Here’s where we are in the trade war – and what it means

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The global era of trade has given countries new weapons to gain economic advantages over others.

In theory, a trade war is simple: Two or more countries impose restrictions on each other’s imported goods in order to gain a competitive edge. But there are plenty of opinions about when such a conflict begins, and many believe it’s a matter of semantics.

Regardless, China’s Ministry of Commerce announced Friday it would place tariffs on U.S. goods, saying it was forced to respond to the U.S. launching “the largest trade war in economic history” by putting duties on Chinese goods.

“Technically speaking, we are in a ‘trade war’ as we now have actual tariffs being imposed, with retaliatory responses,” Michael Englund, chief economist at Action Economics, told CNBC.

However, Englund agrees with CNBC’s Jim Cramer and Eurasia Group CEO Ian Bremmer, who say the effects of the tariffs imposed thus far have been greatly exaggerated.

“There is absolutely a sense that this is the end of the world, this is 1929, 1930,” Cramer said on CNBC’s Squawk on the Street on Friday. “It’s not that bad.”

Wells Fargo investment strategy analyst Peter Donisanu also stopped short of saying the dispute has escalated to an all out war, writing in a note Friday that “while the prospect of a trade war between the U.S. and China has increased, we nevertheless believe that the risks remain contained.”

A trade war requires each side to “appear as the victim” in media coverage of trade negotiations and escalating tariffs, Englund said. Both sides will defer a declaration of trade war on the other, in order to maintain the appearance of being a victim, according to Englund.

“In the media, China is trying to look like the victim, as has Trump, which explains why [the former] are touting the ‘largest in history’ line,” Englund said. “Everything in our growing global economy tends to be the largest in history, but the magnitude of this conflict is hardly dramatic in proportional terms.”

President Trump said in a March tweet that trade wars are “good, and easy to win.”

National Economic Council Director Larry Kudlow defended Trump in April, saying the president is “ultimately a free trader” and using tariffs as leverage in negotiations, rather than an implementation of a protectionist policy. Since then, the White House has continued to escalate both rhetoric and tariffs against China, the European Union, Canada and Mexico.

Beijing and Washington had held several rounds of high-level talks since early May but the Trump administration declared it was considering putting tariffs on an expanded list of Chinese imports.

“The latest tariff threats demonstrates Trump’s frustration with the current state of negotiations with China, significantly increasing the likelihood that Trump will seek to use these investment restrictions in an attempt to bring China to the negotiating table,” wealth management group Raymond James wrote on June 19.

Trump moved forward with the first tranche on Friday, putting U.S. tariffs on $34 billion worth of Chinese goods. China retaliated in kind, placing tariffs on $34 billion of soybeans, pork and electric vehicles from the U.S. Trump is preparing to respond with an additional list of $200 billion worth of Chinese goods targeted for tariffs, which he had U.S. officials draw up.

In the case of the European Union, Canada and Mexico, the U.S. has levied tariffs of 25 percent on steel and 10 percent on aluminum. In response, each responded with tariffs on billions worth of U.S. products: Mexico’s tariffs took effect June 5, the EU’s on June 29 and Canada’s on July 1.

Trump has also threatened 20 percent tariffs on EU autos, to which the trade bloc responded that it would place $294 billion in fresh tariffs against American made cars and auto parts if he does.

Wells Fargo expects “these risks to remain contained so long as tariffs imposed by the U.S. are used as precisely targeted instruments of negotiation and not blunt tools of protectionism,” Donisanu wrote. “Policymakers in Beijing have signaled their desire to avoid a trade war, yet are willing to respond to tariffs and restrictive policies in a one-for-one, like kind manner.”

Donisanu warns of Trump’s administration enacting protectionist economic policies, which Deutsche Bank similarly highlighted in a Mar. 16 analysis of as one of the possible drivers behind the U.S. pushing .

“Protectionism is the ‘quick fix’ that appeals to politicians for its short-term election benefits, while its longer-term costs are significantly under-appreciated,” Deutsche Bank wrote in March. “Protectionist policies can in theory succeed in gaining one country a larger slice of the global pie, but they inevitably invite retaliation that results in a substantial shrinking of the global pie, making all countries worse off.”

Historically, the Tariff Act of 1930 is one of the most infamous examples of protectionist trade policies. As the economy sank into the Great Depression, Congress added a nearly 50 percent increase to tariffs on imports. Trading partners of the U.S. retaliated in kind, hitting exports hard and creating “longer-lasting negative effects” to the economy, Deutsche Bank said.

Donisanu and Englund both say today’s environment continues to be one centered on negotiation, rather than an all-out trade war. But a resolution is not likely to happen quickly or smoothly.

China’s desire to maintain a strong presence in the face of heightened rhetoric from the U.S. on trade issues “could prevent a quick resolution given the current circumstance,” Donisanu said.

“Prices will be paid from some companies along the way as tariffs make supply chains more costly, forcing companies to operate at a loss for a period while the conflict is resolved,” Englund said.

Investment bank B. Riley similarly concluded in a note Thursday that it is improbable the situation will result in “a mutually destructive trade war scenario, despite the recent drumbeat of escalation.” The largest overhanging issue is the “long, systematic WTO process” to resolve the intellectual property dispute between China and the U.S., which B. Riley says is “not poised to be resolved anytime soon.”

In the meantime, U.S. exporters facing higher tariffs in China will have a tough choice. They can either take a profit hit, or try to pass along the higher cost to Chinese consumers, thus making their products less competitive.

The longer the scenario continues, the more “tit far tat tariffs will likely generate more volatility in financial markets,” Atsi Sheth, a Moody’s managing director, said Friday. “If they also weaken consumer sentiment and moderate corporate investment in the US and elsewhere, the second order impact of tariff increases would be to dampen currently robust global growth momentum.”

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