US to impose $200 billion worth of tariffs on Chinese goods starting 24 Sept

It's now official. After two weeks of keeping markets on edge, we finally got the announcement earlier today. Markets sure had plenty of time to digest it and the result is that we're seeing much calmer tones after the initial knee-jerk reaction.

Risk assets are bouncing back following initial declines after the announcement was made. E-minis are only down 0.1% currently after experiencing a 0.4% drop earlier and we're seeing the aussie and kiwi pull ahead in the currencies space while leaving the yen behind. Treasury yields are also basically flat again with 10-year yields sitting comfortably at 2.99%.

But it all comes down now to how will China react in response to the latest round of tariffs announced by the Trump administration.

On the face of things, China will not be able to respond with tit-for-tat tariffs as they only imported $130 billion worth of goods from the US last year. Hence, any form of retaliation will come from other indirect measures.

The most obvious and easy target would be to hit US companies where it hurts and that is to restrict or limit business investments/opportunities. By blocking potential mergers & acquisitions and what not, it'll make it difficult for multinational US companies to tap into the much coveted Chinese market. However, this is something that will start to bite over time and not necessarily something that will show up immediately.

So, if Chinese authorities want an immediate response they could not only up the levies on US goods but also make things difficult for US companies in getting their goods through border control. I mean if you can't slap them with tariffs, there are other ways to make life difficult for companies seeking to get their goods to consumers abroad.

There aren't any obvious indicators of which route China may take to respond against the latest round of tariffs, but they surely will find a way to respond in kind. And if the response starts to involve using the yuan - more than what we've already seen this year - then that's when you know that things are really starting to get serious.