Business Corpus: China Hits Back; How China Trade War May Jolt U.S. GDPFinancial markets may be underestimating the likelihood of a further escalation of Trump tariffs and the economic impact of the China trade war, say UBS economists. The post China Hits Back; How China Trade War May Jolt U.S. GDP appeared first on Investor's Business Daily.

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Neither side is blinking in the China trade war. Beijing on Wednesday finalized another $16 billion in tariffs on U.S. imports, a day after 25% Trump tariffs on Chinese imports were cleared for launch.

So far, Wall Street is taking the escalating tensions in stride. In midday trading on the stock market today, the Dow Jones industrial average, S&P 500 and Nasdaq composite were narrowly mixed.

But markets may be underestimating both the likelihood and impact of further escalation, warns UBS, which now has in its baseline forecast 10% Trump tariffs on an additional $200 billion worth of Chinese imports next month.

That would cut Q4 GDP growth to 1.6%, shrink the earnings per share of S&P 500 companies by 6% and lead the Fed to pause on rates, instead of hiking them for the fourth time this year in December.

Trump's escalated threat last week to slap 25% tariffs on the full range of $200 billion in imports "reinforces our view that the White House will follow through on the imposition of tariffs and raises the risk of escalation beyond our baseline," wrote UBS economists.

An escalation beyond their baseline view, and closer to the latest threat of 25% Trump tariffs, could sink growth "possibly well below 1%" and put the Fed's March hike at risk as well, UBS says.

Trump got close to making a deal with China May, then gave Chinese communications equipment firm ZTE a new lease on life and punted on Chinese investment restrictions and export controls.

Yet none of Trump's efforts helped bring the sides together, suggesting that the deep divide pushing the U.S. toward a technological cold war with China may be unbridgeable.

UBS says that the economic hit to the U.S. from Trump tariffs may be bigger than expected "because many of the goods on the list to receive tariffs are important inputs to production, and China is a substantial source of those goods in many instances."

On Tuesday, Element Electronics said it will have to close its factory in Winnsboro, S.C., and begin laying off 126 workers because of Trump tariffs on television components imported from China.

Beijing said on Wednesday that tariffs on the next $16 billion in U.S. imports will take effect in two weeks. Last week, China said it would hit another $60 billion worth of U.S. imports with tariffs of 10%-25% if the U.S. follows through on the initial threat to target $200 billion worth of Chinese imports with 10% Trump tariffs.

Wall Street also is worried about non-tariff measures China might take, impeding U.S. multinationals from U.S. markets. This week, a Chinese state newspaper said that Beijing could use Apple (AAPL) as a bargaining chip in a trade war with the U.S.

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The post China Hits Back; How China Trade War May Jolt U.S. GDP appeared first on Investor's Business Daily.