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What every investor needs to know about D-Day for a global trade war

It’s an eerie calm on the market as US President Donald Trump’s US$34 billion trade tariffs against China officially kicked off with the Asian giant yet to respond with retaliatory measures as it had promised.

China had vowed to slap higher taxes on the same value of US imports into its country even as Trump said he would up the stakes by targeting up to US$550 billion worth of Chinese imports.

Investors here aren’t perturbed with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index jumping an impressive 0.7% during lunch time trade. Perhaps its because investors aren’t expecting the trade spat between the economic giants to go beyond the first round.

That’s a brave assumption. The problem with the looming trade tantrum is too much male testosterone!

Trump views the trade issue as a zero-sum game and has backed himself into a corner where backing down now would be the same as a defeat. In his mind, the US can’t win unless China loses.

China on the other hand isn’t about to back down either. Nearly two centuries of humiliation at the hands of Westerners since the Opium Wars will ensure that the Chinese leadership will be asserting its position as the second most powerful nation in the world.

Experts agree there is simply no way to quantify the losses from an outbreak of a global war and you can bet your bottom dollar that it won’t be confined to the two countries.

The European Union (EU) is drafting legislation to restrict the import of steel from anywhere in the world as they fear the US tariff on steel will see countries dump their surplus supply of the material into the EU market.

Countries will be closing their trade borders to ensure that affected US and Chinese exports won’t make their markets a dumping ground, and that’s how the contagion will start.

China has more to lose in a trade tiff with the US as China exports a lot more to the world’s largest economy than it imports.

This is one big reason why the key Chinese stock index has tumbled into bear territory with a loss of more than 20% from its peak.

US markets will feel the pain too with the yield curve flattening (a sign of financial stress) and the US Federal Reserve acknowledging the risk of a global recession from a bruising Trump trade war.

Closer to home, if Chinese factories cut back on production as they get locked out of the US market, it will likely mean lower demand for our raw materials and it’s our miners like Rio Tinto Limited and South32 Ltd (ASX: S32) that could feel the impact first.

But there’s still time to save us from this worst-case scenario. Trump could back down from his tough talk (or Tweet as that’s his choice of weapon) as the US market comes under increased pressure, while the Chinese government could unleash a fresh wave of infrastructure spending to provide a buffer for its economy.

After all, China cannot negotiate an acceptable outcome with a weak hand. It could also make life very difficult for US companies in China, such as Apple Inc., and could release havoc on the US bond market with its US$1.2 trillion treasuries holdings.

Trump is right in that trade wars are easy to win. He only needs to understand that winning in this case means moving back – not forward.

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Motley Fool contributor Brendon Lau owns shares of Rio Tinto Ltd. and South32 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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