Asia markets face more pain after China retaliates with higher tariffs

Source: REUTERS / Aly Song

The escalating trade war between the United States and China is causing fresh pain for global investors.

Wall Street's rout extended to Asia on Tuesday. Hong Kong's Hang Seng fell 1.7 percent in afternoon trading. The Shanghai Composite closed down 0.7 percent and Japan's Nikkei shed 0.6 percent. South Korea's KOSPI ended the day mostly flat.

It was the first chance Asian markets had to react to the latest retaliatory measures from China.

Beijing announced late on Monday that it would raise tariffs on $60 billion worth of US goods from June 1. That comes after the United States hiked tariffs from 10 percent to 25 percent on $200 billion worth of Chinese exports on Friday following a breakdown in trade talks between the world's top two economies.

Asian stocks “could be in for an extended period of pain,” said Jeffrey Halley, senior market analyst at Oanda. Equities with a riskier exposure to China “may find it reaches migraine levels,” he added.

US stock futures, meanwhile, were pointing slightly up on Tuesday.

Investors around the world fear a protracted trade war in which both the United States and China continue to raise tariffs. US businesses that import Chinese goods pay the tariffs levied by the United States. Companies either eat that cost, which pinches their profits; or they pass the cost onto consumers, which can hurt demand for their products.

“This is a self-inflicted wound that will be catastrophic for the nation's economy,” said Rick Helfenbein, head of the American Apparel and Footwear Association. Tariffs “are taxes on American consumers that result in higher prices, lower sales, and lost jobs,” he added.

Meanwhile, China is digging in for a fight.

Ministry of Foreign Affairs spokesman Geng Shuang said Monday that China will “never yield to external pressure,” hours before Beijing announced its latest round of tariffs.

Analysts say markets have to start repricing risk to reflect the new geopolitical reality.

“Even if a deal is signed next week, it is now clear to us that the China-US relationship will be fraught for decades to come,” analysts at brokerage firm Jefferies wrote in a client note.

“As China's economic and geopolitical rise butts up against existing US interests, eleventh-hour negotiations and brinkmanship will be a recurring theme which the markets will learn to price in,” they said.