Global investors have mostly looked past the intensifying trade fight between the U.S. and China, even as the countries move to deploy tariffs on hundreds of billions of dollars in goods. But the mood on Wall Street is darkening, with analysts increasingly warning of the potential impact on financial markets as the world's two largest economies square off.
"It is now much more likely that the dispute will continue for a prolonged period of time and that we will see ratcheting up of protectionist measures," Elena Duggar, an associate managing director at credit rating agency Moody's, said in a research note after the Trump administration late Tuesday surprised investors byon an additional $200 billion of Chinese goods. "The economic fallout of such measures could be material for the global economy."
Reflecting those concerns, stocks sold off Wednesday, as the Dow fell 219 points, or 0.9 percent, and the broader S&P 500 and Nasdaq also declined. Chinese indexes also slid.
Financial markets could take a harder fall if China retaliates to the latest volley of U.S. tariffs, as Beijing has vowed, according to research firm Capital Economics.
One reason why Wall Street is worried: The People's Republic, which bought $154 billion in U.S. imports last year, is quickly running out of American products to hit with tariffs. That raises the risk China could, such as placing restrictions on U.S. companies doing business in the country.
Here's why that could prove a soft spot in the White House's trade strategy: American multinationals have far more extensive operations in China, both in terms of sales and employees, than Chinese companies have in the U.S. There is "considerable scope for China to retaliate by penalizing these firms, for example via much more stringent regulatory checks or consumer boycotts," according to Capital Economics.
An all-out trade war with China could affect a third of all U.S. imports, data from Torsten Slok, chief international economist with Deutsche Bank, show.
"Trade experts we have consulted point to the potential for anti-U.S. social media campaigns, delays or blockage of regulatory approvals, travel bans, investment restrictions, among other options," Raymond James analyst Ed Mills said in a report.
A larger concern for the Trump administration could be the trade feud's impact on consumers. Tit-for-tat tariffs already are, such as washing machines, while industry groups warn of potential price hikes for cars, electronics and other items.
Meanwhile, farmers hurt by Chinese tariffs on U.S. agricultural exports pose a political risk for Mr. Trump and for Republicans, especially as the November midterm elections loom.
Analysts say a full-blown trade war with China could wound the U.S. in several ways. Rising prices could chill consumer spending, while companies spooked by the conflict could hold off on investment decisions, such as hiring. Both trends would slow economic growth.
Rising inflation also could prompt the Federal Reserve to raise interest rates faster than expected, raising borrowing costs for individuals and businesses. Tighter monetary policy also would boost the value of the dollar and dent U.S. exports -- another hit to growth.
While there's still time for a resolution to the standoff, Wall Street analysts aren't expecting one anytime soon. In part, that's because the Trump administration has shed more moderate officials who supported a measured stance on trade policy, such as former top.
"Trump's trade war is a masterclass in self-harm for the U.S. and global economy," Nigel Green, CEO of financial advisory firm deVere Group, told clients in a note.