The prospect of a full-blown trade war between the world's two biggest economies rattled investors Thursday, sending U.S. stocks to their biggest loss in six weeks.
The Dow Jones industrial average plunged more than 700 points, as President Donald Trump announced plans to slap tariffs on Chinese imports. The Chinese government vowed to defend itself.
Investors worried that if the dispute escalated, China will counterpunch with restrictions of its own, hurting American exports of airplanes, construction equipment and other goods.
Many big U.S. companies have built complicated supply chains that stretch across the Pacific Ocean. A trade war could disrupt the back-and-forth flow of parts, forcing factories to slow or halt production.
In Canada, trade jitters sent the Toronto Stock Exchange's S&P/TSX composite index down 275.35 points to 15,399.93 in broad-based declines led by base metals.
"The Canadian market's also reacting to Trump's China tariff plan. It just sets a negative tone for global growth, and so everyone's going to get hit if tariffs rise across the world, so even Canada's growth will slow down," said Anish Chopra, managing director with Portfolio Management Corp.
U.S. companies with substantial sales to China were clobbered in the crossfire Thursday.
Construction equipment maker Caterpillar lost 5.7 per cent of its value – its worst loss since mid-2016. Aerospace company Boeing slid 5.2 per cent. Chipmaker Micron Technology fell 3.5 per cent.
Caterpillar gets about 5 per cent of its revenue from China, Boeing 12 per cent and Micron nearly 50 per cent, according to the research firm FactSet.
The broader S&P 500 index lost 2.5 per cent and is now down slightly for the year.
"We don't want a trade war ... but we are not afraid of it," said China's ambassador to the U.S., Cui Tiankai. "If somebody tries to impose a trade war on us ... we will certainly fight back and retaliate. If people want to play tough, we will play tough with them and see who will last longer."
Trump said the U.S. would impose the tariffs, as well as restrict Chinese investment, to punish Beijing for stealing American technology. The action came two weeks after the president announced major tariffs on steel and aluminum imports, a move that unsettled markets already nervous about rising interest rates and the prospect of inflation.
Administration officials said Thursday they were targeting 1,300 Chinese product lines worth about US$50 billion a year in imports. Trump put the figure at US$60 billion, causing some confusion over the actual extent of the sanctions. The Office of the U.S. Trade Representative has 15 days to publish a list of products subject to the tariffs. The administration said it would target imports from Chinese makers of machinery and aerospace and communications equipment.
The tariffs themselves are only equal to about 10 per cent of China's annual goods imports to the United States.
But Trump's move raises longer-term uncertainty about the world's most important economic relationship.
"This is throwing down the gauntlet to the Chinese," Scott Kennedy, a China specialist at the Center for Strategic and International Studies. "The relationship on the commercial front has moved into new territory today from where it has been for the last 40 years ... We really don't know where this is going to go."