Trump's latest broadside on China raises fear that the trade war is the 'new status quo'

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The surprise tariffs President Donald Trump announced Thursday against $300 billion or so of Chinese goods takes the trade dispute between the two countries to a new level, even though in dollar terms it doesn’t amount to a whole lot.

The president’s announcement jolted markets, which had bounced back sharply off Wednesday’s disappointing Fed rate cut only to have their legs cut out from underneath by news of a heightened trade war.

Trump’s move means that all Chinese goods entering the U.S. will be subject to some sort of duties. While the actual price tag of the latest action is technically just $30 billion, or about 0.14 percentage points of GDP, the psychological damage that could be inflicted comes at an inopportune time.

“The direct impact of these tariffs is smaller than a bread box,” said Bill Adams, senior economist at PNC. “The larger effect is going to be through confidence channels and the effect on capital spending.”

Indeed, if business surveys have been clear about anything it’s that American business is nervous about trade. The closely watched Institute of Supply Management manufacturing survey dipped again in July and is teetering on contraction territory, while the Federal Reserve’s key manufacturing gauge has fallen for consecutive quarters.

Morgan Stanley strategists said the latest round of tariffs, if implemented, would contribute to “slowbalization,” or a continuation of lackluster growth, and could hasten a U.S. recession in as soon as three quarters. 

“One key reason: about 68% of the next good tariffed will be consumer goods and autos/parts, with more potential for immediate impact to the economy,” Morgan Stanley strategist Michael Zezas said in a note.

Where the tariffs will hurt

A further reminder came in last week’s GDP report.

The economy rose 2.1% in the second quarter, but the internals showed clear tariff impact. Exports slumped 5.2% for the quarter and nonresidential investment, a key metric for business spending, dropped 0.6% for its worst showing since early 2016.

With Thursday’s news of a trade escalation comes another sign that the tariff issue is unlikely to go away soon.

“Tariffs are affecting the part of the U.S. economy that is most integrated into world trade,” Adams said. “This latest increase in tariffs increases the likelihood that higher trade barriers are the new status quo.”

As for more specific impacts, Adams sees the tariffs raising inflation and lowering disposable income, which increased just 2.5% in the second quarter, its lowest rise in nearly two years.

He also projects a hit on consumption as well as increased margin pressure, particularly for heavy exporters. Q2 earnings season hasn’t been kind to S&P 500 companies that generate more than half their sales outside the U.S., with profits down 13.6% from a year ago.

Inflation could hit sectors such as electronics, clothing, footware and toys and be a credit hit to companies in those sectors along with manufacturing, and apparel and leather, according to Moody’s Investors Service, a credit rating firm. Other sectors that face impact as the trade war escalates include crude oil, transport equipment and semiconductors.

Retaliation from China could come in a number of forms, including tariffs on U.S. goods and pressure on American companies operating there.

“”The escalation of trade tensions will increasingly weigh on the global economy and supply chains in an environment of already decelerating growth in the US, the euro area and China,” Elena Duggar, Moody’s associate managing director, said in a statement. “Uncertainty will dampen business investment and trade flows.”

The tariff news comes a day after the Fed met market expectations — and Trump’s demands — by cutting its benchmark interest rate by a quarter percentage point. However, Fed Chairman Jerome Powell’s remarks after the meeting that he didn’t see the move as the beginning of an extended rate-cut cycle cascaded through markets and prompted more criticism from the president.

—CNBC’s Michael Bloom contributed to this report.

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