According to recent surveys, investors say the biggest risk they see is the trade war. Generally, financial markets do not reflect this, perhaps because the economic impact so far is not that big, and the earnings and revenue effects even less. Yet, investors are right to focus on the trade war, which will have implications for the global economy and markets and no less trenchant repercussions on China. We should remember two things.

First, China and the US are not engaged in a conventional trade spat, such as that involving Nafta countries. Rather, this is about existential matters such as the struggle for technological leadership, mutually accepted rules and regulations in industrial policy, and national security. Second, China has been wrongfooted by the vehemence with which the White House has prosecuted trade conflict, allowing years of political hubris to undermine its preparedness and position. There is, therefore, no realistic off-ramp in sight, and if there is one, it is probably a long way off.

This will matter more to financial markets over time because the cumulative effects of a long trade war could push up global inflation and dampen demand. A strong dollar has kept US non-fuel import costs in check recently, but local prices for steel, metals and some consumer products affected by tariffs have risen sharply. A weaker renminbi, on the other hand and higher tariffs have colluded to raise China’s import prices by around 9 percent since January. Such developments will eventually gain some pass-through and may be reflected in bond yields.