The United States Is Starting a Trade War with China. Now What?

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President Trump on Wednesday said the United States is not in a trade war with China - claiming that was lost by his "foolish, or incompetent" predecessors - just hours after Beijing announced it would impose 25 percent tariffs on American goods, including soybeans, automobiles and airplanes.

China's Ministry of Commerce in Beijing said it would levy 25% tariffs on imports of 106 USA products including automobiles and aircraft. The U.S.is the second-largest supplier of soybeans to China, after Brazil, and soybean farmers past year sent $14 billion worth of the crop to China.

However, if Beijing wanted to make concessions to Washington, which has called for China to reduce its trade surplus with the U.S. by US$100 billion, it could do so by boosting its purchases of American chips, according to a recent report by Financial Times, citing people familiar with the matter. The Russell 2000 index of smaller-company stocks gained 19.51 points, or 1.3 percent, to 1,531.66.

Boeing and Caterpillar led a slide in big USA manufacturers and technology companies that bore the brunt of the U.S. Futures for Soybeans, a big USA export to China, fell 2.2 percent on the CBOT.

The tit-for-tat action comes hours after Washington detailed about 1,300 Chinese products it meant to hit with tariffs - also set at 25%. On Monday, the S&P 500 fell 2.2 percent. The trade is worth about US$14 billion.

Overall, Asian stock market losses were not as bad as first feared at the open, with stocks across the region clawing back ground later in the session.

The swing in risk sentiment put the pep back into bonds, with yields on USA 10-year Treasury debt down two basis points at 2.76 per cent. High-tech manufacturing contributes more than 10 percent of China's economic growth, but around 80 percent comes from labor-intensive traditional industries like retail and refineries. Escalation is the real concern in a trade war.

However, experts warn that 2018 could be a different story, calling a trade war between the two gargantuan economies increasingly likely. The S&P 500 gained 17.72 points, or 0.68 percent, to 2,632.17 and the Nasdaq Composite added 54.37 points, or 0.78 percent, to 6,995.65.

The move went against the interests of China, the United States and the world economy, seriously violating the basic principles and spirit of the World Trade Organization (WTO).

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The FTSE index in London closed up 0.05 percent, while the DAX closed down 0.37 percent and France's CAC 40 index fell 0.2 percent.

Gold hit a one-week high, while prices of U.S. Treasury securities and German bunds gained on safe-haven buying. USA crude settled down 14 cents at $63.37 per barrel and Brent slid 10 cents to settle at $68.02.

And Gary Shapiro, president of the Consumer Technology Association, which represents producers and retailers dependent on Chinese manufacturing, said the tariffs were a "poison pill" for USA industry.

Deere & Co. fell 4.3 percent and Caterpillar dropped nearly 3 percent.

Bond prices turned lower.

The swing in risk sentiment put the pep back into bonds, with yields on United States 10-year treasury debt down two basis points at 2.76%.

The rising trade rhetoric saw the dollar buckle to 106.16 yen, after edging up from a low of 105.70 on Tuesday.

In commodities trading, crude oil futures are tumbling $1.01 to $62.50 a barrel after climbing $0.50 to $63.51 a barrel on Tuesday. The euro hovered at $1.2296, after easing from a top of $1.2335 overnight, while the dollar index was 0.2% lower at 90.

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