but remains resilient, giving the Fed room to keep rates steady amid ongoing uncertainties surrounding tariffs and inflation risks.

However, tariffs could introduce additional risks to the job market, and if inflation remains sticky, the Fed could find itself in a difficult position with its dual mandate. Next week's payroll data will provide further insight into the labor market's trajectory.

Markets Await Key U.S. Inflation Data as Fed Rate Cut Bets Adjust

Market attention is now focused on U.S. inflation data set to be released in a few hours. According to Bloomberg's median survey of economists, the core PCE index likely increased by 2.6% year-over-year in January, down from 2.8% in December. However, the month-over-month increase is expected to accelerate from 0.2% to 0.3%.

The data is likely to indicate that inflation is not accelerating as feared, but it will also reinforce the notion that price pressures in the U.S. remain sticky. 

If the numbers show that inflation is not picking up as rapidly as some had feared, confidence in the Fed’s expected rate cuts this year could strengthen. Swap traders are currently fully pricing in two quarter-point rate cuts this year— with the first expected in July and a slightly over one-third probability for May. A softer inflation report could boost the odds of a May rate cut, potentially adding downward pressure on the U.S. dollar. 

However, if the report paints a different picture, existing concerns— already fueled by Trump’s policies— could intensify, leading to another delay in expected Fed rate cuts.