How bad is the trade war with China going to get?

New York (CNN) — The first punches have been thrown between the United States and China in what could amount to a short-lived trade dispute with limited economic fallout or the start of yet another lengthy and painful trade war reminiscent of President Donald Trump’s first term.

Immediately after a new 10% tariff on all Chinese goods shipped to the US went into effect on Tuesday at 12:01 a.m. ET, China responded by announcing a 15% tariff on some goods it imports from the US: certain types of coal and liquefied natural gas and a 10% tariff on crude oil, agricultural machinery, large-displacement cars and pickup trucks. Those tariffs are set to take effect on Monday.

China’s Commerce Ministry also added two American firms — biotech company Illumina and fashion retailer PVH Group, owner of Calvin Klein and Tommy Hilfiger — to its unreliable entities list, saying they “violated normal market trading principles.” The move significantly hampers the companies’ ability to do business in China.

It’s possible that Trump and Chinese President Xi Jinping will at least agree to postpone these actions to engage in further dialogue, just as the leaders of Mexico and Canada did ahead of when US tariffs on their countries’ goods were set to go into motion.

“If a similar deal isn’t reached, then I think it has the potential to be fairly intense,” said Clark Packard, research fellow at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.

That outcome is not looking likely given Trump and Xi didn’t converse on Tuesday. “I’m in no rush,” Trump told reporters that day.

The next best outcome would be that both nations avoid further escalation measures, like imposing steeper tariffs. The jury is far from out on that.

A limited impact on the US economy — for now

The tariff Trump placed on all Chinese goods, which he tied in part to the country’s alleged role of supplying fentanyl and other illegal drugs into the US, may cause American consumers to pay more for a wide range of goods. That includes consumer electronics, toys and apparel, all of which are among some of the top goods the US imported from China last year, according to federal trade data.

But it’s not just the goods consumers buy that could get more expensive. Many goods the US imports are raw materials, such as rubber, plastic and chemicals, that American firms need in order to make finished products sold in stores and online.

“Raising the costs of those imports would be hard for those firms,” Packard said.

At the same time, prices may not go as high if US businesses are instead able to import products they received from China from other nations facing lower tariffs. The loss of customers could hurt Chinese businesses and lead to job losses.

Similarly, US businesses that export goods to China that are set to face the new tariffs could suffer and be forced to lay off workers.

In total, products that China imports from the US that are covered by the new duties were worth $23.6 billion in 2024, according to S&P Global Market Intelligence data. That total would have been much higher had China chosen to slap an equal 10% tariff on all US goods exported there, which, by comparison, totaled over $130 billion last year.

From bad to worse

Morgan Stanley economists aren’t expecting Trump to stop at the additional 10% tariffs on Chinese goods, given that on the campaign trail he vowed to go as high as 60%.

“We still expect the US will levy more tariffs on China later this year as part of its larger trade policy goals,” they said in a note to clients on Tuesday. That will likely invite more retalliation from China.

There’s also lingering concern that the US won’t just face a one-way trade war with China, but rather a three-way war. That could happen if Trump ends up following through with 25% tariffs on Mexico and Canada after the new March 1 deadline he set, and the two countries as well as China retaliate with higher tariffs on US goods.

It could get ugly for the US economy pretty quickly.

Assuming Canada and Mexico respond by implementing a 10% tariff on all US goods and China levies a 5% across-the-board tariff, Citibank economists predict the US economy will contract at an annual rate of 0.8% this year, and -1.1% next year, assuming the tariffs remain in place.

China’s economy, however, would contract by a smaller amount compared to the US for this year and next. Canada and Mexico’s economies, however, would suffer much bigger blows compared to the US, Citi economists predict.

That said, the risks alone from the tensions between the US and China are “consequential,” Nathan Sheets, global chief economist at Citi, told CNN. “Further sizable increases in tariffs could disrupt supply chains and production, with adverse implications for US employment and growth.”

“It’s really hard to put numbers on these effects — but they would be appreciable by any measure,” he said.

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