Trump has chosen to escalate the trade dispute with China further, which adds to the uncertainty and risk of a trade war.
We still believe the US and China will ultimately strike a deal - but it may take longer than expected.
It is increasingly likely that the rising uncertainty will weaken the global business cycle in 2018.
It may also soon start to affect central banks and could possibly delay or soften their tightening paths.
Yesterday we argued that we were entering a more unpredictable phase of the US and China trade dispute and outlined two scenarios: one in which negotiations start and we end up with a kind of a grand bargain between US and China, see Research - Two scenarios for the US-China trade conflict , 4 April 2018. And one in which we escalate further and enter a real trade war. We also argued the first scenario was most likely.
However, for now we were mostly right about the unpredictability as Trump last night chose the path of escalation by ordering his administration to 'consider whether USD100bn of additional tariffs would be appropriate... and, if so, identify the products upon which to impose such tariffs'. He also instructed his agriculture secretary to 'implement a plan to protect our farmers and agricultural interests' from Chinese retaliation. Not surprisingly, China responded by saying it was prepared to strike back and adopt 'new comprehensive countermeasures'. It also repeated that 'China doesn't want a trade war, but we're not afraid to fight a trade war'.
We still believe that the ultimate outcome will be one of a negotiated solution and do not expect Trump to go all the way and enter an all-out trade war. However, it seems things could get worse before they get better. The longer the uncertainty drags out, the higher the probability that we will see this uncertainty feed into lower economic sentiment among businesses and impact real investments negatively for some time while companies await the outcome of the current dispute .