Markets tumble with China, US towards trade war

Three-quarters of the tilapia imported in the US comes from China. Chart based on NOAA data

Three-quarters of the tilapia imported in the US comes from China. Chart based on NOAA data

"If the United States loses its senses and comes up with a new list, China will be forced to strike back hard, and launch comprehensive measures that match the U.S. move in quantity and quality", the Chinese Commerce Ministry said in a statement Tuesday.

The president ordered his administration to prepare a new package of tariffs affecting as much as $200 billion worth of China trade.

The US "practice of extreme pressure and blackmail departed from the consensus reached by both sides during multiple negotiations and has also greatly disappointed global society", it said.

China swiftly rebuked the threat and said it would take strong countermeasures to safeguard itself if new tariffs are indeed announced. The Dow Jones industrial average fell 1.7%, down more than 400 points, and S&P 500 lost 1.1% after heavy overnight selling dropped China's Shanghai Composite (-3.78%) to its lowest level in two years. But on Saturday, Beijing announced 25 percent tariffs on $34 billion of US imports including soybeans and beef effective July 6 in response to Trump's tariff hike on a similar amount of Chinese goods.

However, he emphasized no additional duties would be imposed until they have gone through a legal vetting process, which includes taking comments and holding a public hearing.

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But just because Beijing can't retaliate reciprocally, doesn't mean it can't hit back proportionately: China can still disrupt US supply chains by freezing activities at select ports, or decline to approve acquisitions sought by American companies.

The Chinese Commerce Ministry reacted quickly to Trump's announcement, accusing the United States of "extreme pressure and extortionist behavior" and warning it would "strike back hard".

"China could target USA firms through tax and regulatory policies", said Citigroup in a report.

On Friday, Trump said he was pushing ahead with a 25 percent tariff on $50 billion worth of Chinese products, prompting Beijing to respond in kind.

"The United States has initiated a trade war and violated market regulations, and is harming the interests of not just the people of China and the US, but of the world", the ministry added.

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The risk of "a more meaningful impact on global trade and growth have increased", said Morgan Stanley economists in a report.

China responded with a 178.6 percent tariff on all imports of sorghum to the United States.

However, "history shows that there are various other measures [China] could take to inflict pain on U.S. companies, especially those present in China, including scaled up health, safety and tax checks, delaying the imports of goods, and boycotts of United States goods", he said. "China's government will step up an already intensive effort to determine whether Trump has the political strength to carry out his threats, while working to maximize pressure on USA interests to force him to back down and accept a compromise". What's more, unlike Trump's other trade spats, there are (arguably) real national interests at stake in his showdown with China.

"Our sense is that President Trump believes the Chinese have little latitude to retaliate given the current trade disparity, but Beijing could employ peripheral policies beyond tariffs that serve to further escalate tensions between the two countries", Boltansky and Davaz wrote in a note to clients.

Gary Cohn, Trump's former top economic adviser, said last week that a "tariff battle" could result in price inflation and consumer debt - "historic ingredients for an economic slowdown".

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