Dow closes 425 points lower on trade war fear after Trump move to impose tariffs on China

Adam Shell | USA TODAY

Show Caption Hide Caption Trump signs order punishing China on trade President Trump took the first step in imposing tariffs on as much as $60 billion worth of Chinese imports. The order is aimed at punishing Beijing for allegedly stealing American technology. (March 22)

U.S. stocks ended a turbulent week with a late-day sell-off that knocked the Dow down more than 400 points and pushed it officially back into "correction" territory as fears of a looming trade war prompted nervous investors to sell.

The Dow Jones industrial average closed down 424.69 points to 23,533.20 Friday, stretching its weekly loss to more than 1,400 points, or 5.7%. The rout left the blue-chip stock gauge 11.6% — above the 10% drop needed for a correction — below its all-time high of 26,616.71 it hit on Jan. 26 and back to levels last seen in November.

Driving the market tumult was President Trump's decision Thursday to follow through on his threats to slap tens of billions of dollars in tariffs on Chinese imports to the U.S., a move that prompted Beijing to retaliate and announce plans to impose tariffs on many American-made goods, including fruits, nuts and wine, entering China.

Wall Street is worried that a major trade conflict will break out and damage the global economic recovery.

“Trump's tariff plans have created uncertainty and put global stock markets under pressure," says Nigel Green, founder and CEO of deVere Group, a U.K.-based investment firm.

A trade war occurs when countries try to protect their own economies and domestic businesses by charging trading partners a tax, or tariff, on imported goods. The fallout of such a fight is measured in weaker economic numbers, such as slower GDP growth, fewer sales of airplanes, wine and other goods and shrinking profits for companies.

The potential weakening of business conditions is what Wall Street fears.

Protectionist trade policies also lead to higher prices for goods and services for consumers and businesses. And a rise in inflationary pressures could prompt the U.S. central bank to speed up its pace of interest rate hikes, which could further slow economic growth. Trade skirmishes can also hurt U.S. exports.

The tit-for-tat trade skirmish has raised worries that this confrontation between the two economic powers is more than just a negotiating ploy and could morph into a more serious full-blown trade war.

“Investors are rattled about the economic and inflation impacts of tariffs and a potential trade war," says Greg McBride, chief financial analyst at Bankrate.com. "This 9-year-old bull market has been sustained by a growing economy in a low-inflation, low-interest rate world. Now those conditions are called into question.”

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Weakness in the technology sector also weighed on markets. The data-privacy controversy surrounding social media giant Facebook — a popular and once-high-flying stock — caused its shares to tumble nearly 14% this week. Facebook's plunge spread to the rest of the technology sector, as investors exited a corner of the market that had been leading the market higher. The tech-packed Nasdaq composite declined 6.5% this week.

The Federal Reserve's decision to hike interest rates this week also reminded investors that borrowing costs, after nearly a decade at record-low levels, are headed higher.

The week's carnage, however, was dominated by the fight over trade involving the two biggest economies in the world: the U.S. and China.

"Markets are on a knife-edge, fearing a trade war," says Peter Rosenstreich of Swissquote Bank, Switzerland’s leading online bank. "China is unlikely to sit idly in response to Trump’s bluster."

However, Rosentreich adds, markets could be "overreacting" to Trump's threats to start a trade war. The heated rhetoric from the president could be more of a negotiating tactic. "Trump is using the issue for political gain rather than actual trade repositioning," he says.



