US-China Trade War Escalates with Tariffs and Retaliation

US President Donald Trump has threatened to impose new tariffs on Chinese-made smartphones and electronics, despite exempting them from a 125% tariff just days earlier. Trump claimed they were being moved to a different "tariff bucket" and would be subject to a "semiconductor tariff" instead. The move has been met with criticism from China, which has called on Trump to "completely cancel" his tariffs regime. The US Commerce Secretary said the new levy would ensure that the US has its own semiconductor and electronics industry. The tariff changes have caused uncertainty and price increases, with Sony announcing a 10% price rise for its PlayStation 5 console in some regions.

European markets are expected to open mixed on Tuesday, with the UK's FTSE 100 and Germany's DAX predicted to rise, while France's CAC is expected to fall. The optimism follows news of a potential US tariff exemption for some tech items and a pause in EU countertariffs. Investors are also awaiting earnings from Ericsson and Publicis, as well as data releases including European industrial production and UK unemployment figures. Meanwhile, Federal Reserve Governor Christopher Waller said that inflation from tariffs is likely to be "transitory" and that interest rate reductions are still possible.

LVMH's shares plummeted 7.8% after the company reported a 3% year-on-year decline in first-quarter sales, missing analyst expectations. The decline was led by a 9% drop in wines and spirits sales, with weaker demand in the US and China. As a result, LVMH was dethroned by Hermès as the world's most valuable luxury stock, with Hermès' market capitalization surpassing LVMH's at $275.4 billion. Analysts warned of limited visibility for the luxury sector due to US and global economic uncertainty, trade tensions, and tariffs, which could further delay the sector's recovery.

South Korea has announced a $23.25 billion support package for its semiconductor industry, amid uncertainty over potential U.S. tariffs on semiconductor imports under President Donald Trump's administration. The package includes subsidies for infrastructure, low-interest loans to companies, and training programs for domestic and foreign talent. The funding support is about a quarter more than last year's commitment and aims to boost the industry, which is a key export sector for South Korea, accounting for over 20% of the country's total exports.

U.S. stock futures fell early Tuesday as investors awaited a fresh set of first-quarter earnings reports and digesting recent guidance on tariffs. Dow Jones Industrial Average futures dropped 33 points, or 0.08%, while S&P 500 futures and Nasdaq 100 futures dipped 0.11% and 0.17%, respectively. The major stock indexes had ended Monday's session higher, with the Dow gaining 0.78%, the S&P 500 climbing 0.79%, and the Nasdaq Composite adding 0.64%, driven by the tech sector after exemptions from tariffs on electronic products were announced. Investors are also watching the latest readings on March's import and export price indexes and the New York Federal Reserve's Empire State Manufacturing Survey. Oppenheimer's chief investment strategist remains bullish on equities, citing a "very much intact bull market" despite near-term volatility tied to tariff uncertainties.

The US Commerce Department is conducting a national security investigation into imports of semiconductor technology and related products, including chip components and downstream products containing semiconductors. The probe, initiated on April 1, will examine the feasibility of increasing domestic semiconductor capacity and whether tariffs are necessary to protect national security. Despite exemptions from some tariffs, the investigation confirms that chips and the electronics supply chain will not be excluded from President Trump's tariff plans, with new tariff rates potentially being announced within a month or two.

China has a powerful tool in its trade war with the US, thanks to its dominance of the rare earth minerals supply chain. Rare earths are crucial for advanced technologies, including iPhones, electric vehicles, and US military equipment. China produces 61% of the world's rare earths but controls 92% of the processing stage. In response to US tariffs, China has imposed export restrictions on seven types of rare earth minerals, requiring companies to secure government permission to export them. This move is likely to hit US industries hard, as they rely heavily on Chinese rare earths. The US has been trying to build up its own domestic supply chain, but it will take years to meet demand. Experts say China's control of the rare earths market gives it significant leverage over the US, and that the export controls are a strategic and surgical move to hit American industry where it hurts.

The US has initiated investigations into imports of pharmaceuticals and semiconductors, potentially leading to tariffs on national security grounds. The investigations, under Section 232 of the Trade Expansion Act of 1962, allow for tariffs to be imposed if imports are deemed a threat to national security. The pharmaceutical industry is concerned that tariffs could lead to shortages and increased costs, as generic manufacturers operate on thin margins. The Trump administration has previously imposed tariffs on steel, aluminum, and the auto industry, and has indicated that pharmaceuticals and semiconductors will face separate tariffs. The investigation into pharmaceuticals includes both finished products and ingredients, and the industry has lobbied for a phased implementation to minimize the impact.

President Trump's decision to escalate a trade war with China is threatening to undermine other negotiations between the two superpowers, including on issues like Taiwan, fentanyl production, and artificial intelligence. The White House is deeply divided on how to handle Beijing, leading to a lack of strategic coherence. Trump's tariffs on China have been met with retaliatory measures from Beijing, and the situation is escalating, with China suspending exports of critical minerals and magnets. The trade war could lead to a decoupling of the two economies and push both countries to the brink of recession, with potential spillover effects on other areas of tension, such as Taiwan and the South China Sea. Experts warn that the lack of a coherent strategy and the absence of high-level communications between the two sides are exacerbating the crisis.

Zhipu AI, a Beijing-based AI unicorn, has submitted pre-IPO documents to China's securities regulator and plans to file for an IPO by October, potentially listing as early as 2026. The company, backed by state-owned entities and tech giants such as Xiaomi, Tencent, and Alibaba, has attracted over $1.4 billion in funding and is considered one of China's top AI start-ups. Zhipu has made strategic investments in AI start-ups and plans to expand, with China International Capital Corporation serving as its IPO tutoring institution.

Chinese factories in Vietnam, particularly those owned by Chinese companies, are experiencing a surge in orders from US clients after US President Donald Trump paused his "reciprocal" tariff policy. The factories had previously seen a halt in business due to the impending tariffs, but now face pressure to front-load shipments within a 90-day window as clients fear potential future tariff changes.

China has lost several top AI scientists at a relatively young age due to accidents or illness, raising concerns about the pressures faced by those in the industry. The fast development of AI and intense competition have created a stressful research environment, with researchers facing not only financial pressures but also ethical concerns. Experts say that AI researchers are under high moral pressure due to the potential societal impact of their work, and the rapid pace of innovation means that ideas can be quickly overtaken by others.

The rapidly escalating trade war between the US and China is threatening online shopping, particularly for Chinese sellers who have become adept at fulfilling American consumers' desires for cheap goods through platforms like Shein, Temu, and Amazon, and the imposition of tariffs is creating uncertainty for these retailers.