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Dow Falls 617 Points, Reflecting Anxiety Over a Possible Protracted US-China Trade War

The U.S-China trade war may not end anytime soon.

Investor anxiety over a protracted trade war resulted in steep declines on Monday, after China said it would hit $60 billion in incoming American goods with a tariff of 25 percent beginning on June 1. That was in retaliation over U.S. President Donald Trump’s move Friday to hike tariffs to 25 percent on $200 billion worth of incoming goods from China. Members of the Trump administration have indicated that the Chinese government has backpedaled on promises in a draft trade agreement to resolve their year-long dispute.

Moody’s Analytics economist Mark Zandi said Monday that one risk from the trade war is that the global economy might suffer a recession later this year.

“Odds remain high that Trump and Chinese President Xi will soon come to terms. But suddenly a number of other scenarios seem possible, even one in which the U.S., China and global economy suffer a recession,” Zandi said. One risk, he added, is that the higher 25 percent tariffs remain in place for longer, even through to the end of the year. And if longer, the trade war and economic fallout could become a prominent part of next year’s presidential election, the economist noted.

While global businesses can navigate around the impact of a 10 percent tariff either through a reduction on profit margin or passing along the costs to consumers, the higher 25 percent tariff would be tougher, Zandi pointed out. The economist placed the odds of this scenario at 30 percent and said if it were to happen, it would reduce “U.S. real GDP growth this year by nearly half a percentage point to closer to 2 percent. The Federal Reserve will be tempted to cut interest rates given the uncertainty and weaker growth.”

For Zandi, the worst case scenario, which he pegged at a 10 percent chance of happening, is that Trump engages in all-out trade war, meaning he opts to add an additional 25 percent tariff on $325 billion of goods from China that aren’t already taxed. He speculated that the Chinese government could retaliate by increasing tariff rates on all American goods exported to China, delay the time it takes for U.S. goods to clear customs, or stop buying U.S. goods, such as the Apple iPhone. While unlikely given the approaching presidential election, if that scenario did play out, Zandi said it would be a “recipe for a U.S., Chinese and global recession later this year.”

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The Dow Jones Industrial Average closed Monday’s trading session down 2.4 percent, or 617.38 points, to 25,324.99, while the Nasdaq Composite fell 3.4 percent, or 269.92 points, to 7,647.02. The S&P 500 closed down 2.4 percent, or 69.53 points, to 2,811.87.

Among the retail stocks that saw significant declines were: Gap Inc., down 6.7 percent to $22.74; L Brands Inc., 6.3 percent to $22.43; American Eagle Outfitters Inc., 6.2 percent to $20.44; Burlington Stores Inc., 5.8 percent to $155.94; Abercrombie & Fitch Co., 5.4 percent to $26.09, and J.C. Penney Co. Inc., 4.8 percent to $1.20.

Apparel stocks, which also saw declines, didn’t fare any better: G-III Apparel Group Ltd., down 9.4 percent to $34.02; Canada Goose Holdings Inc., 7.4 percent to $47.48; Tapestry Inc., 6.3 percent to $30.22; PVH Corp., 5.8 percent to $112.50; Guess Inc., 5.6 percent to $17.94; Oxford Industries Inc., 5 percent to $73.48, and Ralph Lauren Corp., 4.8 percent to $118.28.