Markets in the US fell steeply today after US President Donald Trumps shock threat to impose a ten per cent tariff on $200bn (£152bn) of Chinese goods late on Monday night.
China described the US threats as “extreme pressure and blackmailing” and vowed swift retaliation.
The threat of new tariffs and fears of further trade tensions between the two economic powerhouses sent markets tumbling in the US.
The Dow Jones fell by more than one per cent today, the S&P 500 fell by nearly half a per cent and the tech-focused Nasdaq fell by a third of a per cent.
The Dow's falls today put it into negative territory for the year.
Both the S&P 500 and Nasdaq looked set for deeper losses but recovered towards the end of the days trading.
Companies with large Chinese export books such as planemaker Boeing and machinery manufacturer Caterpillar were hit hard, with their shares sliding by 3.8 per cent and 3.6 per cent respectively.
The sell-off also hit tech companies and chipmakers with Apple shares down 1.6 per cent and Intel shares down half a per cent.
Peter Navarro, a trade adviser to Trump, said today that the tariffs were necessary after trade talks with China had reached an impasse.
“The fundamental reality is that talk is cheap. … The president has taken action on behalf of the American people and its a necessary defence of the crown jewels of American technology and intellectual property against Chinese theft,” he said.
European markets were also affected by the protectionist rhetoric emanating from Beijing and Washington DC with the FTSE 100 closing down 0.36 per cent, Germanys Dax index closing down 1.22 per cent and Frances CAC 40 dropping 1.1 per cent.
Chris Payne, managing director at GWM Investment Management said: “European markets have been selling off as automakers and miners – the sectors most at risk of a trade war – have fallen sharply.”
FTSE listed miner Rio Tintos shares fell by more than three per cent and both Anglo American and BHP Billitons shares fell by more than two per cent.
Miles Eakers, chief market analyst at Centtrip said: “Investors are right to be concerned … Any retaliation by Beijing is likely to fuel the escalating trade war with Washington, which will in turn have a negative impact on equities and increase risk aversion.”
However, Payne argued that despite the negative rhetoric a full-scale trade war was unlikely because of the potential damage it could do to both sides.
“Despite all this tit-for-tat posturing, an all-out trade war is unlikely to ensue because it will not benefit anybody… It should also be noted that China will soon run out of US goods on which to impose retaliatory tariffs which will move this negotiation to a more sensible and constructive forum.”