This weekend U.S. President Donald Trump tweeted a plan to further tax Chinese goods. But our base case is still a trade deal between China and the United States over the next one to three months.

In his tweet, Trump expressed dissatisfaction with U.S.-China negotiations and announced that tariffs on $200 billion of Chinese imports currently taxed at 10% will be increased to 25% effective this Friday. He further stated that the remaining $300 billion of Chinese imports currently not subject to much of a tariff will be taxed at 25% shortly.

The increase from 10% to 25% is for goods on a list compiled last summer, and has been ready for months, in the back pocket of U.S. negotiators. It can come in force quickly, but probably not by Friday. Likewise, it can be revoked quickly, probably by executive order.

The tariff on the remaining $300 billion of Chinese imports is at least two to three months away if the process starts today.

A 100-person strong Chinese delegation is due in Washington this Wednesday for what was thought to be the final round of substantive negotiations. It remains to be seen if this trip takes place.

It looks as if Beijing has settled on a course to navigate the economy through Trump’s presidency, and that is by supporting China’s domestic private sector. Within 12 hours of Trump’s tweet, The People’s Bank of China announced a reserve requirement ratio (RRR) rate cut to 1,000-plus rural banks.

The policy is expected to inject 280 billion renminbi of liquidity, with the funds going exclusively to small and medium-sized enterprises (SMEs) and private enterprises. This policy was designed months ago, and hinted at in March and again in April. The speed of response and timing are not accidental.

Still, a trade deal between China and the United States over the next one to three months remains the base case, not least because Trump will not be able to tolerate the adverse effects on his key constituencies.

The initial market sell-off may become protracted. U.S. farmers, who were looking forward to the resumption of grain and soybean exports, will feel more pain. And U.S. consumers more broadly will be impacted by higher inflation.

The U.S. economy is not nearly as strong as the first gross domestic product growth estimate for the first quarter of 2019 implies: inventory build-up contributed as much to growth (0.7%) as private consumption (0.8%).

This backdrop is not conducive to winning re-election.

Olga Bitel, partner, is a global strategist on William Blair’s Global Equity team.

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Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

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William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

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Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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