'A Policy Mistake Of Gigantic Proportions': Markets And Experts React As China Hits Back At Trump's Trade Tariffs

After months of talk about a potential trade war, Trump finally took action on Tuesday night by placing 25% tariffs on approximately 1,300 Chinese products, ranging from information technology to aerospace, which will target around $50bn of 2018 imports.

Trump justified the looming tariffs on Twitter, commenting: "We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the US. Now we have a trade deficit of $500bn a year, with intellectual property theft of another $300bn. We cannot let this continue!"

Global markets tumble as Trump announces tariffs for China

Less than 24 hours later, China, in response, announced tariffs on 106 US products such as soybeans, cars and whiskey, which are also designed to target up to $50bn of products annually.

On the news, a number of global markets fell sharply.

In Asia, Hong Kong's Hang Seng index fell 2.2% to 29,519 points while China's Shanghai index dropped 0.5% to 3,131 points.

Following China's response, Germany's Dax index, viewed as a measure of global trade due to its export-heavy nature, was down 1.2% while the Euro Stoxx 50 and FTSE 100 had both fallen 1% and 0.5% respectively.

Concerns over what the trade war could mean for global growth meant oil markets were also hit with Brent Crude and West Texas Intermediate both declining 1.4% to $67.1 a barrel and 1.6% to $62.5 a barrel respectively.

Market sentiment

Commenting on the market reaction, Seema Shah, global investment strategist at Principal Global Investors, said it was not entirely irrational as a severe trade war would clearly have a negative effect on global growth.

Investors eye safe havens fearing Trump's 'gunboat diplomacy' could lead to global trade war

However, she said a trade war would not be in the Trump administration's interests as it had been hanging its hat on the strength of the US stock market, which would be impacted by these tariffs.

"Trump has repeatedly cited the rising stock market as proof that his presidency has been successful," Shah said.

"The recent negative market reaction to trade tariffs should moderate their approach.

"Barring a policy error, the more immediate threat from trade tariffs is that markets continue to be disrupted by greater uncertainty and higher volatility."

Combined risks

While the trade war was important, Shah said the potential of an inflationary shock, which would lead to faster-than-expected rate rises, remained the biggest threat.

"Hawkish Federal Reserve policy plus threat of trade war equals potential danger," Shah added.